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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended September 30, 1999 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _____________________
to ________________.
Commission File Number 0-24339
INKTOMI CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3238130
(State of incorporation) (I.R.S. Employer Identification No.)
4100 EAST THIRD AVENUE
FOSTER CITY, CALIFORNIA 94404
(Address of principal executive offices)
Registrant's telephone number, including area code: (650) 653-2800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Based on the closing sale price of the common stock on the Nasdaq National
Market System on November 30, 1999, the aggregate market value of the voting
stock held by non-affiliates of the Registrant was $5,666,270,431. Shares of
common stock held by each officer and director and by each person known by the
Company to own 5% or more of the outstanding common stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
The number of shares outstanding of Registrant's common stock, $0.001 par
value, was 54,071,757 at November 30, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information is incorporated by reference to the Proxy Statement for
the Registrant's 2000 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than 120
days after the end of the fiscal year covered by this Form 10-K.
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INKTOMI CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
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Part I
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Item 1. Business ........................................................ 1
Item 2. Properties........................................................ 10
Item 3. Legal Proceedings ............................................... 10
Item 4. Submission of Matters to a Vote of Security Holders ............. 10
Part II
Item 5. Market Registrant's Common Stock and Related Stockholder Matters.. 10
Item 6. Selected Financial Data ......................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation ........................................ 12
Item 8. Financial Statements and Supplemental Data ...................... 24
Item 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure ............................................ 24
Part III
Item 10. Directors and Executive Officers of the Registrant .............. 24
Item 11. Executive Compensation .......................................... 24
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 24
Item 13. Certain Relationships and Related Transactions .................. 24
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 24
Signatures ...................................................................................... 27
Financial Statements ............................................................................ F-1
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This report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. When used in this report, the words
"anticipate", "believe", "estimate", "will", "may", "intend" and "expect" and
similar expressions identify forward-looking statements. Forward-looking
statements in this report include, but are not limited to, those relating to the
general rapid expansion of our business, including the expansion of our network
products and portal services, our ability to develop multiple applications, our
planned introduction of new products and services, the possibility of acquiring
complementary businesses, products, services and technologies and our
development of relationships with providers of leading Internet technologies.
Although we believe that our plans, intentions and expectations reflected in
these forward-looking statements are reasonable, we can give no assurance that
these plans, intentions or expectations will be achieved. Actual results,
performance or achievements could differ materially from those contemplated,
expressed or implied by the forward-looking statements contained in this report.
Important factors that could cause actual results to differ materially from our
forward-looking statements are set forth in this report, including under the
heading "Factors Affecting Operating Results" contained in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operation." These
factors are not intended to represent a complete list of the general or specific
factors that may affect us. Other factors, including general economic factors
and business strategies, may be significant, presently or in the future, and the
factors set forth in this report may affect us to a greater extent than
indicated.
We incorporated in California in February 1996 and reincorporated in Delaware
in February 1998. In this report, "Inktomi," "we," "us," and "our" refer to
Inktomi Corporation and its subsidiaries.
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PART I
ITEM 1. BUSINESS
Overview
We are a leading provider of scalable software applications designed to
significantly enhance the performance and intelligence of large-scale networks,
particularly the Internet. Our applications fall into two broad categories:
network products and portal services. Our network products applications consist
of the Traffic Server network cache platform, Content Delivery Suite and
associated Traffic Server extensions. These products are intended to provide a
complete infrastructure solution for the distribution, delivery and management
of content and applications. Our current portal services applications include
search, shopping and directory services and are offered to Internet portal and
web site customers.
Industry Background
International Data Corporation estimates that there were approximately 159
million users of the Internet at the end of 1998 and that the number of users
will grow to 410 million by the end of 2002. The dramatic growth in the number
of Internet users and the availability of powerful new tools for the development
and distribution of Internet content have led to a proliferation of useful
information and services on the Internet, including electronic commerce, online
magazines, e-mail services, specialized news feeds, interactive games, and
educational and entertainment applications. Although primarily text and
graphics-based today, information and services available on the Internet are
increasingly incorporating multimedia components such as video and audio clips.
The availability of richer content and services is attracting greater numbers of
Internet users, fueling a cycle of growth where more users demand more
information, and more information attracts more users.
To accommodate and manage increasing traffic, network providers must
continually expand and upgrade their networks as well as improve connectivity to
other regional networks. Similarly, Internet portals and other providers of
online services such as search, electronic commerce, e-mail and chat must scale
and enhance their services to keep pace with the growth in user demand and
available information. The technical challenges and on-going investments
associated with maintaining and upgrading the systems required to provide these
services are substantial. Continued increases in the volume, variety and
richness of information will magnify these challenges.
To date, network providers have primarily attempted to meet increasing
demand by installing additional telephone lines, fiber optic cable, routers and
switches, and by deploying data compression and multiplexing technologies. These
equipment-based approaches focus exclusively on expanding bandwidth capacity by
increasing the number of lines over which data can be transmitted or increasing
the volume of data that can be transported over existing lines. However, these
approaches do not address the fundamental architectural shortcomings of these
networks. As a result, they have not generated and cannot generate sufficient
bandwidth to keep pace with the anticipated growth in traffic. Moreover, these
approaches are labor-intensive, slow and costly to implement and do not enable
the provision of differentiated levels of service.
Other approaches employed by network providers, such as client and proxy
server-based caching, are designed to enhance the efficiency of data
distribution by reducing the amount of redundant network traffic. Web browsers
and proxy servers each contain caches that store data, eliminating the need to
traverse the entire network to reacquire data. Browser-based caches, however,
are small and only address the needs of individual users. Proxy server-based
caches can serve large workgroups, but generally are not scalable beyond several
hundred users and can themselves become network bottlenecks.
Internet portals and other online service providers have primarily
addressed the growth in user demand and available information by deploying
larger computing systems to run their services. At times, this growth has
substantially outpaced their ability to deploy these systems, forcing service
providers to limit the availability or functionality of their services or to
reduce the number of users utilizing the service. Deploying larger computing
systems is expensive and difficult to accomplish on an incremental basis.
Limiting the availability or functionality of the service and reducing the
number of users can result in lost revenue and can alienate end users.
We believe that in order for the Internet to scale cost-effectively,
network and service providers must deploy a new layer of high-performance
software throughout the network infrastructure. This software must efficiently
leverage the Internet's existing and future network hardware infrastructure to
intelligently manage and distribute increasingly more and richer content.
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The Inktomi Solution
We develop and market scalable software applications designed to
significantly enhance the performance and intelligence of large-scale networks,
particularly the Internet. Utilizing our coupled cluster architecture and
dataflow and concept induction technologies, our network products and portal
services are specifically designed to address the challenges posed by the
explosive growth in the number of network users, documents and services, and the
resultant increase in traffic volume and electronic commerce. Our architecture
and technology enable us to provide applications with the following benefits:
Scalability. Our coupled cluster software architecture enables multiple
workstations collaborating via high-speed connections to function as one
extremely powerful computer. The architecture is designed to scale without
limit and without significant deterioration in performance as additional
workstations are added to the cluster. Furthermore, the architecture
facilitates the "hot" addition of incremental workstations, without any negative
impact on existing cluster operations.
Efficiency. Our dataflow technology enables a single workstation to
efficiently process up to thousands of operations simultaneously, as compared to
traditional software architectures that can only process up to tens or hundreds
of operations simultaneously before experiencing significant performance
degradation. This technology greatly improves the performance of each
workstation within the cluster which increases the efficiency of data
throughput.
High System Availability. Our coupled cluster software architecture
enables our applications to be fault-tolerant. If any workstation within the
cluster fails, the cluster management software reassigns the task load among the
remaining workstations running the application. When the failed workstation is
restored, tasks are intelligently reassigned to the newly functioning
workstation. Since each workstation has its own buses, power supply and disk
drives, system availability is maintained because the failure of an individual
workstation generally does not cause the failure of the entire cluster.
Price/Performance. Clusters consist of relatively inexpensive, commodity
workstations and require a significantly smaller initial hardware investment
than mainframe or large SMP-based systems of comparable computing power. When a
coupled cluster system requires additional capacity, one or more workstations
can be added on an incremental, "pay-as-you-go" basis. In contrast, when a
mainframe or large SMP-based system reaches full capacity, the existing system
must be replaced with a larger system or an additional system must be added with
similar capabilities. Each of these alternatives requires a substantial capital
outlay and still may not achieve the same performance capabilities as a cluster-
based system.
Interoperability. Our software architecture is designed to interoperate
with standard central processing unit (CPU) architectures and operating systems.
Our approach is distinguished from that of hardware vendors that may seek to
preserve the market for their network equipment by supporting only their
proprietary operating systems or closed CPU architectures. Our architecture
extends the useful life of customer hardware investments by seamlessly
supporting different generations of workstations in any given cluster.
Manageability. Our coupled cluster software architecture was designed from
the outset to manage large clusters of workstations easily from a single
management station. The architecture enables cluster managers to monitor and
configure the entire system, either on-site or remotely, through a standard Web
browser interface.
Strategy
Our strategy is to be the leading provider of scalable software
applications specifically designed to address the distributed data management
challenges posed by rapidly growing global information networks. Key elements
of our strategy are:
Leverage Core Technology to Develop Multiple Applications. The core of our
clustering technology was initially developed by some of our key employees at
the University of California at Berkeley in 1994, and has been designed from the
start to serve as the foundation for a variety of scalable software
applications. Since that time, we have substantially modified and enhanced the
initial technology and developed additional core technologies such as our
dataflow and concept induction technologies to complement the clustering
technology. In addition, we have invested significant time and resources in
creating a structured product development process and have successfully
recruited computer scientists, engineers and software developers with expertise
and advanced degrees in the areas of massively parallel computing, coupled
cluster computing, software dataflow operations and mathematics. We believe
that our technology, personnel and development process will enable us to enhance
our existing products and to develop new scalable software applications to meet
the needs of network and online service providers.
