<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) October 1, 1999
INKTOMI CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 000-24339 94-3238130
(State of incorporation) (Commission File Number) (IRS Employer Identification No.)
</TABLE>
4100 East 3/rd/ Avenue, Foster City, CA 94404
(Address of principal executive offices of Registrant)
(650) 653-2800
(Registrant's telephone number, including area code)
<PAGE>
The undersigned Registrant hereby amends the following items, financial
statements, exhibits or other portions of its Current Report on Form 8-K,
originally filed with the Securities and Exchange Commission on October 15,
1999, as set forth below:
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
------------------------------------------------------------------
(a) Financial Statements of Business Acquired.
The required financial statements are included herein as Exhibit
99.2.
(b) Pro Forma Financial Information
The requirement to include pro forma financial information is met
through the inclusion of supplemental financial information as
Exhibit 99.3.
(c) Exhibits.
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Reorganization,
dated October 1, 1999, by and among
Inktomi Corporation, WS Acquisition
Corporation and WebSpective Software,
Inc. (previously filed)
99.1 Press release of Inktomi Corporation,
dated September 16, 1999 (previously
filed)
99.2 WebSpective Software, Inc. Financial
Statements
99.3 Inktomi Corporation Supplementary
Consolidated Financial Statements
-2-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
INKTOMI CORPORATION
By: /s/ JERRY M. KENNELLY
Dated: November 3, 1999 ---------------------------
Jerry M. Kennelly
Vice President of Finance and Chief
Financial Officer
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Reorganization, dated October 1,
1999, by and among Inktomi Corporation, WS Acquisition
Corporation and WebSpective Software, Inc. (previously
filed)
99.1 Press release of Inktomi Corporation, dated September 16,
1999 (previously filed)
99.2 WebSpective Software, Inc. Financial Statements
99.3 Inktomi Corporation Supplementary Consolidated Financial
Statements
<PAGE>
EXHIBIT 99.2
WebSpective Software, Inc.
Financial Statements
December 31, 1998
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Stockholders of WebSpective Software, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' deficit and of cash flows present
fairly, in all material respects, the financial position of WebSpective
Software, Inc. at December 31, 1998, and the results of its operations and its
cash flows for the year ended December 31, 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 audit. We conducted our
audit 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
audit provides a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 16, 1999
<PAGE>
WebSpective Software, Inc.
Balance Sheet
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
December 31, June 30,
1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,782,900 $ 5,796,400
Restricted cash 62,400 62,400
Accounts receivable 14,000 59,700
Prepaid expenses and other current assets 167,400 229,400
----------- -----------
Total current assets 4,026,700 6,147,900
Fixed assets, net 580,100 496,200
Other assets 13,500 31,400
----------- -----------
$ 4,620,300 $ 6,675,500
----------- -----------
Liabilities, Redeemable Preferred Stock and Stockholders' Deficit
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 108,200 $ 501,200
Accounts payable 124,600 95,500
Accrued expenses 632,200 1,087,600
Deferred revenue 608,800 829,200
----------- -----------
Total current liabilities 1,473,800 2,513,500
Long-term debt and capital lease obligations 172,700 2,434,300
----------- -----------
Total liabilities 1,646,500 4,947,800
----------- -----------
Commitments (Note 11)
Redeemable preferred stock:
Series A redeemable convertible preferred stock, $.01 par value;
3,035,000 shares authorized; at December 31, 1998 and June 30, 1999
(unaudited), respectively, 3,028,333 shares issued and
outstanding at December 31, 1998 and June 30, 1999 (unaudited), at
redemption value 3,028,400 3,028,400
Series B redeemable convertible preferred stock, $.01 par value;
3,525,364 and 3,905,984 shares authorized at December 31, 1998 and at
June 30, 1999 (unaudited), respectively; 3,525,324 and 3,545,324 shares
issued and outstanding at December 31, 1998 and June 30, 1999
(unaudited), respectively, at redemption value 8,561,600 8,610,200
Shareholder notes receivable (145,700) (109,300)
----------- -----------
Total redeemable preferred stock 11,444,300 11,529,300
----------- -----------
Stockholders' deficit:
Common stock, $.01 par value; 13,000,000 and 13,380,660 shares
authorized at December 31, 1998 and June 30, 1999 (unaudited) respectively;
2,605,000 and 3,523,000 shares issued at December 31, 1998, and June 30, 1999
(unaudited), respectively; 2,486,500 and 3,523,000 shares outstanding at
December 31, 1998 and June 30, 1999 (unaudited), respectively 26,100 35,200
Additional paid-in capital 97,500 3,354,800
Deferred compensation - (843,300)
Shareholder notes receivable (87,000) (237,600)
Treasury stock (11,800) -
Accumulated deficit (8,495,300) (12,110,700)
----------- -----------
Total stockholders' deficit (8,470,500) (9,801,600)
----------- -----------
$ 4,620,300 $ 6,675,500
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WebSpective Software, Inc.
Statement of Operations
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Year ended Six Months Ended
December 31, June 30, June 30,
1998 1998 1999
----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenue:
Product $ 270,000 $ 270,000 $ 796,200
Service 623,900 170,000 526,400
----------- ----------- -----------
Total revenue 893,900 440,000 1,322,600
----------- ----------- -----------
Cost of sales:
Product 14,400 14,400 25,800
Service 124,100 31,500 361,700
----------- ----------- -----------
Total cost of sales 138,500 45,900 387,500
----------- ----------- -----------
Gross profit 755,400 394,100 935,100
----------- ----------- -----------
Operating expenses:
Research and development 2,804,700 1,057,900 1,227,800
Selling and marketing 3,205,100 1,543,300 2,517,600
General and administrative 1,171,800 474,600 742,400
----------- ----------- -----------
Total operating expenses 7,181,600 3,075,800 4,487,800
----------- ----------- -----------
Loss from operations (6,426,200) (2,681,700) (3,552,700)
Interest income/(expense), net 86,300 14,000 (62,700)
----------- ----------- -----------
Net loss $(6,339,900) $(2,667,700) $(3,615,400)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WebSpective Software, Inc.
Statement of Changes in Stockholders' Deficit
<TABLE>
<CAPTION>
Common stock
------------------- Additional Deferred Shareholder
Par paid-in stock notes
Shares value capital compensation receivable
--------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 1,500,000 $15,000 $ (14,000) $ - $ -
Exercise of common stock options 1,169,000 11,700 121,300 (95,000)
Issuance costs of Series B preferred stock
Repurchase of common stock held in treasury 8,000
Repurchase and retirement of common stock (64,000) (600) (9,800)
Net loss
--------- ------- ---------- ---------- ---------
Balance at December 31, 1998 2,605,000 26,100 97,500 (87,000)
Exercise of common stock options (unaudited) 538,000 5,400 174,000 - (152,600)
Exercise of Fidelity warrants A (unaudited) 500,000 5,000 495,000
Payments on shareholder loans (unaudited) 2,000
Retirement of common stock held in treasury (unaudited) (118,500) (1,200) (10,600)
Repurchase and retirement of common stock (unaudited) (1,500) (100) (400)
Deferred stock compensation related to stock option
and warrant grants (unaudited) 2,599,300 (920,900)
Amortization of deferred stock compensation
(unaudited) 77,600
Net loss (unaudited)
--------- ------- ---------- ---------- ---------
Balance at June 30, 1999 (unaudited) 3,523,000 $35,200 $3,354,800 $ (843,300) $(237,600)
========= ======= ========== ========== =========
<CAPTION>
Total
Treasury Accumulated stockholders'
stock deficit deficit
-------- ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1997 $ - $(2,076,500) $ (2,075,500)
Exercise of common stock options 38,000
Issuance costs of Series B preferred stock (78,900) (78,900)
Repurchase of common stock held in treasury (11,800) (3,800)
Repurchase and retirement of common stock (10,400)
Net loss (6,339,900) (6,339,900)
-------- ------------ -----------
Balance at December 31, 1998 (11,800) (8,495,300) (8,470,500)
Exercise of common stock options (unaudited) 26,800
Exercise of Fidelity warrants A (unaudited) 500,000
Payments on shareholder loans (unaudited) 2,000
Retirement of common stock held in treasury (unaudited) 11,800 -
Repurchase and retirement of common stock (unaudited) (500)
Deferred stock compensation related to stock option
and warrant grants (unaudited) 1,678,400
Amortization of deferred stock compensation
(unaudited) 77,600
Net loss (unaudited) (3,615,400) (3,615,400)
-------- ------------ -----------
Balance at June 30, 1999 (unaudited) $ - $(12,110,700) $(9,801,600)
======== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WebSpective Software, Inc.
