<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
Commission File Number 0-24339
INKTOMI CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3238130
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 SOUTH NORFOLK STREET, SAN MATEO, CALIFORNIA 94403
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (650) 653-2800
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [_] No [X]
The number of shares outstanding of the Registrant's common stock as of July 31,
1998 was 21,496,058.
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INKTOMI CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) Page
----
a) Consolidated Statements of Operation
For the three months and nine months ended June 30,
1998 and 1997........................................ 1
b) Consolidated Balance Sheets
As of June 30, 1998 and September 30, 1997........... 2
c) Consolidated Statements of Cash Flows
For the nine months ended June 30, 1998 and 1997..... 3
d) Notes to Unaudited Consolidated Financial Statements. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 6
PART II. OTHER INFORMATION
Item 2. Changes in Securities................................... 18
Item 4. Submission of Matters to a Vote of Security Holders..... 18
Item 6. Exhibits and Reports on Form 8-K........................ 19
SIGNATURE.................................................................. 21
<PAGE>
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
INKTOMI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATION
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
-------------------------- -------------------------
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -------------------------
1998 1997 1998 1997
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues
Network applications $ 3,062.2 $ -- $ 3,752.9 $ --
Search services 3,233.4 1,521.3 8,418.6 3,803.7
---------- ----------- ---------- ----------
Total revenues 6,295.6 1,521.3 12,171.5 3,803.7
Operating expenses
Cost of revenues 1,275.7 357.8 2,970.6 823.9
Sales and marketing 6,147.6 1,792.1 12,668.9 4,453.6
Research and development 2,675.3 1,099.8 6,489.1 2,765.0
General and administrative 993.0 382.6 2,682.0 984.6
---------- ----------- ---------- ----------
Total operating expenses 11,091.6 3,632.3 24,810.6 9,027.1
---------- ----------- ---------- ----------
Operating loss (4,796.0) (2,111.0) (12,639.1) (5,223.4)
Interest income (expense), net 97.0 (28.7) 13.3 (106.4)
---------- ----------- ---------- ----------
Loss before income taxes (4,699.0) (2,139.7) (12,625.8) (5,329.8)
Provision for income taxes -- 0.8 0.8 1.7
---------- ----------- ---------- ----------
Net loss $ (4,699.0) $ (2,140.5) $(12,626.6) $ (5,331.5)
========== =========== ========== ==========
Pro forma basic and diluted
net loss per share $ (0.24) $ (0.17) $ (0.74) $ (0.54)
Shares used in calculating
basic proforma and diluted
net loss per share 19,374 12,798 17,135 9,833
</TABLE>
See notes to the unaudited consolidated financial statements
1
<PAGE>
INKTOMI CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
----------- -----------
JUNE 30, SEPTEMBER 30,
1998 1997
----------- -----------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 37,378.8 $ 6,323.9
Short-term investments 17,058.8 --
----------- -----------
Total cash and short-term investments 54,437.6 6,323.9
Accounts receivable, net 2,209.4 829.4
Prepaid expenses 467.1 142.3
Other current assets 6.4 20.4
----------- -----------
Total current assets 57,120.5 7,316.0
Property and equipment, net 9,895.0 6,808.5
Other assets 69.6 192.3
----------- -----------
Total assets $ 67,085.1 $ 14,316.8
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of notes payable $ 3,264.5 $ 2,449.6
Current portion of capital lease obligations 583.0 --
Accounts payable 2,840.8 927.0
Accrued liabilities 3,288.4 1,147.2
Deferred revenue 1,853.2 714.9
----------- -----------
Total current liabilities 11,829.9 5,238.7
Notes payable 4,882.1 5,029.4
Capital lease obligations, less current
portion 1,469.4 --
----------- -----------
Total liabilities 18,181.4 10,268.1
Stockholders' equity
Series A through E convertible preferred -- 14.9
stock, $0.001 par value; Issued and outstanding:
none at June 30, 1998 and 14,938,121 at
September 30, 1997
Common stock, $0.001 par value; Authorized: 21.5 4.6
100,000,000 at June 30, 1998 and 50,000,000 at
September 30, 1997; Outstanding: 21,473,622
at June 30, 1998 and 4,632,208 at
September 30, 1997
Additional paid-in capital 76,062.9 15,247.9
Deferred compensation (2,331.3) (102.7)
Other (26.1) 1,080.6
Accumulated deficit (24,823.3) (12,196.6)
----------- -----------
Total stockholders' equity 48,903.7 4,048.7
----------- -----------
Total liabilities and stockholders' equity $ 67,085.1 $ 14,316.8
=========== ===========
See notes to the unaudited consolidated financial statements
2
<PAGE>
INKTOMIC CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
------------------------------
FOR THE NINE
MONTHS ENDED
JUNE 30,
------------------------------
1998 1997
------------ ------------
NET LOSS $ (12,626.6) $ (5,331.5)
ADJUSTMENTS
Depreciation and amortization 2,305.8 780.9
Noncash consulting services 35.8 93.2
Unearned compensation 166.2 --
Change in operating assets and liabilities
Accounts receivable (1,380.0) (89.3)
Prepaid expenses and other assets (188.0) (84.5)
Accounts payable 1,913.8 (27.9)
Deferred revenue 1,138.4 225.0
Accrued liabilities and other 2,564.5 96.5
------------ ------------
Net cash used in operations (6,070.1) (4,337.6)
CASH FLOWS USED FOR INVESTMENTS
Purchases of short term investments (18,810.1) --
Proceeds from maturities of short
term investments 1,751.3 --
Purchase of property and equipment (4,057.7) (2,139.2)
Proceeds from sale of equipment 927.6 --
------------ ------------
Net cash used in investing activities (20,189.0) (2,139.2)
CASH FLOWS FROM FINANCING
Proceeds from notes payable 2,156.9 4,350.0
Repayments on notes payable (1,489.2) (116.4)
Payments on obligations under capital lease (209.8) --
Proceeds from issuance of promissory note -- 2,000.0
Repayments of promissory note -- (2,000.0)
Proceeds from issuance of Preferred Stock,
net 12,787.1 8,167.3
Proceeds from exercise of stock options
and warrants 5,016.0 12.0
Proceeds from issuance of Common Stock 39,053.0 --
Proceeds from issuance of warrants -- --
------------ ------------
Net cash provided by financing activities 57,314.0 12,412.9
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 31,054.9 5,936.1
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 6,323.9 415.8
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 37,378.8 $ 6,351.9
============ ============
See notes to the unaudited consolidated financial statements
3
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements include the
accounts of the Inktomi Corporation and its wholly owned subsidiary, Inktomi
Limited located in the United Kingdom ("Inktomi" or the "Company"). All
intercompany accounts and transactions have been eliminated in the accompanying
consolidated condensed financial statements.
In the opinion of management, the consolidated condensed financial statements
reflect all adjustments that are necessary for a fair presentation of the
results for the periods shown. The results of operations for such periods are
not necessarily indicative of the results expected for the full fiscal year or
for any future period. These financial statements should be read in conjunction
with the financial statements and related notes included in the Company's final
prospectus on Form S-1 filed with the Securities and Exchange Commission on June
11, 1998.