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Target Traffic Server at Large Network Providers. We are initially
targeting telecommunications carriers and Internet service providers for our
Traffic Server network cache platform. Traffic Server is a high-performance
caching solution that is designed to be sufficiently scalable to handle massive
and growing network traffic volumes. Network providers are spending billions of
dollars domestically and internationally to increase bandwidth through the
deployment of expensive network hardware intended to speed data transfer and
increase capacity. Despite this investment, demand for bandwidth continues to
outpace the ability of network providers to increase capacity. We believe that
Traffic Server provides a more compelling value proposition for these customers
because it reduces redundant traffic, thereby increasing available bandwidth at
a substantially lower cost.
Establish Traffic Server as the de Facto Standard. We intend to establish
and maintain Traffic Server as the leading cache solution for large-scale
networks. We have initially targeted network providers that operate the largest
and most complex networks, and have designed Traffic Server to serve as a
platform that easily integrates into their existing network infrastructures. We
believe that adoption of Traffic Server by these leading providers will validate
our technology and facilitate broad market acceptance, as well as further our
objective of establishing Traffic Server in the corporate marketplace. In
addition, we believe that, in the absence of standardized approaches to network
caching, the opportunity currently exists for us to establish Traffic Server as
the platform of choice through its adoption and implementation by high profile
network providers.
Become the Technology Provider of Choice to Online Service Providers. We
believe that we can leverage our scalable software architecture to develop and
provide multiple services to Internet portals and other online service
providers. In the early days of the Internet, online service providers
primarily focused on providing a single service to end users, such as search, e-
mail, online magazines and interactive games. As the Internet has matured, many
online service providers have expanded their service offerings and fostered
online communities in an effort to attract and retain increasing numbers of end
users. The goal of these Internet portals and other online service providers
has been to build brand and user loyalty and to diversify and enhance their
sources of direct and indirect revenue. However, the addition of new services
and the significant increase in the size and complexity of the Internet requires
substantial on-going investments and technological expertise in order to
maintain and upgrade the quality of the services provided. We believe these
factors will lead many companies to outsource services such as their search and
online shopping capabilities rather than develop and maintain them in-house.
Develop Direct and Indirect Distribution Channels. Our sales strategy is
to pursue opportunities with large accounts through our direct sales force, and
to penetrate various targeted market segments through multiple indirect
distribution channels. We have established a direct sales force covering the
United States and Canada as well as a direct sales force in England, France and
Germany to address the European market. We intend to increase the size of our
direct sales force and to establish additional sales offices domestically and
internationally. We plan to complement our direct sales force by establishing
multiple indirect distribution channels including OEMs, resellers, systems
integrators and joint marketing partners. These channels are intended to
increase geographic sales coverage and to address mid-tier Internet service
providers and large corporate customers.
Pursue Strategic Investments and Acquisitions. The Internet infrastructure
market is rapidly changing and intensely competitive. The growth of the
Internet is creating business opportunities for companies to sell products and
services to network and online service providers to enable them to provide new
and improved services to their end users. In order to leverage our internal
development capabilities to take advantage of these rapidly developing
opportunities, we intend to acquire and invest in complementary businesses,
products and technologies. For example, since September 1998, we have acquired
three companies to accelerate our entry into the online shopping business and to
enhance our network products offering. We believe this strategy will enable us
to meet the increasingly sophisticated needs of our customers, rapidly expand
our product offerings and take advantage of new market opportunities.
Products
We develop and market scalable software applications designed to
significantly enhance the performance and intelligence of large-scale networks,
particularly the Internet. Our software applications are built upon powerful
core technology and currently consist of network products and portal services.
Network Products
Traffic Server. Our Traffic Server application is the foundation of our
network products offerings. Traffic Server is a network cache platform designed
to enable network providers to manage bandwidth resources more effectively,
significantly improve the quality of service for their end users, and offer new
and differentiating value-added services. We are targeting Traffic Server to
organizations that provide Internet access, hosting and broadband services, as
well as those of enterprise networks, both domestically and internationally.
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At the core of Traffic Server is a highly scalable, high-performance cache
server that is designed to reduce Internet congestion and increase overall
network efficiency. Information available on traditional data networks is
stored in a single source location. An end user interested in particular
information establishes contact with the source computer on the network and
initiates a request for the information. Once contact is established with the
source computer, the information is compiled and sent over the network to the
end user's computer. Multiple end users initiating multiple requests leads to
redundant transmission of the same information over the network, resulting in
network congestion and data access and information delivery bottlenecks.
Redundant traffic strains the network and consumes bandwidth.
Traffic Server is based on the premise that it is less expensive to store
information than to move it. Traffic Server stores or "caches" local copies of
frequently accessed information in dedicated storage systems in proximity to the
user. Requests for information are managed by Traffic Server, which determines
if the requested information is located in the cache. If so, the information is
accessed directly from the cache, thereby avoiding the need to traverse the
entire network. If the information is not located in the cache, the information
is accessed and retrieved from the source computer. The information is then
stored in the cache and is thus made available to subsequent users. In this
way, Traffic Server intelligently eliminates redundant traffic and smoothes
traffic patterns, thereby leveraging and enhancing existing bandwidth within the
network. In addition, Traffic Server is designed to be particularly effective
in alleviating information delivery bottlenecks during peak periods of network
usage and bursts in traffic volume driven by news and other significant events,
thereby significantly enhancing the online experience for the end user.
Once installed in a network, Traffic Server acts as an intermediary between
end-user clients and information residing on the network, interacting with
nearly all data flows over the network. This enables Traffic Server to function
as a platform for a wide variety of value-added services that network providers
can offer their end users. These services today include advanced media
streaming, distributed web hosting and content distribution, interactive
applications and software-on-demand, content filtering, and content
transformation for devices such as set-top boxes and wireless telephones. We
have formed strategic alliances with several companies to develop and deliver
products enabling each of these services. For example, we teamed with
RealNetworks to develop the Traffic Server Media IXT, the industry's first
streaming media cache. Media IXT is a software plug-in component to Traffic
Server that integrates the audio and video streaming capabilities of the
RealNetworks G2 server into Traffic Server. This allows our customers who
choose to implement Media IXT with Traffic Server to cache media files and
stream them to end users in a way that gives users the highest-quality media
experience possible for their connection speed. We have also designed Traffic
Server as an open platform with flexible application programming interfaces
(APIs) in order to enable other third-party software developers to easily
integrate the functionality of their products with Traffic Server.
Traffic Server has been designed to integrate quickly and easily into
existing network infrastructures. Traffic Server runs on standard off-the-shelf
workstations, including workstations made by Sun, Compaq and Silicon Graphics,
and workstations based on Intel-architecture, running on standard operating
systems, including Solaris, Compaq Tru64, UNIX, IRIX, FreeBSD and Windows NT.
Traffic Server inter-operates with standard Internet equipment, is compatible
with standard Web browsers and supports an array of popular Internet protocols,
including HTTP, FTP, RTSP, NNTP, ICP and SNMP. We license Traffic Server based
on the number of CPUs running the software. Upgrade subscriptions, support and
maintenance, and add-on components such as the Media Cache Option are priced
separately.
Content Distribution Suite. Our Content Delivery Suite is a robust
software solution for content and application distribution, delivery and
management. As more complex information is being delivered to increasing
numbers of users, locating content at many delivery points that are
geographically closer to end users is important to performance and availability.
Our Content Delivery Suite provides all of the tools needed to distribute
diverse Internet content across network servers and caches, and to manage and
monitor distributed content and applications. The Content Delivery Suite
includes the Content Distributor, which proactively distributes and synchronizes
content and applications across live servers and caches within global networks,
and the Content Manager, which manages and monitors the performance, usage and
availability of distributed content in real time. These tools integrate
seamlessly with our Traffic Server network cache platform for content storage
and the delivery of content services. Together, Content Delivery Suite and
Traffic Server are intended to provide a complete infrastructure solution for
the distribution, delivery and management of content and applications. We
license the Content Distribution Suite based on the number of CPUs running the
software and provide upgrade subscriptions, support and maintenance separately.
Portal Services
Our second primary business focus is on providing infrastructure services to
Internet portals and other online service providers. We believe the significant
increase in the size and complexity of the Internet together with the
technological challenges and investments associated with developing and
maintaining robust online services provide an incentive for portals
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and other online service providers to outsource many critical services rather
than develop and maintain these services in-house. By outsourcing these critical
services, portals and other online service providers can concentrate on
administering key aspects of their online business, including branding,
advertising sales, end-user marketing and publicity, and business development.
Currently, our portal services offerings consist of Internet search services,
shopping services and directory services. These services can be deployed
independently or collectively as a single, integrated product offering.
Search Engine. We entered the Internet search engine market in May 1996
with the launch of HotBot, a search service powered by our search engine and
marketed by Wired Digital. HotBot has garnered broad media acclaim and won
numerous awards.
The Inktomi search engine enables our customers to provide a variety of
online search services to end users. We use the Inktomi search engine to
provide information search services to our customers, who in turn incorporate
these services into their online offerings to end users. We provide and manage
all hardware, software and operational aspects of the Inktomi search engine and
the associated database of Internet content. We also provide the customer with
a programming interface and software tools to enable the customer to custom
design its search service user interface. The user interface communicates with
the Inktomi search engine via a communication protocol, called the Inktomi Data
Protocol. Separating the user interface enables this portion of the service to
reside in a different physical location from the Inktomi search engine and to
run on the customer's choice of computing equipment. In addition, the customer
can customize the user interface as to look and feel and functionality and can
change the user interface at any time without affecting the operation of the
Inktomi search engine. This turn-key model allows us to serve multiple
customers while continuing to concentrate on developing our core search engine
technology.