Statement of Cash Flows
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Year Ended Six Months Ended
December 31, June 30, June 30,
1998 1998 1999
------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Increase (Decrease) in Cash Equivalents
Cash flows from activities:
Net loss $ (6,339,900) $ (2,667,700) $ (3,615,400)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 191,700 56,300 129,200
Compensation and marketing expense related to stock
option and warrant grants - - 1,464,000
Loss on equipment disposal 19,400 1,400 -
Changes in assets and liabilities:
Accounts receivable 211,200 188,400 (45,700)
Prepaid expenses and other current assets (74,600) (31,400) (62,000)
Accounts payable 48,400 268,800 (29,000)
Accrued expenses 535,200 (134,500) 455,400
Deferred revenue 365,000 206,100 220,400
------------ ------------ ------------
Net cash used in operating activities (5,043,600) (2,112,600) (1,483,100)
------------ ------------ ------------
Cash flows from investing activities:
Investment in certificate of deposit (62,400) - -
Purchases of fixed assets (419,100) (122,400) (45,200)
Decrease (increase) in other assets 18,800 1,300 (17,900)
Payments received on shareholder loans - - 38,400
------------ ------------ ------------
Net cash used in investing activities (462,700) (121,100) (24,700)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of redeemable convertible
preferred stock, net of issuance costs 8,337,000 8,337,000 48,600
Proceeds from issuance of common stock 38,000 28,800 526,800
Repurchase and retirement of common stock (10,400) - (500)
Purchase of common stock held in treasury (3,800) - -
Proceeds from issuance of long-term debt 110,500 110,500 3,000,000
Principal payments on long-term debt (41,600) - (40,100)
Payments under capital lease obligations (17,100) (3,600) (13,500)
------------ ------------ ------------
Net cash provided by financing activities 8,412,600 8,472,700 3,521,300
------------ ------------ ------------
Net increase in cash and cash equivalents 2,906,300 6,239,000 2,013,500
Cash and cash equivalents, beginning of period 876,600 876,600 3,782,900
------------ ------------ ------------
Cash and cash equivalents, end of period $ 3,782,900 $ 7,115,600 $ 5,796,400
============ ============ ============
Non-cash financing and investing activities:
Capital lease obligations incurred for fixed assets $ 63,100 $ 46,600 $ -
Note payable issued in exchange for fixed assets 87,400 - -
Notes received from shareholders in exchange for
Series B Preferred stock 145,700 145,700 152,600
Notes received from employees in connection with
exercise of options to purchase common stock 95,000 95,000 -
Cancellation of employee note in connection with
repurchase of common shares held in treasury (8,000) - -
Retirement of common stock held in treasury - - 11,800
Supplemental disclosure of cash flow information:
Interest paid $ 26,000 $ 9,900 $ 103,200
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WebSpective Software, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Nature of Business and Basis of Presentation
Nature of Business
WebSpective Software, Inc. (the "Company") commenced operations in March
1997 and is engaged in the research, development, marketing, and sale of
Internet operations management solutions for commerce-critical web sites.
The Company's software and related services allow users to effectively
manage multi-server, multi-location web environments. The Company's
principal markets are domestic and international businesses with commerce-
critical web sites.
Basis of Presentation
Since its organization, the Company has devoted a significant portion of
its efforts to research and development, recruiting management and
technical staff, business planning and raising capital. Accordingly,
through December 31, 1998, the Company was considered to be in the
development stage, as defined in Statement of Financial Accounting
Standards ("SFAS") No. 7, Accounting and Reporting by Development Stage
Enterprises. However, in 1999, the Company has commenced its planned
principal operations and, accordingly, is no longer considered to be a
development stage enterprise.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The
Company invests its excess cash in money market funds of major financial
institutions and U.S. Treasury securities which are subject to minimal
credit and market risk.
Restricted cash represents a certificate of deposit required by the lease
agreement for the Company's principal operating facility.
All of the Company's cash equivalents are recorded at fair value and
classified as available-for-sale in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. At
December 31, 1998, the Company's cash equivalents include money market
funds of $3,427,300. Unrealized gains and losses on the Company's cash
equivalents were insignificant at December 31, 1998.
Financial Instruments
At December 31, 1998, the Company's financial instruments consist of cash
and cash equivalents, accounts receivable, and short- and long-term debt.
The carrying value of these instruments approximates their fair value.
Revenue Recognition
Revenue from the sale of software is recognized in accordance with
Statement of Position 97-2, Software Revenue Recognition. Product revenue
consists of revenue from the licensing of software rights and is recognized
at the time of shipment of the product to the customer, provided that the
Company has no remaining obligations, collectibility is considered probable
and fees are fixed and determinable. Where there are obligations that are
essential to the functionality of the software installed, license fees are
recorded over the expected term of the customization period. Service
revenues consist primarily of installation, training and project
management, which are recognized as the related services are performed, and
of maintenance revenue, which is recognized ratably over the contractual
period, generally twelve months.
1
<PAGE>
WebSpective Software, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Fixed Assets
Fixed assets are recorded at cost and are depreciated using the straight-
line method over the estimated useful lives of the related assets, ranging
from three to four years. Assets held under capital lease and leasehold
improvements are amortized on a straight-line basis over the shorter of
their estimated useful lives or remaining lease term.
Research and Development and Software Development Costs
Costs incurred in the research and development of the Company's products
are expensed as incurred. Costs associated with the development of
computer software are expensed prior to establishment of technological
feasibility (as defined by SFAS No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed) and capitalized
thereafter. No software development costs were capitalized through
December 31, 1998 since such costs incurred subsequent to establishment of
technological feasibility were not material to the financial statements.
Stock-Based Compensation
The Company accounts for employee stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25, Accounting For Stock
Issued to Employees, and related interpretations ("APB No. 25");
accordingly, compensation expense is recorded for options awarded to
employees and directors to the extent that the exercise prices are less
than the common stock's fair market value on the date of grant, where the
number of options and exercise price are fixed. The difference between the
fair value of the Company's common stock and the exercise price of the
stock option is recorded as deferred stock compensation. Deferred stock
compensation is amortized to compensation expense over the vesting period
of the underlying stock option. The Company follows the disclosure
requirements of SFAS No. 123, Accounting for Stock-Based Compensation (Note
8).
Concentration of Credit Risk and Major Customer Information
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. The Company performs ongoing evaluations of customers'
financial condition and generally does not require collateral. One
customer accounted for 100% of revenues and accounts receivable at December
31, 1998.
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
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Unaudited Interim Financial statements
The financial statements and related notes as of June 30, 1999 and for the
six months ended June 30, 1998 and 1999 are unaudited. In the opinion of
the Company's management, the unaudited interim financial statements
included all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position and results of
operations for these interim periods. The results of operations for the
six months ended June 30, 1999 are not necessarily indicative of the
results of operations for the year ended December 31, 1999 or any other
future period.
2
<PAGE>
WebSpective Software, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
3. Fixed Assets
Fixed assets at December 31, 1998 consist of the following:
<TABLE>
<CAPTION>
Useful Life December 31,
(years) 1998
----------- ---------
<S> <C> <C>
Computers and equipment 3-4 $ 382,500
Furniture and fixtures 3 240,900
Purchased software 3 77,500
Leasehold improvements lease term 100,000
---------
800,900
Less - accumulated depreciation (220,800)
---------
$ 580,100
---------
</TABLE>
Depreciation expense relating to fixed assets was $191,700 for the year
ended December 31, 1998. Furniture and fixtures includes $49,100 for assets
held under capital leases at December 31, 1998. Computers and equipment
includes $14,000 at December 31,1998 for assets held under capital leases.
Accumulated depreciation for assets under capital lease was $13,900 at
December 31, 1998.
4. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Royalty $100,000
Payroll and related 229,500
Other 302,700
--------
$632,200
--------
</TABLE>
5. Long-Term Debt
During 1997, the Company entered into a Loan and Security Agreement ("Loan
Agreement") with a bank, which provided for a $200,000 line of credit for
equipment purchases ("Equipment Line"). The Equipment Line bears interest
at the bank's prime rate plus 1.5% (9.5% at December 31, 1998) and is
secured by all assets of the Company.
3
<PAGE>
WebSpective Software, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
On December 19, 1997, the Company entered into a Loan Modification
Agreement ("Loan Modification"), which extended the date through which
advances could be requested on the Equipment Line to June 30, 1998. In
addition, under the Loan Modification, principal payments on borrowings
made against the Equipment Line were suspended until July 31, 1998.