NOTE 2. INITIAL PUBLIC OFFERING
On June 11, 1998, the Company completed an initial public offering in which it
sold 2,356,497 shares of Common Stock at $18.00 per share. Upon the closing of
this offering, all the Company's Preferred Stock converted to Common Stock.
After the offering, the Company's authorized capital consists of 100,000,000
shares of Common Stock of which approximately 21,473,622 shares were outstanding
at June 30, 1998.
NOTE 3. CALCULATION OF PROFORMA NET LOSS PER SHARE
Shares used in computing basic and diluted net loss per share are based on the
weighted average shares outstanding in each period. The effect of outstanding
stock options is excluded from the calculation of diluted net loss per share as
their inclusion would be antidilutive.
<TABLE>
<CAPTION>
-------------------------------- ---------------------------------
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- ---------------------------------
1998 1997 1998 1997
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net loss $ (4,698,976) $ (2,140,480) $ (12,626,550) $ (5,331,483)
BASIC AND DILUTED NET LOSS PER SHARE
Weighted average shares outstanding 19,374,208 12,797,769 17,135,058 9,833,210
Shares used in computing per share amounts 19,374,208 12,797,769 17,135,058 9,833,210
Basic and diluted net loss per share $ (0.24) $ (0.17) $ (0.74) $ (0.54)
</TABLE>
4
<PAGE>
NOTE 4. REVERSE STOCK SPLIT
The Company completed a two-for-three reverse stock split in May 1998.
Historical weighted average shares outstanding and loss per share amounts have
been restated to reflect the split.
NOTE 5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board released Statements of
Financial Accounting Standards No. 128, No. 129, Disclosure of Information About
Capital Structure, No. 130, Reporting Comprehensive Income, and No. 131,
Disclosure About Segments of an Enterprise and Related Information, all
effective for the year ended September 30, 1999. The Company is currently
determining the disclosures which may be required under these pronouncements.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Except for historical information, the discussion in this report contains
forward-looking statements that involve risks and uncertainties. Such forward-
looking statements included, among others, those statements including the words,
"expects", "anticipates", "intends", "believes" and similar language. The
Company'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 "Factors Affecting
Operating Results" in this Form 10-Q.
OVERVIEW
Inktomi was incorporated in February 1996 to develop and market scalable
software applications designed to significantly enhance the performance and
intelligence of large-scale networks. From February 1996 to May 1996, the
Company's operations consisted primarily of start-up activities, including
research and development of the Company's core coupled cluster software
architecture and dataflow technology, personnel recruiting and capital raising.
In May 1996, the Company released the first commercial application based on its
core technology, a search engine that enables customers to provide a variety of
Internet search services to end users. In December 1997, the Company first
licensed Traffic Server, the Company's second application, a large-scale network
cache designed to address capacity constraints in high-traffic network routes.
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 service 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.
The Company has a limited operating history. The Company incurred a net
loss of $3.5 million for the period from inception through September 30, 1996,
$8.6 million for the year ended September 30, 1997, and $12.6 million for the
nine months ended June 30, 1998. As of June 30, 1998, the Company had an
accumulated deficit of $24.8 million. The Company has not achieved
profitability on a quarterly or annual basis, and the Company anticipates that
it will incur net losses for at least the next several quarters. The Company
expects to continue to incur significant sales and marketing, product
development and administrative expenses and, as a result, will need to generate
significant quarterly revenues to achieve and maintain profitability.
The Company has generated a substantial portion of its historical search
services revenue and network applications revenue from a limited number of
customers. The Company expects that a small number of customers will continue
to account for a substantial portion of revenues for the foreseeable future.
RESULTS OF OPERATIONS
REVENUES
Total revenues were $6.3 million in the quarter ended June 30, 1998, an
increase of $4.8 million or 314% over the quarter ended June 30, 1997. Three
customers each represented over 10% of total revenues in the quarter ending June
30, 1998. Total revenues were $12.2 million in the nine months ended June 30,
1998, an increase of $8.4 million or 220% over the first nine months of 1997.
Network application revenues totaled $3.1 million in the third quarter and
$3.8 million for the first nine months of fiscal year 1998. Most of these
revenues represented new Traffic Server license sales. There were no network
application revenues in the comparable periods of fiscal year 1997. Search
services revenues totaled $3.2 million in the third quarter and $8.4 million for
the first nine months of fiscal year
6
<PAGE>
1998, representing a 113% and 121% increase of the comparable prior year
periods. Most of these increases came from the addition of new search service
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 the Company and marketed by Wired. A portion of the
advertising on the HotBot site is exchanged for advertisements on the Internet
sites of other companies. The value of these advertisements is recognized as
barter revenue by the Company. Barter revenues represented less than 10% of
total revenues in the third quarter of 1998 and 12% in the first nine months of
fiscal year 1998. Barter revenues represented 35% of total revenues for the
nine-month period ended June 30, 1997. The Company 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
the Company's search services, which comprise depreciation and network charges.
Cost of revenues were $1.3 million for the quarter ended June 30, 1998 an
increase of $0.9 million or 257% from the quarter ended June 30, 1997. Cost of
revenues were $3.0 million for the first nine months of 1998, an increase of
$2.1 million or 261% over the first nine months of 1997. The increase was due
primarily to increased depreciation and network charges resulting from an
expansion of the Company's data center in California during the fourth quarter
of 1997. The Company further expanded its search capacity late in the third
quarter of 1998 with the addition of a second search cluster in Herndon,
Virginia. The Company 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 the
Company's direct sales force and marketing staff and marketing programs,
including trade shows and advertising. Sales and marketing expenses also include
marketing costs related to the Company's support of the HotBot search site.
Sales and marketing expenses were $6.1 million in the third quarter of 1998, an
increase of $4.4 million or 243% from the third quarter of 1997. Sales and
marketing expenses were $12.7 million for the first nine months of 1998, an
increase of $8.2 million or 184% over the same period of 1997. These increases
were primarily due to an increase in the number of sales and marketing
personnel, increased HotBot marketing expenses and other customer-related costs,
and expenses incurred in connection with attendance at trade shows and
additional marketing programs. The Company expects that sales and marketing
expenses will increase substantially in absolute dollars over at least the next
several quarters as the Company hires additional sales and marketing personnel,
initiates additional marketing programs to support its Traffic Server product
and establishes sales offices in additional domestic and international
locations.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of personnel and related
costs for the Company's development and technical support efforts. Research and
development expenses were $2.7 million in the third quarter of 1998, an increase
of $1.6 million or 143% over the third quarter of 1997. Expense for the first
nine months of 1998 totaled $6.5 million, an increase of $3.7 million or 135%
over the comparable period in 1997. The increase was primarily due to an
increase in the number of research and development personnel to support
expansion of the Company's search engine and network application businesses, and
increases in quality assurance, technical support and technical publications
personnel. The Company believes significant investment in research and
development is essential to its future success and expects that research and
development expenses will increase in absolute dollars in future periods. The
Company has not capitalized any software development expenses to date.