The Inktomi search engine consists of a crawler, an indexer and search
engine servers. The crawler and indexer are software programs that collect and
organize information, and store that information on the cluster of search engine
servers. The search engine servers are a collection of workstations that are
linked together as a coupled cluster through the use of Inktomi's software.
The search engine servers provide powerful full-text query operations, including
full Boolean support, date restrictions and the recognition of multimedia files
and other embedded objects. Search results are relevance-ranked using state-of-
the-art text indexing and concept induction methods. Advanced searching
features allow end users to specify the number and types of responses to a
search query and to submit specific documents not currently indexed to the
Inktomi database.
We spend substantial time and resources enhancing our core search engine
technology and developing new functionality and service offerings for our
customers. In addition to our core search services, we have developed and offer
premium search services whereby we crawl, index and host specific sets of
content designated by the customer. The content can be the customer's own
content or specified third-party content, and can be searched by end users as a
distinct database or seamlessly integrated with and searched as part of the
master Inktomi Internet database. In addition, we offer custom data blending
services whereby we tag content selected by a customer in our database and
promote, demote or eliminate this content from the list of results returned in
response to designated search queries. In each of these cases, the customer can
offer a customized and differentiated search experience for its end users.
We generate search service revenues through a variety of contractual
arrangements, which include per-query search fees, search service hosting fees,
advertising revenue sharing plans, license fees and maintenance fees. Our
search services revenues result primarily from the number of end-user searches
that are processed by the Inktomi search engine and the level of advertising
revenue generated by customers.
Shopping Engine. We entered the online shopping market in December 1998 by
releasing the initial version of the Inktomi shopping engine, a high-performance
shopping application designed to handle the complex challenges of bringing
online consumers and merchants together and facilitating transactions between
them. We are developing the Inktomi shopping engine as a platform to provide a
comprehensive shopping experience for online consumers, enabling them to quickly
and easily locate products of interest, compare features and prices among
products, and locate and purchase these products through participating online
merchants. Similar to our search engine application, we do not provide shopping
services through our own branded online shopping site; rather, we make the
shopping engine available to Internet portals and other web site customers who
can, in turn, provide online shopping services through their sites to end users.
The Inktomi shopping engine is designed to provide portals and other web
site customers with a complete infrastructure to enable their end users to
purchase goods and services online. We are developing the Inktomi shopping
engine to function the way consumers already shop by seamlessly integrating all
aspects of the online shopping process, from expert advice and word of mouth
comparisons, to bargain hunting and comparison shopping. Through the Inktomi
shopping engine, online consumers today can access more than four million
products across 14 categories of products and services, and quickly and easily
purchase these products online through participating merchants. For shoppers
who generally know what product
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they want but not the brand or model, the Inktomi shopping engine enables end
users to access consumer reviews and product guides to make an evaluation among
several alternatives.
Similar to our search engine application, we provide and manage all
hardware, software and operational aspects of the Inktomi shopping engine and
the associated databases of product libraries, product reviews and purchasing
locations. This includes collecting, organizing, storing and updating vast
quantities of electronic product information, and presenting this information
for display to end users. We also provide our customers with a programming
interface and software tools to enable them to maintain and customize the look
and feel of their shopping service user interface. Access to the back-end
shopping engine is provided through the Inktomi Data Protocol.
The online shopping market is in a rapid state of evolution with a wide
variety of companies, including large Internet portals, online merchants, online
merchant aggregators, auction sites and other web sites, expending substantial
funds to develop brand recognition and large bases of end user consumers. We
are still developing and refining the business model for our Internet shopping
engine in light of this rapidly changing business environment. We continue to
anticipate that revenues will be generated by revenue-sharing arrangements with
online merchants, and by per-query search fees, advertising revenue and license,
support and maintenance fees from Internet portals and other web site customers.
The success of our shopping engine will largely depend on a variety of factors,
many of which are outside of our control.
Directory Engine. In June 1999, we launched our directory engine, the
first customizable, automated solution for the creation and maintenance of
Internet directories. Traditionally, Internet directories have relied on human
editors alone to systematically review web pages and categorize them into a
directory structure. As the number of documents on the Internet continues to
grow, this manual process will become more cumbersome and expensive as more
editors are required to examine and categorize more documents. The Inktomi
directory engine addresses this problem by automating the production of Internet
directories to deliver better scalability and more efficient directory
management.
The Inktomi directory engine uses our new concept induction technology to
automatically analyze and categorize millions of documents. Concept induction
incorporates sophisticated algorithms that can be trained to associate certain
web pages with specific categories within any desired classification scheme.
This is done through complex statistical analyses of word and phrase structures
against a pre-specified set of training documents. Once trained to recognize
specific categories of classification, the algorithms can analyze a massive
number of unrelated documents and sort them into specified classification
schemes.
As with our other portal services, we provide the Inktomi directory engine
to Internet portal and other web site customers on a private label basis and
manage all of the back-end hardware and operations. We provide our customers
with software tools to develop the front-end user interface and with access to
the directory engine through the Inktomi Data Protocol. The Inktomi directory
engine is flexible and supports a range of deployment options.
We have developed our suite of portal services to enable customers to
incorporate their own content and communities to create unique online services
that enhance end-user loyalty and revenue opportunities. The suite of portal
services is engineered to tightly integrate data and functionality across
applications.
Technology
Our coupled cluster software architecture and dataflow and concept
induction technologies have been designed to serve as the foundation for a
variety of scalable network products. Our coupled cluster software architecture
enables multiple workstations to function together as one extremely powerful
computer, our dataflow technology enhances the operating efficiency of
individual workstations within the cluster and our concept induction technology
enables the automatic classification of content. Certain key employees of
Inktomi initiated their work on cluster computing at the University of
California at Berkeley in 1994 under a grant from the U.S. Department of Defense
Advanced Research Projects Agency to develop networks of workstations with the
performance capabilities of supercomputers, but at substantially lower cost. We
have licensed aspects of this early work, which we have significantly modified
and enhanced. We developed our dataflow and concept induction technologies
internally.
Our coupled cluster software architecture provides the foundation for the
scalability, high availability, fault tolerance and price/performance
characteristics of our applications. Our coupled cluster architecture is based
on sophisticated parallel processing techniques that disaggregate tasks and
assign them to individual workstations (or nodes) within the cluster. In order
to maximize performance, nodes within a cluster are connected to each other
through a high-speed local area network. We have developed complementary
proprietary software that enables the cluster to be managed as if it were a
single node, ensuring consistent configurations and reducing both administrative
costs and the possibility of error. The management software also enables
centralized monitoring (via a standard Web browser) of the full cluster through
any individual node. In the event of a
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<PAGE>
node failure, that node's responsibilities and IP address are automatically
reassigned to other nodes. In addition, nodes may be added or swapped without
interrupting the operations of the cluster and any changes are automatically
recognized and incorporated by the management software. These two features
contribute to enhanced scalability, significantly greater system availability
and reduced administrative costs.
Our dataflow technology provides a framework for building applications that
focus on input/output ("I/O") and data movement. It bypasses the operating
system to directly handle management tasks such as CPU scheduling, network I/O
and memory allocation. We have designed our dataflow technology from the ground
up to address the unique problems of accessing data over variable-speed Internet
connections. This technology is capable of supporting thousands of simultaneous
operations per node, thus maintaining high CPU and memory utilization despite
hundreds of slow network connections. This capability greatly improves the
performance of individual nodes as they are able to process several operations
while waiting for responses to earlier commands or queries, thereby
substantially eliminating idle time.
Our concept induction technology provides the foundation for the
classification of content. The technology incorporates sophisticated algorithms
that can be trained to associate certain web pages with specific categories
within any desired classification scheme. This is done through complex
statistical analyses of word and phrase structures against a pre-specified set
of training documents. Once trained to recognize specific categories of
classification, the algorithms can analyze a massive number of unrelated
documents and sort them into initial classification schemes. Concept induction
technology can be used for a number of functions, including automatic directory
services for search engines, recognition of like content for comparison shopping
services, and pre-programmed directory services for content providers.
In addition to our core coupled cluster software architecture and dataflow
and concept induction technologies, we have developed technologies in several
important related areas, including information retrieval, secure remote cluster
management and object databases for network caches. We intend to continue to
develop new technologies, as well as enhance and extend our core technology, in
order to bring new scalable software applications to market.
Sales and Marketing
Our sales strategy is to pursue opportunities with large accounts through a
direct sales force, and to penetrate various targeted market segments through
multiple indirect distribution channels.
We maintain direct sales personnel domestically in Atlanta, Boston,
Chicago, Dallas, Denver, Foster City (California), Los Angeles, McLean
(Virginia), Seattle and New York. Our direct sales force is organized into
individual account teams, each consisting of a sales representative and a
systems engineer. We generate leads from contacts made through seminars,
conferences, trade shows, customers and an ongoing public relations program. We
qualify the leads and assign an account team to major prospective customers.
The account team initiates the sales process, which generally involves multiple
presentations to information technology and business professionals within the
prospective customer's organization. In addition, sales of the Traffic Server
and Content Distribution Suite applications generally include a pilot
implementation, successful completion and testing of which is a prerequisite to
full-scale deployment. We intend to increase the size of our direct sales force
and to establish additional sales offices domestically and internationally.
In order to achieve broad distribution of our products and services, we
have established multiple indirect distribution channels, including OEMs,
resellers, systems integrators and joint marketing partners. These channels are
intended to increase geographic sales coverage and to address mid-tier Internet
service providers and large corporate customers.
We believe it is important to have a strong international presence and
intend to translate and localize our products and services to address
international markets. We employ a mix of channels similar to our U.S. model
through the use of OEMs, resellers and systems integrators. We have established
a subsidiary in England and sales offices in France and Germany to address the
European market and subsidiaries in Japan and Korea to support channel partners
in the Asia-Pacific region. We intend to hire additional sales and marketing
personnel in these offices and to establish additional offices to support our
international operations.