Through July 31, 1998, the Company was required to make monthly interest
payments only, on outstanding balances. On July 31, 1998, borrowings of
$185,000 under the Equipment Line were converted into a three-year term
loan payable in 36 equal monthly installments of $5,200 plus interest. The
Company is committed to pay principal amounts under the term loan of
approximately $62,000, $62,000 and $31,000 during the years ended December
31, 1999, 2000 and 2001.
The Company is required to maintain compliance with certain restrictive and
financial covenants, as defined in the Loan Agreement. As of December 31,
1998, the Company was in compliance with these covenants.
On July 1, 1998, the Company purchased office equipment from its landlord
by issuing a non-interest bearing note payable ("Note Payable") for
$100,800, to be paid in 36 equal monthly installments. The Company recorded
the Note and office equipment at $87,400, which represents the present
value of the Note using a 9.5% implied interest rate. The discount on the
Note of $13,400 is being amortized to interest expense over the 36 month
term. The Company is committed to pay principal amounts under the Note of
approximately $27,500, $30,200 and $19,000 during the years ended December
31, 1999, 2000 and 2001.
Long-term debt at December 31, 1998 consists of the following:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Term loan/Equipment Line $154,600
Note Payable 76,700
Capital lease obligations (Note 9) 49,600
--------
280,900
Less - current portion 108,200
--------
$172,700
--------
</TABLE>
In March 1999, the Company entered into a Subordinated Loan and Security
Agreement ("Subordinated Loan") with a financing company ("Lender"). Under
the Subordinated Loan, the Company has the ability to borrow up to
$3,000,000, in minimum installments of $500,000 each through March 2000.
The repayment schedule for each installment consists of nine monthly
payments of interest only, followed by 27 monthly payments of principal and
interest. The loan is subordinate in right of payment of interest and
principal to the Equipment Line, bears interest at 12% and is
collateralized by substantially all the assets of the Company. In
addition, the Company is required to comply with certain restrictive
covenants under the Subordinated Loan.
4
<PAGE>
WebSpective Software, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
The Company also entered into a Master Lease Agreement ("Master Lease")
during March 1999 with the same Lender. Under the Master Lease, the
Company is able to finance the purchase of equipment, software and
leasehold improvements ("Property") up to $750,000. The initial term under
the Master Lease is 48 months, with the option to extend for an additional
year. Payments under the Master Lease are due monthly commencing generally
upon acquisition of the Property.
In connection with the Subordinated Loan and Master Lease, the Company
issued the Lender two warrants to purchase 166,763 and 13,897 shares of
Series B Preferred, respectively, at an exercise price of $2.43 per share,
subject to certain anti-dilutive adjustments. The warrants are exercisable
for a period of ten years, or for a period of five years from the effective
date of the Company's initial public offering, whichever is earlier. The
Company recorded the fair value of the warrants as additional paid-in
capital and debt discount and will amortize the discount to interest
expense over the term of the Subordinated Loan and Master Lease. Actual
drawdowns during the six months ended June 30, 1999 (unaudited) totaled
$3,000,000.
(Unaudited) - During the six months ended June 30, 1999, the Company
recorded a debt discount of $318,500 related to these warrants and
recognized $26,550 in interest expense related to amortization of the debt
discount.
6. Redeemable Convertible Preferred Stock
The Series A and Series B redeemable convertible preferred stock (the
"Series A Preferred" and "Series B Preferred") have the following rights:
Voting Rights
Preferred stockholders are entitled to the number of votes equal to the
number of shares of common stock into which the Series A Preferred or
Series B Preferred shares are then convertible. Preferred stockholders
vote together with common stockholders as one class. The holders of
Series A Preferred, voting as a single class, have the right to elect two
members of the Board of Directors. The holders of Series B Preferred,
voting as a single class, have the right to elect one member of the Board
of Directors.
Conversion
Each share of the Series A Preferred and Series B Preferred is currently
convertible, at the option of the holder, into one share of common stock,
subject to certain anti-dilutive adjustments. Each share will
automatically convert into common stock upon the completion of an initial
public offering of the Company's common stock at a price of at least
$5.00 per share and with gross proceeds to the Company of at least $15.0
million.
5
<PAGE>
WebSpective Software, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Dividends and Liquidation Preferences
The holders of Series A Preferred and Series B Preferred are entitled
to receive dividends in the same amounts as declared on the number of
shares of common stock into which each share is then convertible. In
the event of liquidation of the Company, the holders of Series B
Preferred are entitled to receive, prior and in preference to any
distribution to the holders of the Series A Preferred and the common
stock, an amount equal to $2.43 per share, plus any declared but
unpaid dividends ("Series B Liquidation Amount"). The holders of
Series A Preferred are entitled to receive, prior and in preference to
any distribution to the holders of the common stock, an amount equal
to $1.00 per share, plus any declared but unpaid dividends ("Series A
Liquidation Amount"). In addition, the Series A Preferred and Series B
Preferred stockholders are entitled to share ratably with the holders
of common stock in any remaining distribution, provided that the total
amount paid does not exceed $5.00 per share.
Redemption Rights
At the election of any holder of Series A Preferred or Series B
Preferred, the Company is required to redeem any outstanding shares of
the stock for cash consideration equal to the respective Series A and
Series B Liquidation Amounts. The Series A Preferred and Series B
Preferred are redeemable at any time on or after February 28, 2004 and
the liquidation preference amount is payable in three equal annual
installments beginning on the date of redemption.
7. Stockholders' Equity
Common Stock
Each share of common stock entitles the holder to one vote on all matters
submitted to a vote of the Company's common stockholders. Common
stockholders are entitled to receive dividends, as may be declared by the
Board of Directors, if any, subject to any preferential dividend rights of
the preferred stockholders. At December 31, 1998, the Company had reserved
a total of 8,632,911 shares of common stock for issuance under the
Company's stock option plan, conversion of preferred stock and exercise of
stock purchase warrants.
Common Stock Purchase Warrants
In April 1997, the Company issued a warrant to a customer/shareholder for
the purchase of 120,000 shares of the Company's common stock at an exercise
price of $1.50 per share; the warrant expires in April 2002. In
conjunction with the issuance of the Series B Preferred in June 1998, the
Company fully vested the existing warrant and issued to the same
customer/shareholder "Warrant-A" and "Warrant-B." The existing purchase
warrant was determined to have an insignificant fair value.
Warrant-A is for the purchase of 500,000 shares of the Company's common
stock at an exercise price of $1.00 per share. The warrant becomes
exercisable if the warrant holder pays at least $500,000 during the period
May 1, 1998 through December 31, 1998 and $1,000,000 during the period May
1, 1998 through December 31, 1999 for the licensing of software products or
the performance of consulting services. Of these payments, at least 50% of
the aggregate dollar amount must be for the licensing of the Company's
software products. The warrant holder satisfied these conditions during
December 1998 and the warrant vested accordingly. Warrant-A was determined
to have an insignificant fair value.
6
<PAGE>
WebSpective Software, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Warrant-B is for the purchase of 205,880 shares of the Company's common
stock at an exercise price of $2.43 per share. The warrant becomes
exercisable if the warrant holder pays at least $2,000,000 during the
period May 1, 1998 through December 31, 1999 for the licensing of software
products or the performance of consulting services. Of these payments, at
least 50% of the aggregate dollar amount must be for the licensing of the
Company's software products. As of December 31, 1998, these vesting
conditions were not met. Warrant-B was determined to have an insignificant
value at December 31, 1998.
(Unaudited) - During the six months ended June 30, 1999, the
customer/shareholder met the requirements for Warrant-B to become
exercisable. Accordingly, the Company updated its computation of the fair
value of Warrant-B and, in the six months ended June 30, 1999, recognized
related expense of $1,003,000.
Treasury Shares
Of the common stock issued, 118,500 shares with a cost basis of $11,800
were held by the Company as treasury shares at December 31, 1998.
Shareholder Notes Receivable
During 1998, the Company accepted full recourse promissory notes from
certain officers and employees totaling $240,700 for the purchase of 60,000
shares of Series B Preferred and the exercise of options to purchase
850,000 shares of the Company's common stock. Interest on the notes is
computed annually at the "Applicable Federal Rate" prescribed under the
Internal Revenue Code of 1986. Principal and accrued interest are due at
the end of five years or 90 days after an employee's termination, whichever
is earlier. The notes, which are included in stockholders' equity, are
secured by the related Series B Preferred and common shares or other
marketable securities having a fair market value at least equal to the
amount of the note. In 1998, no principal or interest payments were paid
to the Company by the borrowers and $8,000 in notes were forgiven to
repurchase common shares held in treasury.