7
<PAGE>
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
$1.0 million for the third quarter of 1998, an increase of $0.6 million or 159%
over the third quarter of 1997. Expenses totaled $2.7 million for the first
nine months of 1998, an increase of $1.7 million over the first nine months of
1997. This increase was due primarily to an increase in the number of general
and administrative personnel and increased legal and accounting costs incurred
in connection with business activities.
INTEREST INCOME AND EXPENSE, NET
Interest income and expense net includes income on the Company's cash
investments net of expenses related to the Company's financing obligations.
Interest income and expense net totaled $0.1 million of income for the third
quarter of 1998. This compares with a net expense of approximately $29,000 in
the third quarter of 1997. The Company generated net interest income of
approximately $13,000 over the first nine months of 1998, compared to a net
expense of $0.1 million over the comparable quarter of 1997. Proceeds from the
Company's recent initial public offering are expected to significantly increase
the interest income generated in the near term, partially offset by an expected
increase in interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments totaled $54.4 million at
June 30, 1998, up from $6.3 million at fiscal year-end 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.
The Company used $6.1 million in cash for operations in the first nine months
of 1998, an increase of $1.7 million from the $4.3 million used for the first
nine months of 1997. The increase was primarily due to an increase in the
Company's net loss from $5.3 million in the first nine months of 1997 to $12.6
million in the first nine months of 1998, partially offset by increased non-cash
charges in the 1998 period.
The Company has made significant investments in equipment since its inception.
This equipment consists largely of computer servers, workstations and networking
equipment. The Company spent $4.1 million in the first nine months of 1998 and
$2.1 million in the first nine months of 1997 primarily to further expand its
Internet search engine service capacity. In the nine months ended June 30, 1998,
the Company sold $0.9 million of fixed assets to two leasing companies as part
of sale-leaseback transactions.
The Company has used debt and leveraged leases to partially finance its
operations and capital purchases and plans to continue this practice until it
begins generating cash from operations. In the first nine months of 1998, the
Company obtained an additional $2.0 million bank loan to partially fund its
increased search capacity. At June 30, 1998, the Company had $10.2 million in
total loans and capitalized lease obligations outstanding. In addition, the
Company has provided a letter of credit, drawn against the Company's bank line
of credit, in the amount of $500,000 to the lessor of the Company's San Mateo,
California facilities. The loans are collateralized by substantially all of the
Company's assets. Approximately $5.0 million of total debt at June 30, 1998
were bank loans. The bank loans include certain covenants requiring minimum
liquidity, tangible net worth and profitability over time.
In July 1997, the Company and Microsoft entered into a series of agreements
whereby Microsoft selected the Company's technology as the basis for Internet
search services to be provided by Microsoft. Under the agreements, Inktomi is
responsible for developing and adding certain features to its core search engine
technology and providing search results to Microsoft using the customized search
engine technology. In addition, the Company is responsible for hosting the
search engine software and purchasing and operating the cluster on which the
software runs. Among other matters, Microsoft is obligated to loan the price of
new workstations and related hardware and software purchased to service
Microsoft's capacity needs. As of June 30, 1998, loans totaling $2.7 million
were outstanding.
8
<PAGE>
The Company has raised approximately $56.9 million, net of issuance costs,
from equity sales in the first nine months of 1998. This includes approximately
$39.1 million from the Company's June 1998 initial public offering and $12.8
million from a February 1998 preferred stock offering. The Company also
received approximately $5.0 million from option and warrant conversions. In the
first nine months of 1997, the Company raised $8.2 million from a preferred
stock offering.
The Company's capital requirements depend on numerous factors, including
market acceptance of the Company's products, the resources the Company devotes
to developing, marketing, selling and supporting its products, the timing and
extent of establishing international operations, and other factors. The Company
expects to devote substantial capital resources to hire and expand its sales,
support, marketing and product development organizations, to expand marketing
programs, to establish additional facilities worldwide and for other general
corporate activities. Although the Company believes that its current cash
balances will be sufficient to fund its operations for at least the next 12
months, there can be no assurance that the Company will not require additional
financing within this time frame or that such additional funding, if needed,
will be available on terms acceptable to the Company, or at all.
FACTORS AFFECTING OPERATING RESULTS
This quarterly report on Form 10-Q contains forward-looking statements
which involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated by such forward-looking statements as a result
of certain factors including those set forth below.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES
The Company was founded in February 1996 and has a limited operating
history upon which it can be evaluated. Any investment in the Company must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in an early stage of development in new and rapidly
evolving markets. These risks include the Company's substantial dependence on
two products with only limited market acceptance, need to expand its sales and
support organizations, competition, need to manage changing operations, customer
concentration, reliance on strategic relationships and dependence upon key
personnel, as well as dependence upon the Internet and general economic
conditions. There can be no assurance that the Company will be successful in
addressing such risks. The Company incurred a net loss of $3.5 million for the
period from inception through September 30, 1996, $8.6 million for the year
ended September 30, 1997, and $12.6 million for the nine months ended June 30,
1998. As of June 30, 1998, the Company had an accumulated deficit of $24.8
million. The Company has not achieved profitability on a quarterly or annual
basis, and the Company anticipates that it will incur net losses for at least
the next several quarters. The Company expects to continue to incur significant
sales and marketing, product development and administrative expenses and, as a
result, will need to generate significant quarterly revenues to achieve and
maintain profitability. There can be no assurance that any of the Company's
business strategies will be successful or that significant revenues or
profitability will ever be achieved or, if they are achieved, that they can be
consistently sustained or increased on a quarterly or annual basis in the
future.
SUBSTANTIAL DEPENDENCE ON TRAFFIC SERVER; UNCERTAINTY OF MARKET ACCEPTANCE;
LENGTHY SALES CYCLE
The Company's future growth substantially depends on the commercial success
of its Traffic Server network cache product, which the Company has only licensed
to a small number of customers. The Company is initially targeting large
telecommunications carriers and Internet Service Providers ("ISPs") for its
Traffic Server product. The market for large-scale network caching is in its
infancy, and there can be no assurance that these target customers will adopt
and implement caching technology throughout their networks. Even if caching
technology is adopted, Traffic Server may not be accepted and implemented on a
timely basis or at all. Traffic Server has been deployed commercially in only a
small number of sites, and there can be no assurance that the product will
perform desired functions, offer sufficient price/performance
9
<PAGE>
benefits or meet the technical or other requirements of customers. Inktomi
believes that customers may have multiple requirements for enabling network
traffic flow through network caches deployed within a network infrastructure.