We conduct a variety of programs worldwide to stimulate market demand for
our products, including public relations activities, advertising, trade shows
and collateral development. These programs are focused on our target markets
and are designed to create awareness and generate sales leads.
Customer Service and Support
We believe that a high level of customer service and support is critical to
the successful marketing and sale of our products. We are developing a
comprehensive service and support organization to manage customer accounts and
expect to
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provide an increasing level of support as our network products and portal
services are deployed across a range of customers, both domestically and
internationally. We currently provide support for our products and services from
our California, Virginia, England and Japan locations. We plan to establish
additional service and support sites internationally commensurate with customer
needs.
We provide a base level of technical support to our customers through
maintenance and support agreements. The base level of support includes
assistance with installation, configuration and initial set-up of the
application, run-time support, and software maintenance releases. For
additional fees, a customer may choose to receive software upgrades, training
and support during extended hours. We generally provide our base level of
support via e-mail, our web site, fax and telephone.
We also provide a variety of professional services to our customers. These
services include customer network evaluation and implementation guidance,
assistance with installation, configuration and initial set-up of the
application at the customer's facility, and cluster growth and other scaling
recommendations. We expect to expand the variety of these services as necessary
to meet the growing needs of our customers.
The complexity of our products and the difficulty of installing them
require highly trained customer service and support personnel. We currently
have a small customer service and support organization and will need to increase
our staff to support new customers, new product lines and the expanding needs of
existing customers. Hiring customer service and support personnel is very
competitive in our industry due to the limited number of people available with
the necessary technical skills and understanding of the Internet.
Research and Development
We believe that strong product development capabilities are essential to
our strategy of enhancing our core technology, developing additional
applications incorporating that technology, and maintaining the competitiveness
of our product and service offerings. We have invested significant time and
resources in creating a structured process for undertaking all product
development projects. This process involves all functional groups and all
levels within Inktomi and is designed to provide the framework for defining and
addressing the steps, tasks and activities required to bring product concepts
and development projects to market successfully. In addition, we have actively
recruited and hired key computer scientists, engineers and software developers
with expertise and degrees in the areas of massively parallel computing, coupled
cluster computing, software dataflow operations and mathematics, and have
complemented these individuals by hiring senior management with extensive
backgrounds in the network infrastructure, enterprise software and Internet
industries. Through this mix of personnel, we strive to create and maintain an
environment of rapid innovation and product development.
Since inception, we have focused our research and development efforts on
developing and enhancing our coupled cluster software architecture and dataflow
technology and on applying these technologies to our search engine and Traffic
Server network cache products. More recently, we have devoted significant
efforts to developing the initial versions of our shopping engine and directory
engine and to creating our concept induction technology to tightly integrate our
search engine, shopping engine and directory engine applications together. We
are currently working on adding features and functionality across each of our
current applications, developing value-added service modules for use in
conjunction with Traffic Server and enhancing our Content Delivery Suite. Our
research and development expenses totaled $27.1 million, $13.5 million, and $5.1
million for the fiscal years ended September 30, 1999, 1998 and 1997,
respectively.
Competition
We compete in markets that are new, intensely competitive, highly
fragmented and rapidly changing. We face competition in the overall network
infrastructure market as well as the network cache, Internet search/directory
and online shopping segments of this market. We have experienced and expect to
continue to experience increased competition from current and potential
competitors, many of which have significantly greater financial, technical,
marketing and other resources.
In the market for network cache solutions, we compete on the basis of
performance, scalability, data throughput, ease of integration and
manageability. Competition in the network cache market continues to intensify
as market segmentation is increasing, new solutions are coming to market and
several companies are forming technology alliances and OEM relationships to sell
their products. We directly compete against several other companies that sell
network caching products, including CacheFlow, Cisco Systems, InfoLibria,
Microsoft, Netscape, Network Appliance, Novell and Spyglass. We also compete
against freeware caching solutions including CERN, Harvest and Squid. In
addition, we compete against companies that provide content distribution
services including Akamai Technologies. Further, we are aware of numerous other
major software developers as well as smaller entrepreneurial companies that are
focusing significant resources on developing and marketing products and services
that will compete with Traffic Server. We also believe that Traffic Server may
face competition from other providers of competing solutions to network
infrastructure problems, including networking hardware
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and software manufacturers, traditional hardware manufacturers,
telecommunications providers, cable TV/communications providers, software
database companies, and large diversified software and technology companies.
Many of these companies provide or have announced their intentions to provide a
range of software and hardware products based on Internet protocols and to
compete in the broad Internet/intranet software market as well as in specific
market segments in which we compete.
In the market for providing outsourced search and directory services, we
compete on the basis of performance, OEM customization, scalability, price,
relevance of results and user response time. We compete with a number of
companies to provide Internet search and directory services, many of which have
operated services in the market for a longer period, have greater financial
resources, have established marketing relationships with leading online services
and advertisers, and have secured greater presence in distribution channels.
Traditionally, our competitors have provided search/directory services directly
to end-users through their own web sites and have supplied search/directory
services to third-party web sites as a supplement to this business. However, we
are facing increased competition from several newer competitors that are
following our business model of providing Internet search/directory services
primarily to Internet portals and other web site customers. These newer
competitors have focused on search result relevance and ease of use in providing
their services, and many of them have recently completed significant financings
or initial public offerings. We currently compete with companies including Alta
Vista, Ask Jeeves, Direct Hit Technologies, FAST Search and Transfer, Google,
Infoseek, LookSmart, Lycos, Netscape Open Directory and Northern Light. In
addition, large media companies, such as The Walt Disney Company and NBC
Enterprises, and other Internet-based companies such as America Online and
Excite@Home, have recently made investments in or acquired Internet search
engine companies, and we believe that other large media enterprises may enter or
expand their presence in the Internet search and directory market, either
directly or indirectly through collaborations or other strategic alliances.
The market for our shopping engine application is rapidly evolving and
intensely competitive. Our current and potential competitors include other OEM
providers of shopping technologies and services including Bottom Dollar,
InfoSpace and mySimon, third party merchant aggregators including Affinia,
SnapShot and WizShop, and Internet portals and other captive marketplace web
sites, including Amazon.com, America Online, Excite@Home, Lycos and Yahoo!. We
believe the principal factors that will draw end-users to an online shopping
application include brand availability, selection, personalized services,
convenience, price, accessibility, customer service, quality of search tools,
quality of content, and reliability and speed of fulfillment for products
ordered. We have little or no control over many of these factors.
Our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than we can. In addition, our
current and potential competitors may bundle their products with other software
or hardware, including operating systems and browsers, in a manner that may
discourage users from purchasing products offered by us. Also, current and
potential competitors have greater name recognition, more extensive customer
bases and access to proprietary content. Increased competition could result in
price reductions, fewer customer orders, fewer search queries served, reduced
gross margins and loss of market share.
Proprietary Rights
Our products and services operate in part by making copies of material
available on the Internet and other networks and making this material available
to end-users from a central location. In addition, our portal services
technology systems collect end-user and transaction information, which we use to
deliver services to our customers and merchant partners. This creates the
potential for claims to be made against us (either directly or through
contractual indemnification provisions with customers) for defamation,
negligence, copyright or trademark infringement, personal injury, invasion of
privacy or other legal theories based on the nature, content, copying,
collection or use of these materials. These claims have been threatened against
us from time to time and have been brought, and sometimes successfully pressed,
against online service providers. It is also possible that if any information
provided through any of our portal services or facilitated by our Traffic Server
product contains errors, third parties could make claims against us for losses
incurred in reliance on this information. Further, there is the potential for
product liability claims to be asserted against us by end-users who purchase
goods and services through our shopping engine. Although we carry general
liability insurance, our insurance may not cover potential claims of this type
or be adequate to protect us from all liability that may be imposed.
Our success and ability to compete are substantially dependent upon our
internally developed technology, which we protect through a combination of
patent, copyright, trade secret and trademark law. We generally enter into
confidentiality or license agreements with our employees, consultants and
corporate partners, and generally control access to and distribution of our
software, documentation and other proprietary information. Despite our efforts
to protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. Policing unauthorized use
of our products is difficult, and we cannot be sure that the steps we have taken
will prevent misappropriation of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as in
the United States.
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Substantial litigation regarding intellectual property rights exists in the
software industry. We expect that software products may be increasingly
vulnerable to third-party infringement claims as the number of competitors in
our industry segments grows and the functionality of products in different
industry segments overlaps. Lycos has announced that it is the exclusive
licensee of a patent covering a method of crawling information on the Internet,
and that it may bring actions against companies that it believes are infringing
this patent in the future. We also believe that many companies have filed or
intend to file patent applications covering aspects of their technology that
they may claim our technology infringes. Some of these companies have sent
copies of their patents to Inktomi for informational purposes. We cannot be
sure that Lycos or other third parties will not make a claim of infringement
against us with respect to our products and technology. Any claims, with or
without merit, could be time consuming to defend, result in costly litigation,
divert management's attention and resources, and could cause product shipment
delays or require us to reengineer our products or enter into royalty or
licensing agreements. These royalty or licensing agreements, if required, may
not be available on acceptable terms, if at all.
Employees
We had 505 full-time employees as of September 30, 1999. None of our
employees is represented by a labor union. We have not experienced any work
stoppages and consider relations with our employees to be good.
ITEM 2. PROPERTIES
We lease approximately 177,000 square feet of office space in Foster City,
California, which serves as our corporate headquarters. This lease expires in
September 2010. This lease provides us with an option to expand into a total of
approximately 241,000 square feet beginning in September 2004 and provides an
option to purchase the site from months 13 through 59.