8. Stock Option Plan
In March 1997, the Company's stockholders approved the 1997 Stock Option
Plan (the "1997 Plan") which provides for the grant of incentive and
nonqualified stock options for the purchase of up to an aggregate of
1,500,000 shares of the Company's common stock by officers, employees, non-
employee directors and consultants of the Company. In June 1998, the
number of shares issuable under the 1997 Plan was increased to 2,351,667.
The Board of Directors which is responsible for administering the 1997
Plan, determines the term of each option, option exercise price, number of
shares for which each option is granted, the rate at which each option is
exercisable and the vesting term.
Generally, options granted under the 1997 Plan are immediately exercisable
and the rights of the underlying common stock vest over a period of four to
five years from the date of grant. Any unvested stock issued is subject to
repurchase agreements whereby the Company has the right, but not the
obligation, to repurchase unvested shares upon termination of employment at
the original exercise price per share for the option. At December 31,
1998, 789,366 shares of the Company's common stock issued pursuant to the
1997 Plan remained subject to repurchase.
7
<PAGE>
WebSpective Software, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Under the 1997 Plan, incentive and nonqualified stock options may be
granted to any officer, employee, consultant or director at an exercise
price per share of not less than the fair value per common share on the
date of grant (not less than 110% of the fair value in the case of holders
of more than 10% of the Company's voting stock). Options granted under the
1997 Plan generally expire ten years from the date of grant (five years for
incentive stock options granted to holders of more than 10% of the
Company's voting stock).
The Company granted options to purchase 5,000 and 104,000 shares of common
stock during 1998 and 1997, respectively, and 22,500 of restricted stock to
consultants and advisory board members in exchange for services rendered.
The options granted in 1998 and options granted in 1997 for 4,000 shares
were exercisable immediately; the remaining 1997 options and restricted
stock vest ratably over five years. The value ascribed to these options
was not material to the financial statements at December 31, 1998.
(Unaudited) - During the six months ended June 30, 1999, the Company
remeasured the fair value of the unvested non-employee options and
restricted common stock granted during 1997. Such remeasurement resulted
in the Company recognizing compensation expense of $357,000 in the six
months ended June 30, 1999. The fair values were determined under the
Black-Scholes model including adjustments for revaluations at each period-
end of the unvested options.
Transactions under the 1997 Plan for the year ended December 31, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
----------- -----------
<S> <C> <C>
Outstanding at beginning of year 935,000 $.10
Granted 787,750 .21
Exercised (1,169,000) .11
Canceled (90,500) .22
-----------
Outstanding at end of year 463,250 $.22
-----------
Options exercisable at year end 463,250
Weighted average fair value of options
granted during the year $ .06
Options available for future grant 783,417
</TABLE>
8
<PAGE>
WebSpective Software, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
The following table summarizes information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Weighted-
Average
Remaining
Exercise Number Contractual Number
Price Outstanding Life (Years) Exercisable
-------- ----------- ------------ -----------
<S> <C> <C> <C>
$0.10 182,000 8.56 182,000
$0.30 281,250 9.10 281,250
------- -------
463,250 463,250
------- -------
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the minimum value method with the following assumptions for grants in
1998: dividend yield of 0.0%; no volatility; risk free interest rates of
5.3% at December 31, 1998, and a weighted average expected option term of
5.5 years.
Compensation expense recognized for the Company's stock option plan under
APB No. 25 was not significant through December 31, 1998. Had compensation
cost for the Company's stock option plan been determined based on the fair
value at the grant dates, as prescribed in SFAS No. 123, the Company's net
loss would not have been materially different. Since options vest over
several years and additional option grants are expected to be made each
year, the above pro forma disclosures are not necessarily representative of
pro forma effects on reported operations for future years.
(Unaudited) During the six months ended June 30, 1999, stock options to
purchase 595,250 and 74,000 shares of common stock and 20,000 shares of
Series B Preferred were granted to employees with exercise prices of $0.30,
$0.60, and $2.43, respectively. These exercise prices were below the
estimated fair market value of the Company's common stock and Series B
Preferred at the date of grant. Deferred stock compensation of $920,900
was recorded in accordance with APB No. 25, and will be amortized over the
vesting periods of the underlying options, generally four years. Related
stock compensation expense of $77,600 was recognized during the six months
ended June 30, 1999.
9
<PAGE>
WebSpective Software, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
9. Income Taxes
The significant components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 3,325,000
Research and development tax credit
carryforwards 231,000
Reserves not currently deductible 36,000
Depreciation 1,000
-----------
3,593,000
Deferred tax asset valuation allowance (3,593,000)
-----------
$ -
-----------
</TABLE>
Income taxes computed using the federal statutory income tax rate differ
from the Company's effective tax rate primarily due to the following:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Income tax expense (benefit) at US federal
statutory tax rate $(2,155,600)
State income taxes, net of federal tax effect (700,000)
Permanent items (84,800)
Other 234,400
Change in deferred tax asset valuation allowance 2,706,000
-----------
$ -
-----------
</TABLE>
The Company has provided a valuation allowance for the full amount of its
net deferred tax asset since realization of these future benefits is not
sufficiently assured at December 31, 1998. Should the Company achieve
profitability, these deferred tax assets may be available to offset future
income tax liabilities and expense.
At December 31, 1998, the Company had federal and state net operating loss
carryforwards of approximately $8,244,000 which expire at various dates
through 2018. The Company also had federal and state research and
development tax credit carryforwards of approximately $231,000 which expire
at various dates through 2018. Under the Internal Revenue Code, certain
substantial changes in the Company's ownership may limit the amount of net
operating loss and tax credit carryforwards that can be utilized to offset
future taxable income or tax liability.
10. Employee Retirement Plan
10
<PAGE>
WebSpective Software, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
In 1998, the Company adopted a defined contribution plan established under
the guidelines of Section 401(k) of the Internal Revenue Code. This plan
covers substantially all employees and allows participants to defer a
portion of their annual compensation on a pre-tax basis. Company
contributions to the plan may be made at the discretion of the Board of
Directors. There have been no contributions made by the Company since
inception of the plan.
11. Commitments
The Company leases its office facilities and certain equipment under
various operating and capital leases. Total rent expense under operating
leases was approximately $277,500 for the year ended December 31, 1998.
Future minimum lease commitments at December 31, 1998 under capital leases
and operating leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
------- ----------
<S> <C> <C>
1999 $24,700 $ 381,800
2000 23,900 374,500
2001 5,500 374,500
2002 5,900 374,500
------- ----------
Total minimum lease payments 60,000 $1,505,300
----------
Less - Amount representing interest 10,400
-------
Present value of minimum lease payments $49,600
-------
</TABLE>
12. Acquisitions of the Company (unaudited)
On September 15, 1999, the Company entered into a purchase and sale
agreement with Inktomi Corporation, whereby Inktomi will issue shares of
Inktomi common stock in exchange for all of the outstanding equity of the
Company with the result that the Company will become a subsidiary of
Inktomi Corporation.
11
<PAGE>
EXHIBIT 99.3
INKTOMI CORPORATION
INDEX TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants.............................................................................. F-2
Supplementary Consolidated Balance Sheets...................................................................... F-3
Supplementary Consolidated Statements of Operations............................................................ F-4
Supplementary Consolidated Statements of Changes in Stockholders' Equity....................................... F-5
Supplementary Consolidated Statements of Cash Flows............................................................ F-6
Notes to Supplementary Consolidated Financial Statements....................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Inktomi Corporation
In our opinion, the accompanying supplementary consolidated balance sheet and
the related supplementary consolidated statement of operations, changes in
stockholders' equity and cash flows, present fairly, in all material respects,
the financial position of Inktomi Corporation and its subsidiaries at September
30, 1998 and the results of their operations and cash flows for the year then
ended, 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed
above.
As described in Note 1, on October 1, 1999 Inktomi Corporation acquired
WebSpective Software, Inc. in a transaction accounted for as a pooling of
interests. The accompanying supplementary consolidated financial statements
give retroactive effect to the acquisition of WebSpective Software, Inc.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling of interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation;
however, they will become the historical consolidated financial statements of
Inktomi Corporation and its subsidiaries after financial statements following
the date of consummation of the business combination are issued.
PRICEWATERHOUSECOOPERS LLP
San Francisco, California
October 16, 1998, except as to the
pooling of interests with Impulse!
Buy Network, Inc. which is as of
April 30, 1999, and the pooling
of interests of WebSpective
Software, Inc. which is as of
October 1, 1999.