Although Inktomi has devised solutions for handling these data flow
requirements, these solutions may not address all customer needs, or new or
unforeseen requirements could develop for which current solutions may be
inadequate. Despite testing of Traffic Server prior to its commercial release,
there can be no assurance that all performance errors or deficiencies have been
discovered and remedied, that additional errors or deficiencies will not occur,
or that if they occur, the Company will be able to correct such errors and
deficiencies. The Company believes that license of Traffic Server will involve
an enterprise-wide decision-making process and that the Company or its
distribution partners will need to provide a significant level of education and
information to prospective customers regarding the use and benefits of Traffic
Server. In addition, the Company believes that the time required to deploy
Traffic Server will vary significantly depending on a number of factors,
including the needs and skill set of the customer, the size of the deployment,
the complexity of the customer's network environment, the quantity of hardware
and degree of hardware configuration necessary to deploy Traffic Server, and the
customer's installation schedule. For these and other reasons, the license and
deployment of Traffic Server may be characterized by lengthy sales and
implementation cycles. Failure of Traffic Server to achieve market acceptance
for these or any other reasons would have a material adverse effect on the
Company's business, financial condition and results of operations.
NEED TO EXPAND SALES AND SUPPORT ORGANIZATIONS
The Company currently sells its products and services primarily through its
direct sales force. The Company believes that its future success is dependent
upon substantially increasing the size of its direct sales force, both
domestically and internationally. Competition for such personnel is intense,
and there can be no assurance that the Company will be able to attract,
assimilate or retain additional qualified sales personnel on a timely basis in
the future, or at all. In addition, the Company believes that its future
success is dependent upon establishing relationships with a variety of
distribution partners, including original equipment manufacturers ("OEMs"),
systems integrators, value added resellers ("VARs") and joint marketing
partners. The Company has had discussions with only a small number of such
distribution partners and has entered into written distribution and reseller
agreements with a limited number of companies. There can be no assurance that
the Company will be able to enter into agreements or establish relationships
with desired distribution partners on a timely basis or at all, or that such
distributors will devote adequate resources to selling the Company's products.
Failure of the Company to successfully expand the size of its sales organization
or establish appropriate distribution channels for its products would have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, the Company believes that the complexity of its
products and the breadth and scale of customer deployments will require a number
of highly trained customer service and support personnel. The Company currently
has a small customer service and support organization and only has limited
experience supporting Traffic Server in commercial deployment. There can be no
assurance that the Company will be able to increase the size of its customer
service and support organization on a timely basis or at all, or that the
Company will be able to provide the high level of support required by its
customers. Failure in either of these regards could have a material adverse
effect on the Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH INTERNET SEARCH ENGINE SERVICE
The Company's search services revenues are primarily based upon the volume
of end-user search queries that are processed by the Inktomi search engine and
the level of advertising revenue generated by customers. The Company's
contracts do not require the customer to direct its users to the Company's
search services or to use the search service at all. Accordingly, the Company
is highly dependent upon the willingness of customers to promote and use the
search services provided by the Company, the ability of customers to attract
users to their on-line services, the volume of end-user search queries that are
processed by the Inktomi search engine, and the ability and willingness of
customers to sell advertisements on Internet pages viewed by end users. Failure
of customers to promote and use the Company's services, a low volume of end-user
search queries processed by the Inktomi search engine and lower than expected
levels of advertising revenues will result in lower levels of revenue generated
by the Company, which
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could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's contracts require the Company
to provide services in accordance with certain specifications as to the
functionality and performance of the search experience, the size of the Internet
database maintained, the frequency of refreshing the search database,
reliability of the service and search response speeds. Failure of the Company to
perform in accordance with these specifications could result in the cancellation
of one or more customer contracts. The Company will be required to expand the
capacity of its existing data centers and/or build out additional data centers
to adequately provide service. These activities require highly specialized
personnel and involve many difficult installation, tuning and optimization
tasks, and will require the Company to expend substantial financial and
management resources. The Company has in the past experienced difficulties and
delays in expanding and stabilizing the cluster of workstations in its existing
data centers. As a result, there can be no assurance that the Company will be
able to expand its infrastructure to meet increased customer demand on a timely
basis. The Company houses its data centers at hosting facilities operated by
independent third parties who take certain precautions to protect the Company's
equipment against damage from fire, earthquakes, floods, power and
telecommunications failures, sabotage, intentional acts of vandalism and similar
events. Despite such precautions, the occurrence of a natural disaster or other
unanticipated problems at current and future data centers of the Company could
result in interruptions in the search services provided by the Company. Such
interruptions could result in reductions in, or terminations of, service
provided to the Company's customers, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's operating results may fluctuate significantly in the future
as a result of a variety of factors, many of which are outside of the Company's
control. These factors include demand for Traffic Server, demand for commercial
search services powered by the Company's search technology, lengthy sales
cycles, changes in the growth rate of Internet usage, customers' capital
expenditures and other costs relating to the expansion of their respective
operations, demand for Internet advertising, seasonal trends in advertising
sales, introduction of new products or services by the Company or its
competitors, delays in the introduction or enhancement of products and services
by the Company or its competitors, customer order deferrals in anticipation of
upgrades and new products, changes in the Company's pricing policies or those of
its competitors, the Company's ability to anticipate and effectively adapt to
developing markets and rapidly changing technologies, changes in the mix of
international and U.S. revenues, changes in foreign currency exchange rates, mix
of products and services sold and the channels through which those products and
services are sold, general economic conditions and specific economic conditions
in Internet and related industries. Additionally, as a strategic response to a
changing competitive environment, the Company may elect from time to time to
make certain pricing, service, marketing or acquisition decisions that could
have a material adverse effect on the Company's quarterly financial performance.
Quarterly sales and operating results generated by the Company's search
engine application generally depend on per-query fees and advertising revenues
received from the Company's search engine customers within the quarter, which
are difficult to forecast. Advertising revenues generated by the Company's
search engine customers are all pursuant to short-term contracts and are subject
to seasonal trends in advertising sales. Revenues from per-query fees depend on
the volume of end-user search queries processed by the Inktomi search engine.
The Company has only limited historical basis for predicting the volume of
search queries that may be generated by end users of on-line services provided
by many of its customers. Moreover, the Company's customers are generally under
no obligation to direct its users to the Company's search engine service or use
the search service at all. Accordingly, a low level of usage by end users or the
cancellation or deferral of any customer contract could have a material adverse
effect on the Company's quarterly financial performance.
The Company expects that a significant portion of its future revenues will
be generated by licenses of Traffic Server and further expects that such
revenues will be derived from orders placed by a limited number of customers.
The Company expects that the volume and timing of such orders and their
fulfillment, all of which are difficult to forecast, will cause material
fluctuations in the Company's operating results, particularly on a quarterly
basis. The Company expects that revenues from Traffic Server will also
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be difficult to forecast because the Company's sales cycle, from initial
evaluation to product shipment, is expected to vary substantially from customer
to customer. Accordingly, the cancellation or deferral of even a small number of
licenses of Traffic Server could have a material adverse effect on the Company's
quarterly financial performance. Conversely, to the extent significant sales
occur earlier than expected, operating results for subsequent quarters may not
compare favorably with those of earlier quarters.