We also lease space in Atlanta, Boston, Chicago, Dallas, Denver, Frankfurt
(Germany), London, Los Angeles, McLean (Virginia), Munich, Needham
(Massachusetts), Paris, Seattle, Seoul and Tokyo. The McLean, Virginia lease
covers approximately 6,200 square feet and expires in August 2003, the London
lease covers approximately 3,500 square feet and expires in June 2009, and the
Tokyo lease covers approximately 3,500 square feet and expires in April 2001.
The Needham, Massachusetts lease covers approximately 15,000 square feet and was
assumed in connection with our acquisition of WebSpective Software. The
remaining leases are executive office leases and have terms of 12 months or
less.
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any material legal proceedings at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock has been quoted on the Nasdaq National Market under the
symbol "INKT" since our initial public offering on June 10, 1998. Prior to this
time, there was no public market for our common stock. The following table
shows the high and low sale prices per share of our common stock as reported on
the Nasdaq National Market for the periods indicated:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal 1998:
Third Quarter (from June 10, 1998).............. $ 22.88 $ 9.00
Fourth Quarter.................................. 44.38 19.50
Fiscal 1999:
First Quarter................................... 79.25 26.56
Second Quarter.................................. 94.88 52.06
Third Quarter................................... 159.13 82.00
Fourth Quarter.................................. 145.13 91.00
Fiscal 2000:
First Quarter (through December 23, 1999)....... 197.25 93.82
</TABLE>
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As of November 30, 1999, there were approximately 1,197 holders of our common
stock. We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. The covenants under our Loan and Security Agreement with
Silicon Valley Bank prohibit us from paying cash dividends.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of Inktomi
Corporation and the Notes thereto included elsewhere in this report. The
historical results are not necessarily indicative of results to be expected for
any future period.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1999 1998 1997
---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues
Network products ................................................... $ 40,964 $ 7,962 $ 60
Portal services .................................................... 30,261 12,476 5,725
-------- -------- --------
Total revenues ................................................. 71,225 20,438 5,785
Operating expenses
Cost of revenues ................................................... 12,662 4,888 1,512
Sales and marketing ................................................ 52,759 21,940 7,835
Research and development ........................................... 27,140 13,455 5,134
General and administrative ......................................... 6,394 4,095 1,487
Acquisition related costs .......................................... 1,110 1,018 --
-------- -------- --------
Total operating expenses ....................................... 100,065 45,396 15,968
-------- -------- --------
Operating loss........................................................ (28,840) (24,958) (10,183)
Other income, net ................................................... 4,669 424 (194)
-------- -------- --------
Net loss ....................................................... $(24,171) $(24,534) $(10,377)
======== ======== ========
Basic and diluted net loss per share (1) ............................ $(0.48) $(0.63) $(0.40)
======== ======== ========
Shares used in calculating basic and diluted net loss per share....... 49,915 39,130 25,954
======== ======== ========
Pro forma net loss per share to effect two-for-one
stock split declared on December 3, 1999 (2):
Pro forma basic and diluted net loss per share
(unaudited) ...................................................... $(0.24) $(0.31) $(0.20)
======== ======== ========
Pro forma shares used in calculating basic and diluted net loss per
share (unaudited).................................................... 99,830 78,260 51,908
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
------------------
(in thousands)
CONSOLIDATED BALANCE SHEET DATA:
<S> <C>
Cash, cash equivalents and short-term investments.................... $304,996
Working capital...................................................... 302,014
Total assets......................................................... 376,271
Debt and capital lease obligations, less current portion............. 6,124
Total stockholders' equity........................................... 340,150
</TABLE>
__________________________________
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the weighted average common and common equivalent
shares used to compute net loss per share.
(2) On December 3, 1999, Inktomi announced a two-for-one common stock split. On
December 30, 1999, stockholders of record at the end of the day on December
14, 1999 will be entitled to receive one additional share (in the form of a
100% stock dividend) of Inktomi's common stock for every share they hold on
that day. See Notes 1 and 15 of Notes to Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Except for historical information, the discussion in this report contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in the forward-looking
statements as a result of a number of factors, including the risks described in
the section titled "Factors Affecting Operating Results" set forth below.
Overview
Inktomi was formed in February 1996 to develop and market scalable software
applications designed to significantly enhance the performance and intelligence
of large-scale networks, particularly the Internet. Our applications fall into
two broad categories: network products and portal services. Our network
products applications currently consist of the Traffic Server network cache
platform and associated Media IXT applications, and our portal services
offerings currently consist of our search engine, shopping engine and directory
engine applications.
Network products revenues are composed of Traffic Server and Media IXT
licenses, consulting, support and maintenance fees. Traffic Server and Media
IXT license fees are based on the number of CPUs running the software and are
generally recognized upon shipment of the software. Consulting, support and
maintenance fees are recognized ratably over the service period.
Portal services revenues are composed of revenues generated through our
search engine, directory engine and shopping engine. We generate revenues from
our search engine and directory engine through a variety of contractual
arrangements, which include per-query search fees, search service hosting fees,
advertising revenue, license fees and 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. To
date, revenues from the directory engine have not been significant. We are
still developing the business model for our shopping engine and anticipate that
revenues will be generated by revenue sharing arrangements with online
merchants, and by per-query search fees, advertising revenue and license,
support and maintenance fees from Internet portals and other web site customers.
Revenues from online shopping have not been significant to date and are
expected to be modest for the next few quarters.
In October 1999, we acquired WebSpective Software, Inc. ("WebSpective"), a
developer of software solutions for content and application distribution,
delivery and management, to supplement our network products offerings. We offer
these software solutions as the Inktomi Content Distribution Suite. The
acquisition of WebSpective will be accounted for as a pooling of interests.
Financial results for historical periods will be restated to reflect the
combined operations beginning in the quarter ended December 31, 1999. Inktomi
expects to record acquisition costs of approximately $4.0 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 from inception through September 30, 1999 were $3.2 million.
WebSpective raised $12.4 million through various stock issuances since its
inception in March 1997, and had net losses from inception to September 30, 1999
of $13.5 million.
We have not achieved profitability on a quarterly or annual basis and
expect to continue to incur net losses for at least the next several quarters.
We expect to continue to incur significant sales and marketing, product
development and administrative expenses across all lines of business, and in
particular in our shopping engine business as we continue to develop and enhance
our shopping technology, solidify and refine the business model, and initiate
new sales and marketing efforts. As a result, we will need to generate
significant revenues to achieve and maintain profitability.
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Result of Operations
The following table sets forth our results of operations expressed as a
percentage of revenues. Our historical operating results are not necessarily
indicative of the results for any future period.
<TABLE>
<CAPTION>
For the Year Ended September 30,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
Revenues
Network products ..................................................... 57% 39%
Portal services ...................................................... 43% 61%
---- ----
Total revenues ................................................... 100% 100%
Operating expenses
Cost of revenues ..................................................... 18% 24%
Sales and marketing .................................................. 74% 107%
Research and development ............................................. 38% 66%
General and administrative ........................................... 9% 20%
Acquisition related costs ............................................ 2% 5%
---- ----
Total operating expenses ......................................... 141% 222%
---- ----
Operating loss ........................................................ (41%) (122%)
Other income, net ..................................................... 7% 2%
---- ----
Net loss ......................................................... (34%) (120%)
==== ====
</TABLE>
Fiscal Years Ended September 30, 1999 and 1998
Revenues
Total revenues were $71.2 million in the fiscal year ended September 30,
1999, an increase of $50.8 million or 248% over the year ended September 30,
1998. No customers individually represented over 10% of total revenues for the
fiscal year ended September 30, 1999. For the fiscal year ended September 30,
1998, four customers each represented over 10% and, in the aggregate, accounted
for approximately 77% of total revenues.
Network products revenues totaled $41.0 million in fiscal 1999,
representing an increase of $33.0 million or 414% over network products revenues
of $8.0 million in fiscal 1998. Most of these revenues represented new Traffic
Server license sales. For the year ended September 30, 1999, two customers
represented 17% and 13% of all network products revenue, and for the year ended
September 30, 1998, two customers represented 38% and 34% of all network
products revenue.
Portal services revenues totaled $30.3 million in fiscal 1999, representing
an increase of $17.8 million or 143% over portal services revenues of $12.5
million in fiscal 1998. Most of the increase was the result of revenues
generated from new search customers. The increase in portal services revenues
was partially offset by a decrease in revenues recorded from the HotBot site as
discussed below. For the year ended September 30, 1999, three customers
represented 14%, 13% and 12% of all portal services revenue, and for the year
ended September 30, 1998, two customers represented 57% and 20% of all portal
services revenue.
Historically, a significant portion of portal services revenues has been
derived from the HotBot search service. From our inception through the first
three months of fiscal 1999, HotBot was maintained by us and marketed by Wired
Digital. During this period, we recorded the gross value of advertising
revenues, including barter revenues, generated on the site and recorded amounts
due to Wired Digital as marketing expense. In the second quarter of fiscal
1999, Wired Digital assumed maintenance of the HotBot site. Due to the change
in our status as operator of the HotBot site, we recorded net revenues from
HotBot for the remainder of the fiscal year ended September 30, 1999. Barter
revenues represented 0% and 9% of total revenues recorded in fiscal 1999 and
1998 respectively.
Expenses
Cost of Revenues
Cost of revenues consist primarily of expenses related to the operation of
our search and shopping services, which are primarily depreciation and network
charges. Cost of revenues was $12.7 million for fiscal 1999, an increase of
$7.8 million or 159% from fiscal 1998. The increase was due primarily to
increased depreciation and network charges resulting from continued expansions
of our data centers in California and the establishment of a data center in the
United Kingdom during
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fiscal 1999. We expect cost of revenues to increase substantially in absolute
dollars in the next few quarters as a result of expanded cluster operation
costs.