F-2
<PAGE>
INKTOMI CORPORATION
SUPPLEMENTARY CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1999
----------------- ---------------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents............................................................ $ 33,050 $ 35,634
Short-term investments............................................................... 19,752 82,707
-------- --------
Total cash, cash equivalents and short-term investments............................. 52,802 118,341
Accounts receivable, net of allowances of $632 and $1,368, respectively.............. 5,103 14,337
Prepaid expenses and other current assets............................................ 755 1,537
-------- --------
Total current assets................................................................ 58,660 134,215
Property and equipment, net............................................................ 18,096 27,652
Security deposits and other long-term assets........................................... 225 2,233
-------- --------
Total assets........................................................................ $ 76,981 $164,100
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Current portion of notes payable..................................................... $ 3,921 $ 5,117
Current portion of capital lease obligations......................................... 2,073 2,643
Accounts payable..................................................................... 5,063 6,935
Accrued liabilities.................................................................. 7,395 9,293
Deferred revenue..................................................................... 1,979 6,142
-------- --------
Total current liabilities........................................................... 20,431 30,130
Notes payable........................................................................ 4,378 7,954
Capital lease obligations, less current portion...................................... 4,677 2,569
-------- --------
Total liabilities................................................................... 29,486 40,653
Commitments (Note 6)
Stockholders' equity
Common Stock, $0.001 par value; Authorized:
100,000 at September 30, 1998 and 300,000 at June 30, 1999 (unaudited);
Outstanding: 48,158 at September 30, 1998 and 51,035 at June 30, 1999
(unaudited)......................................................................... 48 51
Additional paid-in capital........................................................... 97,728 195,062
Deferred compensation and other...................................................... (3,419) (1,894)
Accumulated deficit.................................................................. (46,862) (69,772)
-------- --------
Total stockholders' equity.......................................................... 47,495 123,447
-------- --------
Total liabilities and stockholders' equity.......................................... $ 76,981 $164,100
======== ========
</TABLE>
The accompanying notes are an integral part of these supplementary consolidated
financial statements.
F-3
<PAGE>
INKTOMI CORPORATION
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Year For the Nine Months For the Nine Months
Ended September 30, 1998 Ended June 30, 1998 Ended June 30, 1999
------------------------ ------------------- -------------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Revenues
Network products............................... $ 8,856 $ 4,261 $ 26,908
Portal services................................ 12,476 8,419 19,477
-------- -------- --------
Total revenues............................. 21,332 12,680 46,385
Operating expenses
Cost of revenues............................... 5,026 3,032 8,664
Sales and marketing............................ 25,145 14,924 37,328
Research and development....................... 16,260 10,580 20,975
General and administrative..................... 5,267 3,531 5,452
Acquisition related costs...................... 1,018 -- 1,110
-------- -------- --------
Total operating expenses................... 52,716 32,067 73,529
-------- -------- --------
Operating loss.................................. (31,384) (19,387) (27,144)
Other income, net............................... 510 19 2,394
-------- -------- --------
Net loss................................... $(30,874) $(19,368) $(24,750)
======== ======== ========
Basic and diluted net loss per share............ $(0.78) $(0.52) $(0.50)
======== ======== ========
Shares used in calculating basic and diluted
net loss per share............................ 39,626 36,971 49,971
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these supplementary consolidated
financial statements.
F-4
<PAGE>
INKTOMI CORPORATION
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the year ended September 30, 1998
and the nine months ended June 30, 1999 (unaudited) (in thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional Deferred
------------------ --------------- Paid-in Compensation Accumulated
Shares Amount Shares Amount Capital & Other Deficit Total
-------- ------- ------ ------ ---------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1997 ...... 14,938 $ 15 12,262 $12 $ 20,752 $ 909 $(15,988) $ 5,700
Issuance of Preferred Stock,
net of issuance costs of $1,128... 3,298 3 12,884 12,887
Issuance of Common Stock for
cash, notes, or services,
including for exercise of
options and warrants ............ 9,557 10 48,742 (1,886) 46,866
Exercise of Preferred Stock
warrants ........................ 1,225 1 4,071 4,072
Conversion of Preferred Stock
to Common Stock ................. (19,461) (19) 26,339 26 8,476 8,483
Stock compensation in
connection with issuance of 2,394 (2,078) 316
stock options ...................
Foreign currency translation ..... (49) (49)
Stock compensation in
connection with issuance of
stock options by Impulse! Buy 409 (315) 94
Network .........................
Net loss ......................... (30,874) (30,874)
------- ------ ------ --- -------- ------- -------- --------
Balance, September 30, 1998 ...... -- -- 48,158 48 97,728 (3,419) (46,862) 47,495
Issuance of Common Stock in
public offering net of
issuance costs of $680 .......... 1,333 1 88,865 88,866
Issuance of Common Stock for
cash, notes, or services,
including for exercise of
options and warrants ............ 1,544 2 6,412 1,678 8,092
Stock compensation in
connection with issuance of
stock options by Impulse! Buy
Network and WebSpective 2,057 (1,917) 140
Software, Inc. ..................
Amortization of stock
compensation .................... 635 635
Repayment of shareholder loans ... 526 526
Foreign currency translation ..... (132) (132)
Unrealized gain on short term
investments ..................... 735 735
Adjustment to conform
WebSpective's year end .......... 1,840 1,840
Net loss ......................... (24,750) (24,750)
------- ------ ------ --- -------- ------- -------- --------
Balance, June 30, 1999
(Unaudited) ..................... -- $ -- 51,035 $51 $195,062 $(1,894) $(69,772) $123,447
======= ====== ====== === ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these supplementary consolidated
financial statements.
F-5
<PAGE>
INKTOMI CORPORATION
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the For the For the
Year Ended Nine Months Nine Months
September 30, 1998 Ended June 30, 1998 Ended June 30, 1999
------------------- -------------------- --------------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $ (30,874) $ (19,368) $ (24,750)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 3,955 2,425 8,252
Provision for doubtful accounts......................... 551 214 736
Stock based compensation................................ 980 232 2,314
Gain on equipment disposal.............................. 19 1 18
Changes in operating assets and liabilities
Accounts receivable.................................. (4,600) (1,535) (9,908)
Prepaid expenses and other assets.................... (194) (355) (2,839)
Accounts payable..................................... 2,484 2,165 1,995
Deferred revenue..................................... 1,021 1,496 4,982
Accrued liabilities and other........................ 6,190 2,685 1,726
--------- --------- ----------
Net cash used in operating activities.............. (20,468) (12,040) (17,474)
Cash flows from investing activities:
Purchases of short-term investments......................... (32,834) (18,810) (108,140)
Proceeds from the sale of short-term investments............ 13,091 1,751 45,920
Purchase of property and equipment.......................... (7,301) (4,543) (17,574)
Proceeds from sale of equipment............................. 928 928 --
--------- --------- ----------
Net cash used in investing activities.............. (26,116) (20,674) (79,794)
Cash flows from financing activities:
Proceeds from notes payable................................. 2,956 2,457 7,065
Repayments on notes payable................................. (2,338) (990) (2,293)
Payments on obligations under capital leases................ (353) (214) (1,538)
Proceeds from stockholder loans............................. -- -- 526
Proceeds from issuance of Redeemable Convertible Preferred
Stock, net of issuance costs.............................. 8,337 8,337 48
Proceeds from issuance of Preferred Stock, net of issuance
costs..................................................... 16,186 13,887 (5)
Proceeds from exercise of stock options and warrants......... 4,962 5,016 3,121
Repurchase and retirement of Common Stock.................... (10) (1) (1)
Purchase of Common Stock held in Treasury, net of issuance
costs..................................................... (4) -- (7)
Proceeds from issuance of Common Stock....................... 42,026 39,967 91,959
--------- --------- ----------
Net cash provided by financing activities.......... 71,762 68,459 98,875
--------- --------- ----------
Effect of exchange rates on cash and cash equivalents.......... (49) -- (132)
Increase in cash and cash equivalents.......................... 25,129 35,745 1,475
Adjustment to conform WebSpective's year end................... -- 735 1,109
Cash and cash equivalents at beginning of period............... 7,921 7,921 33,050
--------- --------- ----------
Cash and cash equivalents at end of period..................... $ 33,050 $ 44,401 $ 35,634
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these supplementary consolidated
financial statements
F-6
<PAGE>
INKTOMI CORPORATION
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 1999 and for the nine month
period then ended is unaudited)
(1) Significant Accounting Policies:
Organization:
Inktomi Corporation ("Inktomi" or the "Company") 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 data flow 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
3,782,628 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. In April 1999, Inktomi
acquired Impulse! Buy Network, Inc. ("Impulse! Buy"), a developer of online
merchandising software, to supplement the functionality of the shopping engine.