The Company plans to significantly increase its operating expenses to
expand its sales and marketing operations, broaden its customer support
capabilities, establish new search engine data centers, develop new distribution
channels, fund greater levels of research and development, and establish
strategic alliances. Because the Company's operating expenses are based on
anticipated revenue trends and because a high percentage of the Company's
expenses are fixed in the short term, a delay in generating or recognizing
revenue from a limited number of business transactions could cause significant
variations in operating results from quarter to quarter and could result in
operating losses. To the extent that such expenses are not subsequently
followed by increased revenues, this could have a material adverse effect on the
Company's business, financial condition and results of operations. As a result
of these and other factors, the Company believes that period to period
comparisons of its operating results may not be meaningful and should not be
relied upon as an indication of future performance. Due to all of the foregoing
factors, it is likely that in some future quarter, the Company's operating
results may be below the expectations of public market analysts and investors.
In such event, the price of the Company's Common Stock would likely be
materially adversely affected.
SUBSTANTIAL COMPETITION
The markets in which the Company competes are new, intensely competitive,
highly fragmented and characterized by rapidly changing technology and evolving
standards. The Company faces competition in the overall network computing
software market as well as each of the market segments in which its products and
services compete. The Company has experienced and expects to continue to
experience increased competition from current and potential competitors, many of
whom have significantly greater financial, technical, marketing and other
resources than the Company.
In the network cache market, the Company competes with companies including
CacheFlow, Inc., Cisco Systems, Inc. ("Cisco"), Microsoft Corporation
("Microsoft"), Mirror Image Internet, Inc., Netscape Communications Corp.
("Netscape"), Network Appliance, Inc., Novell, Inc., and Spyglass, Inc. among
others, as well as against freeware caching solutions including CERN, Harvest
and Squid. In addition, other companies may embed competing technology into
other products such as server or firewall software. The Company is aware of
numerous other major software developers as well as smaller entrepreneurial
companies that are focusing significant resources on developing and marketing
software products and services that will compete with Traffic Server. The
Company believes that its software may face competition from other providers of
hardware and software claiming to offer competing solutions to network
infrastructure problems, including networking hardware and companion software
manufacturers such as Ascend Communications, Inc., Bay Networks, Inc., Ciena
Corporation and IBM Corporation; hardware manufacturers such as Digital
Equipment Corporation ("Digital"), Hewlett-Packard Company, Intel Corporation,
Motorola, Inc. and Sun Microsystems, Inc.; telecommunications providers such as
AT&T, Inc., MCI Telecommunications Corporation, 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, Microsoft and Netscape provide or have announced their
intentions to provide a range of software and hardware products based on
Internet protocols and to compete in the broad Internet/intranet software market
as well as in specific market segments in which the Company competes. Cisco,
Microsoft and Netscape have often acquired technology and products from other
companies to augment their product lines, in addition to developing their own
technology and products.
The Company competes with a number of companies to provide Internet search
services, many of whom have operated services in the market for a longer period,
have greater financial resources, have established marketing relationships with
leading on-line services and advertisers, and have secured greater
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presence in distribution channels. Competitors who offer search services to on-
line service providers include Digital (Alta Vista), Excite, Inc. ("Excite"),
Infoseek Corporation ("Infoseek"), Lycos Corporation ("Lycos"), and Northern
Light, Inc., among others. In addition, large media concerns such as The Walt
Disney Company and NBC Enterprises have recently made investments in Internet
search engine companies and the Company 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. Increased use and visibility of the Company's search engine services
depends on the Company's ability to maintain highly available and reliable
services across multiple data centers and to maintain the freshness of the
search database.
The Company's competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sales of their products than the
Company. Certain of the Company's current and potential competitors may bundle
their products with other software or hardware, including operating systems and
browsers, in a manner that may discourage users from purchasing products offered
by the Company. Also, certain current and potential competitors have greater
name recognition, more extensive customer bases that could be leveraged, and/or
access to proprietary content, thereby gaining market share to the Company's
detriment. Inktomi expects additional competition as other established and
emerging companies enter the network computing software market and new products
and technologies are introduced. Increased competition could result in price
reductions, fewer customer orders, fewer search queries served, reduced gross
margins and loss of market share, any of which could materially adversely affect
the Company's business, financial condition and results of operations. Current
and potential competitors may make strategic acquisitions or establish
cooperative relationships among themselves or with third parties, thereby
increasing the ability of their products to address the needs of the Company's
prospective customers. The Company's current or future channel partners may
establish cooperative relationships with current or potential competitors of the
Company, thereby limiting the Company's ability to sell its products through
particular distribution channels. Accordingly, it is possible that new
competitors or alliances among current and new competitors may emerge and
rapidly gain significant market share. Such competition could materially
adversely affect the Company's ability to obtain new contracts and maintenance
and support renewals for existing contracts on terms favorable to the Company.
Further, competitive pressures could require the Company to reduce the prices of
its products and services, which could materially adversely affect the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors, and the failure to do so would have a material adverse
effect upon the Company's business, financial condition and results of
operations.
NEED TO MANAGE CHANGING OPERATIONS; DEPENDENCE UPON KEY PERSONNEL
The ability of the Company to successfully offer products and services and
implement its business plan in a rapidly evolving market requires an effective
planning and management process. The Company continues to increase the scope of
its operations domestically and internationally and has grown its headcount
substantially. This growth has placed, and the Company's anticipated future
operations will continue to place, a significant strain on the Company's
management systems and resources. The Company expects that it will be required
to continue to improve its financial and managerial controls and reporting
systems and procedures, and will need to expand, train and manage its work force
worldwide. Furthermore, the Company expects that it will be required to manage
multiple relationships with various customers and other third parties. There
can be no assurance that the Company will be able to effectively manage these
tasks, and the failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
intends to hire a significant number of additional sales, support, marketing,
and research and development personnel in calendar 1998 and beyond. Competition
for such personnel is intense, and there can be no assurance that the Company
will be able to attract, assimilate or retain additional highly qualified
personnel in the future. If the Company is unable to hire and retain such
personnel, particularly those in key positions, the Company's business,
financial condition and results of operations may be materially adversely
affected. The Company's future success also depends in significant part upon
the continued service of its executive officers and other key sales, marketing
and support personnel. In addition, the Company's products and technologies are
complex and the Company is
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substantially dependent upon the continued service of its existing engineering
personnel, and especially the founders of the Company, many of whom have
advanced degrees. None of the Company's officers or employees are bound by an
employment agreement for any specific term and the relationships of such
officers and employees with the Company is, therefore, at will. The Company does
not have "key person" life insurance policies covering any of its employees.
The loss of the services of any of its executive officers, engineering personnel
or other key employees would have a material adverse effect on the business,
financial condition and results of operations of the Company.
CUSTOMER CONCENTRATION
The Company has generated a substantial portion of its historical search
services revenue and network applications revenue from a limited number of
customers. The Company expects that a small number of customers will continue
to account for a substantial portion of revenues for the foreseeable future. As
a result, the loss of a major customer or, in the case of the Company's search
engine customers, a decline in the usage of any such customer's search service,
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, there can be no assurance
that customers that have accounted for significant revenues in past periods,
individually or as a group, will continue to generate revenues in any future
period.