Sales and Marketing Expenses
Sales and marketing expenses consist of personnel and related costs for our
direct sales force and marketing staff and marketing programs, including trade
shows and advertising. Sales and marketing expenses were $52.8 million in
fiscal 1999, an increase of $30.8 million or 140% from fiscal 1998. This
increase was primarily due to an increase in the number of sales and marketing
personnel in the United States and overseas, expenses incurred in connection
with attendance at trade shows and additional marketing programs, and increased
sales commissions. The increase was partially offset by lower HotBot marketing
expenses since we no longer record HotBot advertising revenues on a gross basis
as a marketing expense, as described above. We expect that sales and marketing
expenses will increase substantially in absolute dollars over the next few
quarters as we hire additional sales and marketing personnel, initiate
additional marketing programs to support each of our product lines, and
establish sales offices in additional domestic and international locations.
Research and Development Expenses
Research and development expenses consist primarily of personnel and
related costs for our development and technical support efforts. Research and
development expenses were $27.1 million in fiscal 1999, an increase of $13.7
million or 102% over the comparable period in fiscal 1998. The increase was
primarily due to an increase in the number of research and development personnel
to support expansion of our search engines and network products businesses,
online shopping development, and increases in quality assurance, technical
support and technical publications personnel. We believe significant investment
in research and development is essential to our future success and expect that
research and development expenses will increase in absolute dollars in future
periods. We have not capitalized any software development expenses to date.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel and
related costs for general corporate functions, including finance, accounting,
human resources, facilities and legal. General and administrative expenses
totaled $6.4 million in fiscal 1999, an increase of $2.3 million or 56% over
fiscal 1998. This increase was due primarily to an increase in the number of
general and administrative personnel and increased accounting and legal costs
incurred in connection with business activities.
Acquisition-Related Charges
In September 1998, we acquired C2B Technologies, a developer of online
shopping software. We accounted for the acquisition as a pooling of interests.
We recorded acquisition costs of approximately $1.0 million in fiscal 1998 as a
result of the acquisition. The charge comprised C2B's financial advisory fees,
facilities consolidation costs, and legal and accounting fees related to the
transaction. As of September 30, 1999, all acquisition-related costs had been
paid.
In April 1999, we acquired Impulse! Buy Network, a developer of online
merchandising software, to supplement the functionality of our shopping engine.
We accounted for the acquisition as a pooling of interests. We recorded
acquisition costs of approximately $1.1 million in fiscal 1999 as a result of
the acquisition, primarily for accounting, legal and other expenses. As of
September 30, 1999, all acquisition-related costs had been paid.
Other Income and Expense, Net
Other income and expense, net includes income on our cash and short-term
investments, less expenses related to our debt and capital lease obligations.
Other income and expense, net, totaled $4.7 million of income in fiscal 1999,
compared to $0.4 million of income in fiscal 1998. Most of this increase was
generated from interest income on proceeds from our August 1999 and November
1998 public offerings, partially offset by increased interest charges on debt
and capital lease obligations. We also recognized losses for the abandonment of
leasehold improvements and equipment with a net book value of approximately $1.9
million due to corporate relocation in fiscal 1999.
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Fiscal Years Ended September 30, 1998 and 1997
Revenues
Total revenues were $20.4 million in the year ended September 30, 1998, an
increase of $14.7 million or 253% over the year ended September 30, 1997. Four
customers each represented over 10% and, in the aggregate, 77% of total revenues
for the year ended September 30, 1998. For the year ended September 30, 1997,
two customers accounted for approximately 92% of total revenues.
Network products revenues totaled $8.0 million in fiscal 1998. Most of
these revenues represented new Traffic Server license fees. There were minimal
network products revenues in fiscal 1997. Portal services revenues totaled
$12.5 million in fiscal 1998, representing a 118% increase over the prior year.
Most of this increase came from the provision of search services to new
customers and, to a lesser extent, an increase in revenues from existing search
customers.
A significant portion of portal services revenues were derived from the
HotBot search service maintained by us and marketed by Wired Digital. A portion
of the advertising on the HotBot site was exchanged for advertisements on the
Internet sites of other companies. The value of these advertisements was
recognized as barter revenue by us. Barter revenues represented 28% of total
revenues in fiscal 1997 and 9% in fiscal 1998.
Expenses
Cost of Revenues
Cost of revenues was $4.9 million for fiscal 1998, an increase of $3.4
million or 223% from fiscal 1997. The increase was due primarily to increased
depreciation and network charges resulting from expansions of our data center in
California during fiscal 1998, and the addition of a new service facility in
Virginia in the third quarter of fiscal 1998.
Sales and Marketing
Sales and marketing expenses were $21.9 million in fiscal 1998, an increase
of $14.1 million or 180% from fiscal 1997. This increase was primarily due to
an increase in the number of sales and marketing personnel in the United States
and abroad, increased HotBot marketing expenses and other customer-related
costs, and expenses incurred in connection with attendance at trade shows and
additional marketing programs.
Research and Development
Research and development expenses were $13.5 million in fiscal 1998, an
increase of $8.3 million or 162% over fiscal 1997. The increase was primarily
due to an increase in the number of research and development personnel to
support expansion of our Portal Services and Network Products businesses,
initial online shopping development, and increases in quality assurance,
technical support and technical publications personnel.
General and Administrative
General and administrative expenses totaled $4.1 million in fiscal 1998, an
increase of $2.6 million or 175% over fiscal 1997. This increase was due
primarily to an increase in the number of general and administrative personnel
and increased legal and accounting costs incurred in connection with business
activities.
Acquisition-Related Charges
In September 1998, we acquired C2B Technologies, a developer of online
shopping software. The transaction was accounted for as a pooling of interests.
We incurred expenses of $1.0 million related to the transaction. The charge
included C2B's financial advisory fees, facilities consolidation costs, and
legal and accounting fees. Of the total charge, $0.7 million of the expenses
were paid in fiscal 1998.
Other Income and Expense, Net
Interest income, net totaled $0.4 million of income in fiscal 1998,
compared to a net other expense of $0.2 million in fiscal 1997. Most of this
increase was generated from interest income on proceeds from our June 1998
initial public offering and prior preferred stock issuances, partially offset by
increased interest charges on debt and capital lease obligations.
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Liquidity and Capital Resources
Cash, cash equivalents and short-term investments totaled $305.0 million at
September 30, 1999, up from $49.0 million at September 30, 1998. Most of the
increase came from sales of common stock, partially offset by cash used in
operations and the purchase of property and equipment.
We used $21.3 million in cash used in operations in fiscal 1999, an
increase of $5.9 million from the $15.4 million used in fiscal 1998. The
increase in cash used in operations was primarily due to increases in accounts
receivable and other assets, partially offset by increased depreciation,
increases in accrued expenses and an increase in deferred revenue in the fiscal
year ended September 30, 1999.
We have made significant investments in equipment since inception. This
equipment consists largely of computer servers, workstations and networking
equipment. We invested $32.7 million and $6.9 million, respectively, in fiscal
1999 and 1998 primarily to further expand our Internet search engine service
capacity, to launch and support our online shopping business and for leasehold
improvements at our new corporate headquarters.
From time to time, we have used debt and leases to partially finance
capital purchases and intend to continue this practice until we begin generate
cash from operations. We obtained an additional $4.1 million and $2.8 million
in bank loans and added $5.3 million and $6.9 million, in capitalized leases to
partially fund increased search and online shopping capacity in fiscal 1999 and
1998, respectively. At September 30, 1999, Inktomi had $13.3 million in total
loans and capitalized lease obligations outstanding. The loans are
collateralized by the underlying assets. Approximately $7.2 million of our debt
at September 30, 1999 was in the form of bank loans. The bank loans include
certain covenants requiring minimum liquidity, tangible net worth and
profitability over time. In fiscal 1998, we sold $0.9 million of fixed assets
to two leasing companies as part of sale-leaseback transactions.
We raised $315.3 million, net of issuance costs, from equity sales during
fiscal 1999. This includes $305.1 million from the sale of common stock and
$11.2 million from stock option and warrant exercises.
Our capital requirements depend on numerous factors, including market
acceptance of Inktomi's products, the resources we devote to developing,
marketing, selling and supporting our products, the timing and extent of
establishing international operations, the extent and timing of investments,
acquisition costs, and other factors. We expect to devote substantial capital
resources to hire and expand our sales, support, marketing and product
development organizations, to expand marketing programs, to establish additional
facilities worldwide and for other general corporate activities.
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "0" means 1900 or 2000. This may result in software failures
or the creation of erroneous results.
We utilize a significant number of computer software programs and operating
systems across our company. These programs and operating systems include
proprietary and third party applications used in our Traffic Server network
cache product, our Content Distribution Suite software, our search, directory
and online shopping services, and our internal systems. To the extent that these
applications are unable to appropriately process dates in the calendar year
2000, some level of modification or replacement may be necessary.
We initiated our year 2000 compliance program in early 1998 by conducting a
preliminary review of our Traffic Server and search engine software code and by
performing preliminary tests on these applications to determine Year 2000
compliance. We also began making inquiries of the vendors of our essential
internal business systems to assess their Year 2000 readiness. Since this time,
we have increased the scope of our business operations, developed new versions
of our Traffic Server and search engine software, acquired and enhanced our
online shopping engine software, developed and released the first version of our
directory engine software and acquired our Content Distribution Suite. This
expansion led us to hire a full time Year 2000 project coordinator in early 1999
to manage our Year 2000 efforts. Under his direction, we developed a
comprehensive Year 2000 compliance plan covering each of our software products,
our search, directory and shopping services operations, and our internal
business systems.
We have completed a code review and testing of current versions of our
Traffic Server software to ensure Year 2000 readiness. Based on this review and
testing, we believe that these versions of our Traffic Server software, when
configured and used in accordance with its documentation, correctly functions
when used with Year 2000 date codes. Although we have reviewed the software
code and tested earlier versions of our Traffic Server software and believe them
to be Year 2000
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compliant, we have not performed our suite of tests on these versions. We have
recommended that our customers upgrade to our later Traffic Server versions.