Under the terms of the merger agreement, Inktomi acquired all outstanding shares
of capital stock and assumed all outstanding warrants, stock options and stock
purchase rights of Impulse! Buy in exchange for 899,967 shares of Inktomi Common
Stock. The transaction was accounted for as a pooling of interests. Impulse!
Buy revenues since inception, were not significant. Impulse! Buy raised $4.3
million through various stock issuances in 1997 and 1998 and had net losses of
$2.2 million in the year ended September 30, 1998.
On October 1, 1999, Inktomi acquired WebSpective Software, Inc.
("WebSpective"), a developer of online operations management solutions software
for commerce-critical web sites. WebSpective's software and related services
allow users to effectively manage multi-server, multi-location web environments.
Under the terms of the merger agreement, Inktomi acquired all shares of capital
stock and assumed all outstanding warrants, stock options and stock purchase
rights of WebSpective in exchange for 827,524 shares of Inktomi Common Stock.
The transaction was accounted for as a pooling of interests. The Company will
record acquisition costs of approximately $3.8 million in the quarter ending
December 31, 1999 as a result of the acquisition, primarily for investment
banking fees, accounting, legal and other expenses. WebSpective revenues since
inception were $2.3 million. WebSpective raised $12.4 million through various
stock issuances since its inception in March 1997, and had net losses of $6.4
million and $3.6 million in the period ended December 31, 1998 and the nine
month period ended June 30, 1999 (unaudited), respectively. Prior to the merger
with Inktomi, WebSpective used a fiscal year ending December 31. On October 1,
1999, the reporting periods of Inktomi and WebSpective will be conformed, and
results of operations will be combined. As a result of conforming the reporting
periods of Inktomi and WebSpective, the operating results of WebSpective's three
month period ended December 31, 1998 are included in the restated financial
statements for both the fiscal year ended September 30, 1998, and the nine month
period ended June 30, 1999. Net loss for this period of approximately $1.8
million is reflected as an adjustment to conform WebSpective's year end in these
supplementary financial statements.
These financial statements present the supplementary consolidated financial
statements of the Company and WebSpective.
F-7
<PAGE>
INKTOMI CORPORATION
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the nine month
period then ended is unaudited)
Stock Splits:
In May 1998, Inktomi's Board of Directors and stockholders approved a 2:3
reverse stock split of the Company's Common Stock.
In December 1998, Inktomi's Board of Directors approved a two-for-one stock
split (in the form of a 100% stock dividend) of the Company's Common Stock.
Historical weighted average shares outstanding and loss per share amounts
have been restated to reflect both stock splits and the pooling of interests
with C\\2\\B, Impulse! Buy, and WebSpective.
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Inktomi Limited, a United Kingdom subsidiary
formed in October 1997. All intercompany balances and transactions have been
eliminated in the supplementary 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 high grade commercial paper, other debt instruments and
money market funds.
Short-Term Investments:
Short-term investments are comprised primarily of debt and equity
securities and are classified as available-for-sale investments. The carrying
value of debt security investments is adjusted to fair value with a resulting
adjustment to stockholders' equity. 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. Equity securities are carried at
cost until evidence exists to support their realizable fair value. Realized
gains and losses are recorded using the specific identification method. All
investments have maturity dates of less than one year.
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 period of disposition. Assets held under capital
lease and leasehold improvements are amortized on a straight-line basis over the
shorter of their estimated useful lives or remaining lease term. Major
additions and improvements are capitalized, while replacements, maintenance and
repairs that do not improve or extend the life of the assets are charged to
expense.
F-8
<PAGE>
INKTOMI CORPORATION
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the nine month
period then ended is unaudited)
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.
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.
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.
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 (included in portal 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-9
<PAGE>
INKTOMI CORPORATION
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the nine month
period then ended is unaudited)
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 $1,810,000 for the year ended September 30,
1998. Inktomi did not record revenue and expenses from barter agreements in the
unaudited nine-month period ended June 30, 1999.
Network products 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 ratably 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, which consist of stock options and warrants, have not
been included in the computation of diluted net loss per share as their effect
is anti-dilutive.
Foreign Currencies
The balance sheets of the Company's U.K. subsidiary are translated into
U.S. dollars at period end rates of exchange. Revenues and expenses are
translated at average rates for the period. The resulting translation
adjustments are included in stockholders' equity.
Exchange gains and losses arising from transactions denominated in a
foreign currency other than the functional currency of the entity involved are
included in other expense. Such exchange gains (losses) have been immaterial to
date.
Business Risk and Concentration of Credit Risk:
The Company operates in the Internet industry, which is 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), short-term investments, and accounts
receivable. The Company places its cash, cash equivalents, and short-term
investments with major financial institutions and such deposits exceed federally
insured limits.
The Company does not require collateral, and maintains reserves for
potential credit losses on customer accounts when deemed necessary. For the year
ended September 30, 1998, four customers represented 35%, 16%, 14% and 12%,
respectively, of accounts receivable and 10%, 0%, 21% and 8% of all revenue
generated by the Company, at September 30, 1998. For the unaudited nine-month
period ended June 30, 1999, one customer accounted for 12% of all revenue
generated by the Company and a different customer accounted for 13% of accounts
receivable at June 30, 1999, respectively.
F-10
<PAGE>
INKTOMI CORPORATION
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the nine month
period then ended is unaudited)
Recently Issued Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 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 investments. The
components of comprehensive income are as follows (in thousands):
<TABLE>
<CAPTION>
For the Year Ended For the Nine Months
September 30, 1998 Ended June 30, 1999
-------------------- ---------------------
(unaudited)
<S> <C> <C>
Net loss...................................... $ (30,874) $ (24,750)
Unrealized gain on available for sale
investments............................. -- 735
Foreign currency translation losses........... (49) (132)
--------- ---------
Comprehensive net loss........................ $ (30,923) $ (24,147)
========= =========
</TABLE>
During 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, Disclosure about Segments of an Enterprise and Related Information,
effective for the fiscal year ended September 30, 1999. The Company is currently
determining the disclosures that may be required under this pronouncement.
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 provides
guidance for determining whether computer software is internal-use software and
on accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Inktomi believes that the adoption of
SOP 98-1 will not have a material impact on its consolidated financial
statements. SOP 98-1 will be effective for Inktomi's consolidated financial
statements for the fiscal year beginning October 1, 1999.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 is effective for transactions
entered into after March 31, 2000 and requires that all derivative instruments
be recorded on the balance sheet at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and the type of hedge transaction. The ineffective portion of all
hedges will be recognized in earnings. Inktomi is currently assessing the impact
of this new statement but does not expect any material effect on its
consolidated financial position, liquidity or results of operation.
In October 1998, Inktomi adopted SOP 97-2, Software Revenue Recognition,
which was amended by SOP 98-4, Deferral of the Effective Date of Certain
Provisions of SOP 97-2, and SOP 98-9, Software Revenue Recognition. The adoption
of SOP 97-2, SOP 98-4 and SOP 98-9 did not have a significant impact on the
Company's revenue recognition policies.
Unaudited Interim Financial Information
In the opinion of management, the unaudited interim financial statements
for the nine month period ended June 30, 1999 have been prepared on the same
basis as the annual financial statements and reflect all adjustments that are
necessary for the fair presentation of 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 interim period.
F-11
<PAGE>
INKTOMI CORPORATION
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the nine month
period then ended is unaudited)
(2) Property and Equipment:
Property and equipment consists of (in thousands):
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1999
------------------- -------------
(unaudited)
<S> <C> <C>
Computer equipment ............................................... $21,846 $ 36,323
Furniture and fixtures ........................................... 1,494 2,471
Leasehold improvements ........................................... 389 1,678
------- --------
23,729 40,472
Less accumulated depreciation and amortization .............. (5,633) (12,820)
------- --------
Property and equipment, net ................................ $18,096 $ 27,652
======= ========
</TABLE>
The Company recognized losses for the abandonment of leasehold improvements
with net book values of $605,000 due to a corporate relocations in March 1999.
Assets acquired under capitalized lease obligations are included in computer
equipment and furniture and fixtures and totaled $6,953,000 (including equipment
previously purchased), with related amortization of $350,000 as of September 30,
1998.