RISKS OF INFRINGEMENT AND PROPRIETARY RIGHTS
Because materials may be downloaded by the search services operated or
facilitated by the Company, or may be copied and stored by customers that have
deployed the Company's Traffic Server product, and, in either case, may be
subsequently distributed to others, there is a potential that claims will be
made against the Company (directly or through contractual indemnification
provisions with customers) for defamation, negligence, copyright or trademark
infringement, personal injury or other theories based on the nature, content or
copying of such materials. Such claims have been threatened against the Company
from time to time, and have been brought, and sometimes successfully pressed,
against on-line services in the past. It is also possible that if any
information provided through the search services operated or facilitated by the
Company or information that is copied and stored by customers that have deployed
Traffic Server, such as stock quotes, analyst estimates or other trading
information, contains errors, third parties could make claims against the
Company for losses incurred in reliance on such information. Although the
Company carries general liability insurance, the Company's insurance may not
cover potential claims of this type or may not be adequate to indemnify the
Company for all liability that may be imposed. Any imposition of liability or
legal defense expenses that are not covered by insurance or is in excess of
insurance coverage could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's success and ability to compete are substantially dependent
upon its internally developed technology. While the Company primarily relies on
copyright, trade secret and trademark law to protect its technology, the Company
believes that factors such as the technological and creative skills of its
personnel, new product developments, frequent product enhancements and reliable
product maintenance are more essential to establishing and maintaining a
technology leadership position. There can be no assurance that others will not
develop technologies that are similar or superior to the Company's technology.
The Company generally enters into confidentiality or license agreements with its
employees, consultants and corporate partners, and generally controls access to
and distribution of its software, documentation and other proprietary
information. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use the
Company's products or technology. Policing unauthorized use of the Company's
products is difficult, and there can be no assurance that the steps taken by the
Company will prevent misappropriation of its technology, particularly in foreign
countries where the laws may not protect the Company's proprietary rights as
fully as do the laws of the United States. Substantial litigation regarding
intellectual property rights exists in the software industry, and the Company
expects that software products may be increasingly subject to third-party
infringement claims as the number of competitors in the Company's industry
segments grows and the functionality of products in different industry segments
overlaps. Lycos recently announced that it is the exclusive licensee of a
patent covering a method of crawling information on the Internet, and that it
plans to
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bring actions against companies that it believes are infringing this patent in
the near future. There can be no assurance that Lycos or other third parties
will not claim infringement by the Company with respect to its software or
enhancements thereto. Any such claims, with or without merit, could be time-
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, if at all. A
successful claim of product infringement against the Company and failure or
inability of the Company to license the infringed or similar technology could
have a material adverse effect on the Company's business, financial condition
and results of operations.
DEPENDENCE ON STRATEGIC RELATIONSHIPS
The Company believes that its success in penetrating markets for its
Traffic Server product and search engine application depends in part on its
ability to develop and maintain strategic relationships with key hardware and
software vendors, distribution partners and customers. The Company further
believes that such relationships are important in order to validate the
Company's technology, facilitate broad market acceptance of the Company's
products, and enhance the Company's sales, marketing and distribution
capabilities. The Company's inability to attract or retain strategic
relationships, or the termination of one or more successful relationships could
have a material adverse effect on the Company's business, financial condition
and results of operations. In July 1997, the Company and Microsoft entered into
a series of agreements whereby Microsoft selected the Company's technology as
the basis for Internet search services to be provided by Microsoft. Federal and
state regulatory authorities have recently initiated broad antitrust actions
against Microsoft. The Company is unable to predict whether or to what extent
such antitrust actions may affect its relationship with Microsoft, although such
actions may delay initiation of the services to be provided by the Company to
Microsoft or narrow the scope of Internet sites and applications where Microsoft
may incorporate the Company's Internet search engine services. In addition, the
Company has from time to time licensed certain minor components from third
parties such as reporting functions and security features and incorporated them
into the Company's products. Failure of such third parties to maintain or
enhance their products could impair the functionality of the Company's products
and could require the Company to obtain alternative products from other sources
or to develop such software internally, either of which could involve costs and
delays as well as diversion of engineering resources.
RISKS ASSOCIATED WITH NEW VERSIONS OF SOFTWARE AND NEW PRODUCTS; RAPID
TECHNOLOGICAL CHANGE
The Company's future growth depends on its successful and timely
introduction of new products and services in markets that do not currently exist
or are rapidly evolving. The markets for the Company's products are
characterized by rapid technological change, frequent new product introductions,
changes in customer demands and evolving industry standards. The introduction
of products embodying new technologies and the emergence of new industry
standards can render existing products obsolete and unmarketable. The Company's
future success will depend upon its ability to address the increasingly
sophisticated needs of its customers by developing and introducing enhancements
to its software on a timely basis that keep pace with technological
developments, emerging industry standards and customer requirements. There can
be no assurance that the Company will be successful in developing and marketing
enhancements to its software that respond to technological change, evolving
industry standards or customer requirements, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and sale of such enhancements or that such enhancements will
adequately meet the requirements of the marketplace and achieve any significant
degree of market acceptance. The Company has in the past experienced delays in
the release dates of new products and product enhancements. Any material delay
in the release dates of future products or enhancements or any failure of such
future products or enhancements to achieve market acceptance when released,
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the
introduction or announcement of new product offerings by the Company or the
Company's competitors will not cause customers to defer or forego purchases of
current versions of the Company's software, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
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RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company markets and sells its products in the United States and
internationally. The Company has established a subsidiary located in the United
Kingdom to market and sell the Company's products in Europe and plans to
establish additional facilities in other parts of the world. The Company's
expansion of its existing international operations and entry into additional
international markets will require significant management attention and
financial resources. If international revenues generated by the Company are
not adequate to offset the expense of establishing and maintaining foreign
operations, the Company's business, financial condition and results of
operations would be materially adversely affected. To date, the Company has
only limited experience in developing localized versions of its products and
marketing and distributing its products internationally. There can be no
assurance that the Company will be able to successfully market, sell and deliver
its products in these international markets. International operations are
subject to inherent risks, including the impact of possible recessionary
environments in economies outside the United States, costs of localizing
products for foreign markets, longer receivables collection periods and greater
difficulty in accounts receivable collection, unexpected changes in regulatory
requirements, difficulties and costs of staffing and managing foreign
operations, reduced protection for intellectual property rights in some
countries, potentially adverse tax consequences and political and economic
instability. There can be no assurance that the Company or its distribution
partners will be able to sustain or increase international revenues, or that the
foregoing factors will not have a material adverse effect on the Company's
future international revenues and, consequently, on the Company's business,
financial condition and results of operations. The Company's international
revenues are generally denominated in local currencies. The Company does not
currently engage in currency hedging activities. Although exposure to currency
fluctuations to date has been insignificant, there can be no assurance that
fluctuations in currency exchange rates in the future will not have a material
adverse impact on revenues from international sales and thus the Company's
business, financial condition and results of operations.