We have also reviewed the software code to our Content Distribution Suite,
which we acquired through the acquisition of WebSpective Software, and performed
limited testing. Based on this review and testing, we believe that our Content
Distribution Suite, when configured and used in accordance with its
documentation, correctly functions when used with Year 2000 date codes.
Our Traffic Server software runs on several hardware platforms and
associated operating systems, including those provided by Sun, Compaq and
Silicon Graphics, and those based on Intel-architecture. Our Content
Distribution Suite software runs on Sun and systems utilizing the Windows NT
operating system. These software products are therefore dependent upon the
correct processing of dates by these systems. We have reviewed information made
publicly available by our hardware platform partners regarding Year 2000
compliance. Based on this review, we do not believe the underlying systems that
operate in conjunction with our Traffic Server software or our Content
Distribution Suite software contain material Year 2000 deficiencies in their
latest releases.
We have reviewed the software code for our search engine, directory engine
and shopping engine software and performed testing on these applications. Based
on this review and testing, we believe that these products correctly function
when used with Year 2000 date codes.
We provide our search, directory and shopping services from multiple
computer clusters, most of which are housed at facilities operated by a single
hosting provider in the United States. Search, directory and shopping services
for certain European customers are generated from clusters housed at a single
hosting provider in the United Kingdom. Our computer clusters are reliant on
security, climate control and Internet connectivity, all of which are provided
and maintained by the hosting providers. We have obtained affirmative
documentation as to their Year 2000 readiness.
Our software applications operate in accordance with several external
Internet protocols, such as HTTP and NNTP, and are therefore dependent upon the
correct processing of dates by these protocols. We have researched the date
handling capabilities of these protocols and do not believe they contain
material Year 2000 deficiencies.
We use multiple software systems for our internal business purposes,
including accounting, e-mail, development, human resources, customer service and
support, and sales, most of which have been purchased in the last two years. We
completed an inventory of our internal systems and reviewed the web sites of key
system vendors to confirm the systems' Year 2000 readiness. The current
versions of all key systems have been declared Year 2000 compliant by the
vendors.
To date, the costs incurred to perform the assessment of our Year 2000
readiness have not been material, and have consisted primarily of the cost of
our project manager and labor costs for our quality assurance, software
development and information technology personnel. Despite investigation and
testing by us and our partners, our software products, and the underlying
systems, services and protocols running our products may contain errors or
defects associated with Year 2000 date functions. We are unable to predict to
what extent our business may be affected if our software or the systems that
operate in conjunction with our software experience a material Year 2000
failure. Known or unknown errors or defects that affect the operation of our
software could result in delay or loss of revenue, interruption of search or
shopping services, cancellation of customer contracts, diversion of development
resources, damage to our reputation, increased service and warranty costs, and
litigation costs, any of which could adversely affect our business, financial
condition and results of operations.
Factors Affecting Operating Results
Interested persons should carefully consider the risks described below in
evaluating Inktomi. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also impair our business operations.
If any of the following risks actually occur, our business, financial condition
or results of operations could be materially adversely affected. In that case,
the trading price of our common stock could decline.
We have a history of operating losses, expect to incur future losses, and cannot
be certain that we will become a profitable company.
Inktomi was founded in February 1996 and has a limited operating history.
As of September 30, 1999, we had an accumulated deficit of $62.6 million. We
have not achieved profitability and expect to continue to incur net losses for
at least the next several quarters. We expect to continue to incur significant
sales and marketing, product development and administrative expenses across all
lines of our business, and in particular in our shopping engine business as we
continue to develop and enhance our shopping technology, solidify and refine the
business model, and initiate new sales and marketing
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efforts. As a result, we will need to generate significant revenues to achieve
and maintain profitability. Although our revenues have grown in recent quarters,
we cannot be sure that this growth will continue at the same rate or that we
will achieve sufficient revenues for profitability. If we do achieve
profitability, we cannot be sure that we can sustain or increase profitability
on a quarterly or annual basis in the future.
Our business substantially depends upon the success of our Traffic Server
product.
Our future growth substantially depends on the commercial success of our
Traffic Server network cache product, which we have licensed to only a small
number of customers. We are initially targeting telecommunications carriers and
Internet service providers for our Traffic Server product, although we are
expanding our customer prospects to include Internet hosting providers, OEM
customers and large enterprise customers. Our ability to generate substantial
and sustained revenues from our Traffic Server product is dependent upon
achieving sales penetration in each of these market segments and significantly
increasing the number of new and repeat customer transactions. The market for
large-scale network caching is in its early stages, and we are not sure our
target customers will widely adopt and deploy caching technology throughout
their networks. Even if they do so, they may not choose our Traffic Server
network cache product, because it does not include the features they require,
they wish to outsource content distribution services to a third party vendor
rather than directly implement caching in their networks, or for technical,
cost, support or other reasons. Although we have tested our Traffic Server
product prior to making it available to customers, we cannot be sure that we
have found and fixed all significant performance errors. If our target
customers do not widely adopt and purchase our Traffic Server product, our
business, financial condition and results of operations will be adversely
affected.
Our business would be harmed if customers choose not to use or promote our
search and directory services.
Revenues from our search and directory services result primarily from the
number of end-user searches that are processed by our search engine and
directory engine and the level of advertising revenue generated by our Internet
portal and other web site customers. Our agreements with customers do not
require them to direct end-users to our search or directory services or to use
our search or directory services exclusively or at all. Accordingly, revenues
from search and directory services are highly dependent upon the willingness of
customers to promote and use the search and directory services we provide, the
ability of our customers to attract end-users to their online services, the
volume of end-user searches that are processed by our search engine and
directory engine, and the ability and willingness of customers to sell
advertisements on the Internet pages viewed by end-users. Certain of our
customers have selected competing search and directory services to operate in
combination with our services, which has reduced the number of queries available
for us to serve and may erode future revenue growth opportunities. The
technological barriers for customers to implement additional services or to
replace our services are not substantial.
Our entry into the online shopping business will require us to develop
significant new capabilities and may not be successful.
The online shopping market is in a rapid state of evolution with a wide
variety of companies, including large Internet portals, online merchants, online
merchant aggregators, auction sites and other web sites, expending substantial
funds to develop brand recognition and large bases of end user consumers. We
are still developing and refining the business model for our Internet shopping
engine in light of this rapidly changing business environment. We continue to
anticipate that revenues will be generated by revenue-sharing arrangements with
online merchants, and by per-query search fees, advertising revenue and license,
support and maintenance fees from Internet portals and other web site customers.
The success of our shopping engine will largely depend on a variety of factors,
many of which are outside of our control. These factors include:
. our ability to establish and maintain strong relationships with
customers and online merchants;
. our ability to assemble a robust and varied database of products of
interest to end user consumers;
. the ability and willingness of our customers to promote our shopping
services on their web sites;
. the dollar volume of online purchases made by end users of our
customers' web sites;
. the ability of participating merchants to successfully merchandize their
products through our shopping engine; and
. the level of advertising revenues generated by customers.
We launched the first commercial version of our Internet shopping engine in
mid-1999. Our shopping engine is designed to collect and organize vast amounts
of electronic information from online merchants and publishers of comparative
product information. The shopping engine is also designed to track and confirm
purchases made by end-users of our customers' services and to generate invoices
for our online merchants to pay revenue-sharing amounts to us. These are highly
complex tasks. We have experienced some difficulty and delays in implementing
our shopping service, stabilizing and
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optimizing our product database, consistently tracking end user consumer
purchases and rolling out new features. We anticipate that resolving current
technological challenges, developing required features to meet current customer
commitments, and developing and deploying new features will require significant
additional expenses and management and development resources. We have made
significant investments in our online shopping business and expect to continue
to do so. This investment has been and will continue to be required in advance
of generating revenues, which have not been significant to date and are expected
to be modest for the next few quarters. We cannot be sure that our entry into
the online shopping business will be successful.
The markets in which we operate are highly competitive and we may be unable to
compete successfully against new entrants and established companies with greater
resources.
We compete in markets that are new, intensely competitive, highly
fragmented and rapidly changing. We face competition in the overall network
infrastructure market as well as the network cache, Internet search/directory
and online shopping segments of this market. We have experienced and expect to
continue to experience increased competition from current and potential
competitors, many of which have significantly greater financial, technical,
marketing and other resources.
Competition in the network cache market continues to intensify as market
segmentation is increasing, new solutions are coming to market and several
companies are forming technology alliances and OEM relationships to sell their
products. We directly compete against several other companies that sell network
caching products, including CacheFlow, Cisco Systems, InfoLibria, Microsoft,
Netscape, Network Appliance, Novell and Spyglass. We also compete against
freeware caching solutions including CERN, Harvest and Squid. In addition, we
compete against companies that provide content distribution services including
Akamai Technologies, Inc. Further, we are aware of numerous other major
software developers as well as smaller entrepreneurial companies that are
focusing significant resources on developing and marketing products and services
that will compete with Traffic Server. We also believe that Traffic Server may
face competition from other providers of competing solutions to network
infrastructure problems, including networking hardware and software
manufacturers, traditional hardware manufacturers, telecommunications providers,
cable TV/communications providers, software database companies, and large
diversified software and technology companies. Many of these companies provide
or have announced their intentions to provide a range of software and hardware
products based on Internet protocols and to compete in the broad
Internet/intranet software market as well as in specific market segments in
which we compete.