(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 are as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
September 30, 1998 June 30, 1999
------------------ --------------
(unaudited)
<S> <C> <C>
Federal tax benefit at statutory rate ............... $(10,497) $(8,415)
State taxes, net of federal tax effect .............. (2,127) (1,611)
Permanent items ..................................... (84) (60)
Other ............................................... 234 133
Change in deferred tax asset valuation allowance .... 2,706 2,267
Research and experimentation credits ................ (469) (150)
Unutilized net operating losses ..................... 10,237 7,836
-------- -------
$ -- $ --
======== =======
</TABLE>
Net deferred tax assets comprise (in thousands):
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1999
------------------ ------------------
(unaudited)
<S> <C> <C>
Net operating loss carryforwards .................... $ 16,601 $ 22,358
Research and experimentation credit carryforwards ... 1,318 1,526
Other liabilities and reserves ...................... 767 1,402
Property and equipment .............................. (666) (356)
Acquired technology ................................. 173 45
Deferred revenue .................................... 524 2,138
Valuation allowance ................................. (18,717) (27,113)
-------- --------
Net deferred tax assets .......................... $ -- $ --
======== ========
</TABLE>
F-12
<PAGE>
INKTOMI CORPORATION
-------------------
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the nine month
period then ended is unaudited)
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. Should the Company
achieve profitability, these deferred tax assets may be available to offset
future income tax liabilities and expenses.
At June 30, 1999 (unaudited), the Company had the following carryforwards
available to reduce future taxable income and income taxes (in thousands):
<TABLE>
<CAPTION>
June 30, 1999
-------------------------
Federal State
----------- -----------
(unaudited)
<S> <C> <C>
Net operating loss carryforwards...................................................... $ 87,845 $ 43,646
Research and experimentation credit carryforwards..................................... $ 1,391 $ 750
</TABLE>
The federal and state net operating loss carryforwards expire through 2019
and 2004, respectively, and the research and experimentation credits expire
through 2004.
For federal and state tax purposes, the Company's net operating loss and
research and experimentation credit carryforwards could be subject to certain
limitations on annual utilization if certain changes in ownership were to occur,
as defined by federal and state tax laws.
F-13
<PAGE>
INKTOMI CORPORATION
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the nine month
period then ended is unaudited)
(4) Notes Payable and Line of Credit (dollars in thousands):
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1999
------------------- -------------
(unaudited)
<S> <C> <C>
Bank line (1).......................................................... $ 352 $ 3,500
Equipment notes (2).................................................... 3,389 7,193
Bank term note (3)..................................................... 1,167 611
Other bank note (4).................................................... 490 --
Notes payable (5)...................................................... 2,521 1,563
Other notes payable (6)................................................ 380 204
------- -------
8,299 13,071
Less current portion................................................... (3,921) (5,117)
------- -------
Notes payable, less current portion.................................... $ 4,378 $ 7,954
======= =======
</TABLE>
__________
(1) The Company has a $2,500 revolving bank 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 June 30, 1999. Borrowings
under the facility are repayable in 36 equal monthly installments plus
interest at 0.25% over prime (8.75% at September 30, 1998 and 8.0% at June
30, 1999). The master bank credit agreement requires the Company to comply
with certain financial covenants related to working capital, tangible net
worth and debt service 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. The Company has a subordinated
loan with a financing company in which the Company has the ability to borrow
up to $3,000, in minimum installments of $500 each through March 2000 (as of
June 30, 1999, the entire $3,000 had been borrowed under the terms of the
loan agreement). This loan was assumed as a part of the WebSpective
acquisition. The repayment schedule for each installment consists of nine
monthly payments of interest only, followed by 27 monthly payments of
principal and interest. The loan is subordinate in right of payment of
interest and principal to the equipment line, bears interest at 3.5% over
prime (1.25% at June 30, 1999), and is collateralized by substantially all
the assets of the Company.
(2) The equipment notes include five loans. The first loan for $1,750 has
monthly payments of interest only until May 1998 and then is payable in
equal monthly payments of $49 plus interest at 0.5% over prime (9.0% at
September 30, 1998 and 8.25% at June 30, 1999) through April 2001. The
second loan for $2,000 has monthly payments of $56 plus interest at 0.25%
over prime (8.75% at September 30, 1998 and 8.0% at June 30, 1999) and
matures in June 2001. The third loan for $4,722 has monthly payments of $139
plus interest at 0.25% over prime (8.0% at June 30, 1999) and matures in
June 2002. The fourth loan for $185 has equal monthly payments of $5 plus
interest at 1% over prime (9.5% at September 30, 1998 and 8.75% at June 30,
1999) through July 2001. The fifth loan for $101 has monthly payments of $3
plus interest at 1% over prime (9.5% at September 30, 1998 and 8.75% at June
30, 1999) through July 2001. The fourth and fifth loans were assumed as part
of the WebSpective acquisition. The notes have collateralization and
covenant requirements consistent with the bank line of credit as described
above.
(3) The bank term note of $2,000 is payable in equal monthly payments of $56
plus interest at 0.5% over prime (9.0% at September 30, 1998 and 8.25% at
June 30, 1999) 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, Inc. in September 1998. The
8.5% note was paid in full in November 1998.
(5) The notes payable are payable in equal monthly payments of $103 and
$5 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 $20
through March 2000, with a final balloon payment of $60. 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>
<CAPTION>
Years ending:
<S> <C>
September 30, 1999.................................................................................. $ 3,921
September 30, 2000.................................................................................. 3,430
September 30, 2001.................................................................................. 948
-------
$ 8,299
=======
</TABLE>
The carrying value of notes payable approximated fair value as the related
interest rates approximate market rates.
F-14
<PAGE>
INKTOMI CORPORATION
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the nine month
period then ended is unaudited)
(5) Accrued Liabilities:
Accrued liabilities comprise (in thousands):
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1999
------------------ -------------
(unaudited)
<S> <C> <C>
Accrued payroll, vacation and bonuses .................................. $4,028 $3,697
Other accrued liabilities .............................................. 3,367 5,596
------ ------
Total accrued liabilities ........................................... $7,395 $9,293
====== ======
</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
June 30, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
------- ------
<S> <C> <C>
Three months ending September 30, 1999.................................. $ 1,892 $ 389
Years ending September 30,:
2000................................................................ 5,560 2,948
2001................................................................ 6,892 2,613
2002................................................................ 8,175 6
2003................................................................ 7,161 --
2004................................................................ 7,155 --
Thereafter.......................................................... 47,396 --
------- -------
Total minimum lease payments............................................ $ 84,231 $ 5,956
=======
Less amount representing interest....................................... (744)
-------
Present value of minimum lease payments................................. 5,212
Less current portion.................................................... (2,643)
-------
Capital lease obligations, less current portion......................... $ 2,569
=======
</TABLE>
In October 1998, the Company signed a lease for new office space located in
Foster City, California. This lease commenced in September 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 provided a supplemental
deposit in the form of a letter of credit in the amount of $4,844,000 in January
1999.
(7) Stockholders' Equity:
In June 1998, all 19.5 million shares of Preferred Stock were converted
into 26.3 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 $46.9 million, net of issuance costs, from
an initial public offering of 4,712,994 shares of Common Stock and other stock
offerings including the issuance of common stock for cash, notes, services, and
the exercises of common stock options and warrants.
F-15
<PAGE>
INKTOMI CORPORATION
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the nine month
period then ended is unaudited)
In November 1998, the Company completed a secondary offering of its Common
Stock in which it sold 1,332,536 shares raising $88.9 million, net of issuance
costs and underwriters' discounts.
(8) Deferred Compensation and Other:
Deferred compensation and other includes (in thousands):
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1999
------------------ -------------
(unaudited)
<S> <C> <C>
Deferred compensation ................................................... $(2,496) $(3,625)
Warrants issued and options granted to consultants ...................... 239 1,917
Shareholder loans ....................................................... (1,113) (740)
Cumulative foreign exchange adjustment .................................. (49) (181)
Unrealized losses on short-term investments ............................. -- 735
------- -------
Total deferred compensation and other equity ......................... $(3,419) $(1,894)
======= =======
</TABLE>
(9) Warrants:
In 1997 and 1998, the Company issued warrants to a customer and financial
providers to purchase Common Stock.
In May 1999, a warrant holder elected to exercise its warrant to purchase
400,944 shares of Common Stock. As a result of a net exercise, the Company
issued 392,117 shares of Common Stock to the warrant holder.
At June 30, 1999 (unaudited) the following warrants were outstanding:
<TABLE>
<CAPTION>
Common Stock Exercise Price Expiration Dates
--------------- ----------------- -------------------------
<S> <C> <C> <C>
Common Stock ......................................... 835,402 $ 137,841 April 2002
Common Stock ......................................... 6,668 $ 25,005 August 2001
Common Stock ......................................... 194,446 $2,925,024 June 2002
Common Stock ......................................... 8,939 $ 180,000 April 2002
Common Stock ......................................... 15,337 $ 500,288 June 2003
</TABLE>
At June 30, 1999 (unaudited), all warrants were exercisable. Subsequent to
June 30, 1999, a warrant holder elected to exercise its warrant to purchase
15,337 shares of Common Stock.