YEAR 2000 RISKS
The potential for software failures due to processing errors arising from
calculations using the year 2000 date is a known risk. The Company recognizes
the need to ensure that its operations, products and services will not be
adversely impacted by Year 2000 software failures. The Company has established
procedures for evaluating and managing the risks and costs associated with this
problem and believes that its internal computer systems, including its
accounting, sales and technical support automation systems, are currently Year
2000 compliant. However, there can be no guarantee that the systems of other
companies on which the Company's systems and operations rely will be able to
handle all Year 2000 problems.
In addition, although the Company believes that its search engine
application and Traffic Server are Year 2000 compliant, there can be no
assurance that the Company's software products contain all necessary date code
changes. Furthermore, many of the Company's customers use Internet protocols
and maintain their Internet operations on servers that may be impacted by Year
2000 complications. Reliance on such Internet protocols or the failure of the
Company's customers to ensure that their servers are Year 2000 compliant could
have a material adverse effect on the Company's customers and the Company's
products and search services, which in turn could have a material adverse effect
on the Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
The Company may in the future pursue acquisitions of complementary
products, technologies or businesses. Future acquisitions by the Company may
result in potentially dilutive issuances of equity securities and the incurrence
of additional debt and amortization expenses related to goodwill and other
intangible assets, which could adversely affect the Company's results of
operations. In addition, acquisitions involve numerous risks, including
difficulties in the assimilation of the operations, products and personnel of
the acquired company, the diversion of management's attention from other
business
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concerns, risks of entering markets in which the Company has no direct prior
experience, and the potential loss of key employees of the acquired company.
There can be no assurance that the Company will ever successfully complete an
acquisition.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to or commerce
on the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that a number of laws and regulations may be adopted at
the local, state, national or international levels with respect to the Internet,
covering issues such as user privacy, pricing, taxation, advertising,
intellectual property rights, information security or the convergence of
traditional communications services with Internet communications. The
Telecommunications Reform Act of 1996 imposes criminal penalties (via the
Communications Decency Act) on anyone who distributes obscene communications on
the Internet knowing that the recipient of the communications is under 18 years
of age. Other nations, including Germany, have taken actions to restrict the
free flow of material deemed to be objectionable on the Internet. In addition,
the applicability to the Internet of existing laws governing issues such as
property ownership, copyrights and other intellectual property issues, taxation,
libel and personal privacy is uncertain. The vast majority of such laws were
adopted prior to the advent of the Internet and related technologies and, as a
result, do not contemplate or address the unique issues of the Internet and
related technologies. Changes to such laws or adoption of additional laws or
regulations intended to address these issues, including some recently proposed
changes, could create uncertainty in the marketplace which could reduce demand
for the Company's products and services, could increase the Company's cost of
doing business as a result of compliance, could result in litigation or could in
some other manner have a material adverse effect on the Company's business,
financial condition and results of operations.
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Part II. Other Information
ITEM 2. CHANGES IN SECURITIES.
Upon the closing of the Registrant's initial public offering in June 1998,
all outstanding shares of Preferred Stock were automatically converted into
approximately 13,100,000 shares of Common Stock. Following such closing, the
Registrant filed an Amended and Restated Certificate of Incorporation with the
Delaware Secretary of State which eliminated the previously authorized Preferred
Stock, authorized 10,000,000 shares of undesignated Preferred Stock and
increased the authorized Common Stock to 100,000,000 shares.
From April 1, 1998 through June 30, 1998, the Registrant issued
unregistered securities to a limited number of persons as described below:
(a) In April 1998, the Registrant issued and sold 61,991 shares of Series
D1 Preferred Stock (which converted into 41,332 shares of Common Stock upon the
closing of Registrant's initial public offering) to twelve investors upon
exercise of warrants for an aggregate purchase price of $206,151.07.
(b) In April 1998, the Registrant issued and sold 519,586 shares of Common
Stock to two investors upon exercise of warrants for an aggregate purchase price
of $58,453.43.
(c) In April 1998, the Registrant issued warrants to purchase 29,412 shares
of Common Stock at $17.55 per share and warrants to purchase 73,530 shares of
Common Stock at $35.10 per share to a customer in consideration for publicity
activities. The warrants become exercisable in June 1999 and expire in June
2002. The warrants may be exercised for cash or may be "net" exercised whereby
the exercise price is provided through the surrender of shares subject to the
warrants having the same value.
(d) In June 1998, the Registrant issued 113,813 shares of Common Stock to
two investors upon the exercise of warrants. The warrants were "net" exercised
in which the aggregate exercise price of $1,280,396.20 was provided through the
surrender of shares subject to the warrants having the same value.
(e) From April 1998 through June 1998, the Registrant issued an aggregate
of 481,558 shares of Common Stock upon exercise of stock options granted under
the Registrant's 1996 Equity Incentive Plan.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and the Registrant believes
that each transaction was exempt from the registration requirements of the
Securities Act of 1933, as amended, by virtue of Section 4(2) thereof,
Regulation D promulgated thereunder or Rule 701 pursuant to compensatory benefit
plans and contracts relating to compensation as provided under such Rule 701.
The recipient in such transactions represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with the Registrant, to information
about the Registrant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
In May 1998, the Registrant submitted several matters to a vote of its
security holders through an Action by Written Consent. The following is a brief
description of the matters voted upon at the meeting and a statement of the
number of votes cast for and against and the number of abstentions. There were
no broker non-votes with respect to any matter.
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1. To approve amendments to the Registrant's Certificate of Incorporation
to provide for a two for three reverse stock split of the Registrant's Common
Stock.
FOR: 13,203,354 AGAINST: 0 ABSTAIN: 5,758,061
2. To approve an amendment and restatement of the Registrant's Certificate
of Incorporation to (i) increase the authorized number of shares of Common Stock
to 100,000,000 shares, (ii) authorize 10,000,000 shares of undesignated
Preferred Stock for issuance, (iii) eliminate cumulative voting in the election
of directors or any other matter submitted to a vote of the stockholders, (iv)
provide that all actions by the stockholders be taken at an annual or special
meeting of the stockholders and not by written consent, (v) require approval by
holders of at least 66 2/3% of the Registrant's Common Stock to amend certain
provisions of the Registrant's Certificate of Incorporation and Bylaws.
FOR: 13,203,354 AGAINST: 0 ABSTAIN: 5,758,061
3. To approve an amendment and restatement of the Registrant's Bylaws to
(i) fix the parties entitled to call a special meeting of the stockholders as
the board of directors, the chairman of the board, the president, or the chief
executive officer of the Registrant, (ii) eliminate cumulative voting in the
election of directors or any other matter submitted to a vote of the
stockholders, and (iii) provide that all actions by the stockholders be taken at
an annual or special meeting of the stockholders and not by written consent.
FOR: 13,203,354 AGAINST: 0 ABSTAIN: 5,758,061
4. To approve and adopt a new 1998 Stock Plan and to reserve a total of
1,000,000 shares of Common Stock thereunder for issuance to employees, officers,
directors and other service providers.