F-16
<PAGE>
INKTOMI CORPORATION
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the nine month
period then ended is unaudited)
(10) Stock Options:
Pursuant to the Inktomi Corporation 1998 Stock Plan, its 1996 Equity
Incentive Plan, the C\\2\\B Technologies Inc. 1997 Stock Plan (the "Plans"), as
amended, the Impulse! Buy Network 1997 Stock Option Plan (the "Impulse Plan"),
and the WebSpective 1997 Stock Option Plan (the "WebSpective Plan"), employees,
directors and consultants of the Company may be granted options to purchase
shares of Common Stock. At September 30, 1998, 2,000,000 shares of Common Stock
were reserved under the 1998 plan and 111,023 shares were authorized under the
Impulse Plan and 175,197 shares of Common Stock were reserved under the
WebSpective Plan. At September 30, 1998, shares were no longer available for
issuance from the 1996 and 1997 plans. Options granted under the Plans, the
Impulse Plan and the WebSpective Plan include incentive stock options and
nonqualified stock options. Stock options granted under the Plans the Impulse
Plan and the WebSpective Plan generally vest over 36 to 50 months and are also
immediately 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 on the original vesting schedule. Prior to the adoption
of the Plans, the Impulse Plan and the WebSpective Plan, the Company granted
nonqualified stock options to purchase Common Stock to certain employees and
consultants. Options have a term of generally 10 years.
A summary of the activity under the Plans, the Impulse Plan and the
WebSpective Plan 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 October 1, 1997................................. 3,927 $0.06-$ 1.95 1,095 $ 0.28
Granted........................................................ 3,477 $1.34-$53.75 36,896 $10.61
Exercised...................................................... (1,566) $0.11-$10.50 (1,418) $ 0.91
Canceled....................................................... (373) $0.45-$18.00 (226) $ 0.61
------ --------
Outstanding at September 30, 1998.............................. 5,465 $0.06-$53.75 36,347 $ 6.65
Granted (unaudited)............................................ 3,107 $0.80-$84.75 199,133 $64.10
Exercised (unaudited).......................................... (680) $0.17-$61.63 (2,210) $ 3.45
Canceled (unaudited)........................................... (189) $0.23-$ 4.03 (1,580) $ 8.40
------ --------
Outstanding at June 30, 1999 (unaudited)....................... 7,703 $0.06-$84.75 $231,690 $30.08
====== ========
</TABLE>
At June 30, 1999, there were 1,709,274 shares which were subject to
repurchase.
F-17
<PAGE>
INKTOMI CORPORATION
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the nine month
period then ended is unaudited)
The following table summarizes information with respect to stock options
outstanding at June 30, 1999 (unaudited):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------- ---------------------------------
Weighted
Average Weighted Number Weighted
Number Remaining Average Exercisable Average
Range of Outstanding Contractual Life Exercise At June 30, Exercise
Exercise Prices at June 30, 1999 (Years) Price 1999 Price
- ------------------------ ------------------ ---------------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 0.06- 5.25 3,163,913 7.38 $ 0.97 3,163,913 $ 0.97
$ 6.50-$31.00 1,824,396 9.09 $22.82 1,824,396 $22.82
$39.53-$84.75 2,715,373 9.76 $69.93 2,715,373 $69.93
</TABLE>
In connection with the completion of the Company's initial public offering
and the acquisitions of C\\2\\B, Impulse! Buy and WebSpective, certain options
granted in 1997 and 1998 have been considered to be compensatory. Compensation
associated with such options for the year ended September 30, 1998 amounted to
$2,803,000. Of these amounts, $410,000 was charged to operations for the year
ended September 30, 1998 and $3,012,000 will be charged to operations during the
remaining period to 2002.
The following information concerning the Plans, the Impulse Plan and the
WebSpective Plan is provided in accordance with SFAS No. 123, Accounting for
Stock-Based Compensation. The Company accounts for all Plans in accordance with
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations; accordingly, compensation expense is
recorded for options awarded to employees and directors to the extent that the
exercise prices are less than the Common Stock's fair market value on the date
of grant, where the number of options and exercise price are fixed. The
difference between the fair value of the Company's Common Stock and the exercise
price of the stock option is recorded as deferred stock compensation, and is
amortized to compensation expense over the vesting period of the underlying
stock option.
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, 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 weighted
average fair values for the year ended September 30, 1998, was $10.50. The
following assumptions were used in determining the fair value of options
granted:
<TABLE>
<CAPTION>
<S> <C>
Net loss--Historical............................................................. September 30, 1998
------------------
Risk-free interest rates......................................................... 5.30%-6.60%
Expected life.................................................................... 5 years
Dividends........................................................................ 0%
Volatility....................................................................... 140%
</TABLE>
The following comprises the pro forma information pursuant to the
provisions of SFAS No. 123 (in thousands):
<TABLE>
<CAPTION>
September 30, 1998
-------------------
<S> <C>
Net loss--Historical.............................................................. $(30,874)
Net loss--Pro Forma............................................................... $(32,416)
</TABLE>
These pro forma amounts may not be representative of the effects on pro
forma net loss for future years as options vest over several years and
additional awards are generally made each year.
F-18
<PAGE>
INKTOMI CORPORATION
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the nine month
period then ended is unaudited)
(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. At June 30, 1999,
$178,000 of the principal loan balance remains outstanding.
In August and October 1999, the Company provided loans to an employee
totaling $2.2 million. The loans are repayable to the Company in August and
October 2003 with interest at a rate of 5.96%. The loans are collateralized by
the personal assets of the employee.
The Company holds equity securities as short-term investments in certain
customers at June 30, 1999. These customers attributed $1,361,000 of accounts
receivable and $5,942,000 of revenue as of and for the nine month period ended
June 30, 1999.
(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. The Company may make
discretionary contributions. The Company has made no contributions during the
period ended September 30, 1998 and the unaudited nine month period ended June
30, 1999.
(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 Year Ended For the Nine Months For the Nine Months
September 30, 1998 Ended June 30, 1998 Ended June 30, 1999
-------------------- --------------------- --------------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Numerator--Basic and Diluted EPS............................
Net loss ................................................ $(30,874) $(19,368) $(24,750)
======== ======== ========
Denominator--Basic and Diluted EPS
Weighted average Common Stock outstanding ............... 39,626 36,971 49,971
======== ======== ========
Basic and diluted loss per common share ................... $ (0.78) $ (0.52) $ (0.50)
======== ======== ========
Securities not included as they would be anti-dilutive .... 6,964 4,710 8,764
======== ======== ========
</TABLE>
F-19
<PAGE>
INKTOMI CORPORATION
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of June 30, 1999 and for the nine month
period then ended is unaudited)
(14) Supplemental Disclosure of Cash Flow Information (in thousands):
<TABLE>
<CAPTION>
For the For the For the
Year Ended Nine Months Nine Months
September 30, 1998 Ended June 30, 1998 Ended June 30, 1999
------------------- ------------------- -------------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Accounts payable related to purchase of property and
equipment................................................... $ 1,473 $ -- $ --
======= ====== ======
Exercise of Common Stock options in exchange for note
receivable.................................................. $ 666 $ -- $ --
======= ====== ======
Stock options issued as compensation for services rendered... $ 36 $ -- $ --
======= ====== ======
Capital lease obligations incurred for fixed assets.......... $ 63 $ 47 $ --
======= ====== ======
Note payable issued in exchange for fixed assets............. $ 87 $ -- $ --
======= ====== ======
Notes received from shareholders in exchange for Series B
Preferred Stock............................................. $ 146 $ 146 $ 153
======= ====== ======
Notes received from employees in connection with exercise
of options to purchase Common Stock......................... $ 95 $ 95 $ --
======= ====== ======
Cancellation of employee note in connection with repurchase
of Common Shares held in Treasury........................... $ (8) $ -- $ --
======= ====== ======
Assets acquired under capital lease.......................... $ 6,939 $1,705 $ --
======= ====== ======
Common Stock issued in exchange for prepaid advertising
$ 285 $ -- $ --
======= ====== ======
Retirement of Common Stock held in Treasury.................. $ -- $ -- $ 12
======= ====== ======
Cash paid for interest....................................... $ 26 $ 406 $1,359
======= ====== ======
</TABLE>
(15) Subsequent Events:
In August 1999, the Company completed the sale of 2,447,275 shares of
Common Stock to the public, raising $216.2 million, net of issuance costs and
underwriters' discounts.
F-20