FOR: 13,203,354 AGAINST: 0 ABSTAIN: 5,758,061
5. To approve and adopt a new 1998 Employee Stock Purchase Plan and to
reserve a total of 300,000 shares of Common Stock thereunder for issuance to
employees.
FOR: 13,203,354 AGAINST: 0 ABSTAIN: 5,758,061
6. To approve an amendment to the Registrant's 1996 Equity Incentive
Plan to increase the number of shares of Common Stock reserved for issuance
thereunder by 55,467 share.
FOR: 13,203,354 AGAINST: 0 ABSTAIN: 5,758,061
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1* Amended and Restated Certificate of Incorporation of the
Registrant.
3.2** Amended and Restated Bylaws of the Registrant.
4.1*** Form of Common Stock certificate.
10.1*** Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2*** 1998 Stock Plan and form of agreements thereunder.
10.3*** 1998 Employee Stock Purchase Plan and form of agreements
thereunder.
10.4*** 1996 Equity Incentive Plan and form of agreement thereunder.
10.5*** Fifth Amended and Restated Investors' Rights Agreement dated as
of February 13, 1998 among the Registrant and certain of the
Registrant's security holders named therein.
10.6*** Executive Employment Agreement dated as of July 1, 1996 between
the Registrant and David C. Peterschmidt.
19
<PAGE>
10.7*** Amended and Restated Loan and Security Agreement dated as of May
12, 1998 between the Registrant and Silicon Valley Bank.
10.8*** Sublease Agreement dated November 27, 1996 between the
Registrant and Macromedia, Inc.
10.9*** Office Lease dated July 31, 1997 between the Registrant and
Norfolk Atrium, a California limited partnership.
10.10*** Underlease Agreement (undated) between Inktomi Limited and
Technomic Research Associates Limited.
10.11***# Information Services Agreement dated as of April 1, 1998 between
the Registrant and Wired Digital, Inc.
10.12***# Information Services Agreement dated as of April 1, 1998
between the Registrant and Wired Digital, Inc.
10.13***# Software Development Agreement dated as of July 27, 1997 between
the Registrant and Microsoft Corporation.
10.14***# Software Hosting Agreement dated as of July 27, 1997 between the
Registrant and Microsoft Corporation.
10.15***# Loan Agreement dated as of July 27, 1997 between the Registrant
and Microsoft Corporation.
10.16***# Security Agreement dated as of July 27, 1998 between the
Registrant and Microsoft Corporation.
10.17***# Escrow Agreement dated as of July 29, 1997 among the Registrant,
Data Base, Inc., and Microsoft Corporation
10.18***# Lease dated May 14, 1998 between the Registrant and B.F. Saul
Real Estate Investment Trust.
27.1 Financial Data Schedules.
* Incorporated by reference to Exhibits 3.2 previously filed with the
Registrant's Registration statement on form S-1 (No. 333-50247).
** Incorporated by reference to Exhibit 3.4 previously filed with the
Registrant's Registration statement on form S-1 (No. 333-50247)
*** Incorporated by reference to the same numbered exhibit previously filed
with the Registrant's Registration statement on form S-1 (No. 333-50247).
# Certain portions of this exhibit have been omitted based upon a request for
confidential treatment. The omitted portions have been separately held
with the commission.
(b) Reports on form 8-K
None.
20
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by
undersigned, thereunto duly authorized.
Inktomi Corporation
Date: August 11, 1998 By: /s/ Jerry M. Kennelly
-------------------------------------
Jerry M. Kennelly,
Vice President of Finance and
Chief Financial Officer
(duly authorized officer
and principle financial officer)
21
<PAGE>
INDEX TO EXHIBITS
3.1* Amended and Restated Certificate of Incorporation of the Registrant.
3.2** Amended and Restated Bylaws of the Registrant.
4.1*** Form of Common Stock certificate.
10.1*** Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2*** 1998 Stock Plan and form of agreements thereunder.
10.3*** 1998 Employee Stock Purchase Plan and form of agreements
thereunder.
10.4*** 1996 Equity Incentive Plan and form of agreement thereunder.
10.5*** Fifth Amended and Restated Investors' Rights Agreement dated as of
February 13, 1998 among the Registrant and certain of the
Registrant's security holders named therein.
10.6*** Executive Employment Agreement dated as of July 1, 1996 between
the Registrant and David C. Peterschmidt.
10.7*** Amended and Restated Loan and Security Agreement dated as of May
12, 1998 between the Registrant and Silicon Valley Bank.
10.8*** Sublease Agreement dated November 27, 1996 between the Registrant
and Macromedia, Inc.
10.9*** Office Lease dated July 31, 1997 between the Registrant and
Norfolk Atrium, a California limited partnership.
10.10*** Underlease Agreement (undated) between Inktomi Limited and
Technomic Research Associates Limited.
10.11***# Information Services Agreement dated as of April 1, 1998 between
the Registrant and Wired Digital, Inc.
10.12***# Information Services Agreement dated as of April 1, 1998
between the Registrant and Wired Digital, Inc.
10.13***# Software Development Agreement dated as of July 27, 1997 between
the Registrant and Microsoft Corporation.
10.14***# Software Hosting Agreement dated as of July 27, 1997 between the
Registrant and Microsoft Corporation.
10.15***# Loan Agreement dated as of July 27, 1997 between the Registrant
and Microsoft Corporation.
10.16***# Security Agreement dated as of July 27, 1998 between the
Registrant and Microsoft Corporation.
10.17***# Escrow Agreement dated as of July 29, 1997 among the Registrant,
Data Base, Inc., and Microsoft Corporation
10.18***# Lease dated May 14, 1998 between the Registrant and B.F. Saul
Real Estate Investment Trust.
27.1 Financial Data Schedules.
* Incorporated by reference to Exhibits 3.2 previously filed with the
Registrant's Registration statement on form S-1 (No. 333-50247).
** Incorporated by reference to Exhibit 3.4 previously filed with the
Registrant's Registration statement on form S-1 (No. 333-50247)
*** Incorporated by reference to the same numbered exhibit previously filed
with the Registrant's Registration statement on form S-1 (No. 333-50247).
# Certain portions of this exhibit have been omitted based upon a request for
confidential treatment. The omitted portions have been separately held
with the commission.
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INKTOMI
CORP. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 37,379
<SECURITIES> 17,059
<RECEIVABLES> 2,679
<ALLOWANCES> 470
<INVENTORY> 0
<CURRENT-ASSETS> 57,121
<PP&E> 13,841
<DEPRECIATION> 3,946
<TOTAL-ASSETS> 67,085
<CURRENT-LIABILITIES> 11,830
<BONDS> 0
0
0
<COMMON> 21
<OTHER-SE> 48,882
<TOTAL-LIABILITY-AND-EQUITY> 67,085
<SALES> 0
<TOTAL-REVENUES> 12,172
<CGS> 0
<TOTAL-COSTS> 2,971
<OTHER-EXPENSES> 21,840
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> (12,626)
<INCOME-TAX> 1
<INCOME-CONTINUING> (12,627)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,627)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