We compete with a number of companies to provide Internet search and
directory services, many of which have operated services in the market for a
longer period, have greater financial resources, have established marketing
relationships with leading online services and advertisers, and have secured
greater presence in distribution channels. Traditionally, our competitors have
provided search/directory services directly to end-users through their own web
sites and have supplied search/directory services to third-party web sites as a
supplement to this business. However, we are facing increased competition from
several newer competitors that are following our business model of providing
Internet search/directory services primarily to Internet portals and other web
site customers. These newer competitors have focused on search result relevance
and ease of use in providing their services, and many of them have recently
completed significant financings or initial public offerings. We currently
compete with companies including Alta Vista, Ask Jeeves, Direct Hit
Technologies, FAST Search and Transfer, Google, Infoseek, LookSmart, Lycos,
Netscape Open Directory and Northern Light. In addition, large media companies,
such as The Walt Disney Company and NBC Enterprises, and other Internet-based
companies such as America Online and Excite@Home, have recently made investments
in or acquired Internet search engine companies, and we believe that other large
media enterprises may enter or expand their presence in the Internet search and
directory market, either directly or indirectly through collaborations or other
strategic alliances.
The market for our shopping engine application is rapidly evolving and
intensely competitive. Our current and potential competitors include other OEM
providers of shopping technologies and services including Bottom Dollar,
InfoSpace and mySimon, third party merchant aggregators including Affinia,
SnapShot and WizShop, and Internet portals and other captive marketplace web
sites, including Amazon.com, America Online, Excite@Home, Lycos and Yahoo!. We
believe the principal factors that will draw end-users to an online shopping
application include brand availability, selection, personalized services,
convenience, price, accessibility, customer service, quality of search tools,
quality of content, and reliability and speed of fulfillment for products
ordered. We have little or no control over many of these factors.
Our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than we can. In addition, our
current and potential competitors may bundle their products with other software
or hardware, including operating systems and browsers, in a manner that may
discourage users from purchasing products offered by us. Also, current and
potential competitors have greater name recognition, more extensive customer
bases and access to proprietary content. Increased competition could result in
price reductions, fewer customer orders, fewer search queries served, reduced
gross margins and loss of market share.
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The loss of a key customer could adversely affect our revenues and be perceived
as a loss of momentum in our business.
We have generated a substantial portion of our historical revenues from a
limited number of customers. We expect that a small number of customers will
continue to account for a substantial portion of revenues for the foreseeable
future. As a result, if we lose a major customer for any reason, including non-
renewal of a customer contract, or in the case of our search engine business, if
there is a decline in usage of any customer's search service, our revenues would
be adversely affected. In addition, potential customers of Inktomi and public
market analysts or investors may perceive any such loss as a loss of momentum in
our business, which may adversely affect future opportunities to sell our
products and services and cause our stock price to decline. Also, we cannot be
sure that customers that have accounted for significant revenues in past
periods, individually or as a group, will continue to generate revenues in any
future period.
If we do not meet performance requirements in our Portal Services agreements,
customers may cancel our service or choose a different service.
Our search engine, directory engine and shopping engine agreements
typically include specific performance requirements, including the features
provided, reliability, processing speed, size of the Internet database
maintained, number of merchants and products within the database, and frequency
of updating the database. In addition, we believe it is important to maintain
features and functionality that are not explicitly covered in our agreements,
such as high relevance of search and product results. The growing volume of
search queries processed by our search engine and the frequency with which we
update our portal services to include additional functionality have placed some
strain on our operational capability to meet customer requirements. If we do
not meet these requirements, customers may cancel our service or choose to use a
different service.
Circumstances beyond our control may result in service interruptions which could
cause our business to suffer.
We provide our portal services from multiple data centers, all of which are
housed at facilities operated by a single-source hosting provider.
Circumstances outside of our control such as fires, earthquakes, power failures,
telecommunications failures, sabotage, unauthorized intrusions into our
databases and similar events may bring down one or more of our data centers.
For example, in June 1998, lightning struck the facility housing our data center
in Virginia, interrupting service from this center. In addition, our data
center hosting provider has experienced network failures from time to time,
which has also interrupted our service. Service interruptions for any reason
would reduce our revenues and could result in contract cancellations.
Our quarterly operating results may fluctuate significantly, and these
fluctuations may cause our stock price to fall.
We expect that a significant portion of our future revenues will come from
licenses of Traffic Server. We further expect that these revenues will come
from licenses of Traffic Server to a small number of customers. The volume and
timing of orders are difficult to predict because the market for Traffic Server
is in its early stages and the sales cycle varies substantially from customer to
customer. The cancellation or deferral of even a small number of licenses of
Traffic Server would reduce our expected revenues, which would adversely affect
our quarterly financial performance. To the extent significant sales occur
earlier than expected, operating results for later quarters may not compare
favorably with operating results from earlier quarters.
Our operating expenses are largely based on anticipated revenue trends and
a high percentage of our expenses are fixed in the short term. We plan to
significantly increase our operating expenses to enhance and support our online
shopping business, expand our sales and marketing operations, broaden our
customer support capabilities, establish new data centers, develop new
distribution channels, and fund greater levels of research and development. A
delay in generating or recognizing revenue for the reasons set forth above or
for any other reason could cause significant variations in our operating results
from quarter to quarter and could result in substantial operating losses.
Due to these factors, we believe that quarter-to-quarter comparisons of our
operating results are not a good indication of our future performance. It is
likely that in some future quarter, our operating results may be below the
expectations of public market analysts or investors, and the price of our common
stock may fall.
Our operating results may fluctuate because the sales cycle for Traffic Server
is long.
To date, our customers have taken a long time to evaluate Traffic Server,
and many people within our customers' organizations have been involved in the
process. Along with our distribution partners, we spend a significant amount of
time educating and providing information to our prospective customers regarding
the use and benefits of Traffic Server. Even after purchase, our customers tend
to deploy Traffic Server slowly and deliberately, depending on the skill set of
the customer, the
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size of the deployment, the complexity of the customer's network environment,
and the quantity of hardware and the degree of hardware configuration necessary
to deploy Traffic Server. The long sales and implementation cycles for Traffic
Server may cause license revenues and operating results to vary significantly
from period to period.
Our success depends on our ability to expand our sales and support
organizations.
We will need to substantially expand our direct and indirect sales
operations, both domestically and internationally, in order to increase market
awareness and sales of our products. Our products and services require a
sophisticated sales effort targeted at several people within our prospective
customers' organizations. We have recently expanded our direct sales force and
plan to hire additional sales personnel. Competition for qualified sales
personnel is intense, and we might not be able to hire the kind and number of
sales personnel we are targeting. In addition, we believe that our future
success is dependent upon establishing and maintaining productive relationships
with a variety of distribution partners, including OEMs, resellers, systems
integrators and joint marketing partners. We seek to sign up distribution
partners that have a substantial amount of technical expertise in the computer
network and telecommunications industry. Even with this expertise, our
distribution partners generally require a significant amount of training and
support from us, and we anticipate that it will take several quarters before any
of our distribution partners will develop the expertise and skills we believe
necessary to effectively sell our products. We cannot be sure that we will be
successful in signing up desired distribution partners or that our distribution
partners will devote adequate resources or have the technical and other sales
capabilities to sell our products.
Similarly, the complexity of our products and the difficulty of installing
them require highly trained customer service and support personnel. We
currently have a small customer service and support organization and will need
to increase our staff to support new customers, new product lines (such as the
recent addition of our directory engine), the expanding needs of existing
customers and the internationalization of our business. Competition for
customer service and support personnel is intense in our industry due to the
limited number of people available with the necessary technical skills and
understanding of the Internet.
Our success depends on our ability to manage growing and changing operations.
Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We continue to increase the scope of our operations
domestically and internationally and have grown our headcount substantially.
This growth has placed, and our anticipated future operations will continue to
place, a significant strain on our management systems, personnel and other
resources. We expect that we will need to continue to improve our financial and
managerial controls and reporting systems and procedures, enhance our internal
and external security systems, and continue to expand, train and manage our work
force worldwide. Furthermore, we expect that we will be required to manage
multiple relationships with various customers, merchants and other third
parties.
The legal environment in which we operate is uncertain and claims against us
could cause our business to suffer.
Our products and services operate in part by making copies of material
available on the Internet and other networks and making this material available
to end-users from a central location. In addition, our portal services
technology systems collect end-user and transaction information, which we use to
deliver services to our customers and merchant partners. This creates the
potential for claims to be made against us (either directly or through
contractual indemnification provisions with customers) for defamation,
negligence, copyright or trademark infringement, personal injury, invasion of
privacy or other legal theories based on the nature, content, copying,
collection or use of these materials. These claims have been threatened against
us from time to time and have been brought, and sometimes successfully pressed,
against online service providers. It is also possible that if any information
provided through any of our portal services or facilitated by our Traffic Server
product contains errors, third parties could make claims against us for losses
incurred in reliance on this information. Further, there is the potential for
product liability claims to be asserted against us by end-users who purchase
goods and services through our shopping engine. Although we carry general
liability insurance, our insurance may not cover potential claims of this type
or be adequate to protect us from all liability that may be imposed.
Internet-related laws could adversely affect our business.
Laws and regulations which apply to communications and commerce over the
Internet are becoming more prevalent. The most recent session of the United
States Congress resulted in Internet laws regarding children's privacy,
copyrights, taxation and the transmission of sexually explicit material. The
European Union recently enacted its own privacy regulations, and is currently
considering copyright legislation that may extend the right of reproduction held
by copyright holders to include the right to make temporary copies for any
reason. The law of the Internet, however, remains largely unsettled, even in
areas where there has been some legislative action. It may take years to
determine whether and how existing laws such as those governing intellectual
property, privacy, libel and taxation apply to the Internet. In addition, the
growth and development of
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the market for online commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business online. The adoption or
modification of laws or regulations relating to the Internet, or interpretations
of existing law, could adversely affect our business.
The Internet infrastructure market is rapidly changing and we must develop and
introduce new products and technologies to remain competitive.
The Internet infrastructure market is characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements and evolving industry standards. The introduction of products
embodying new technologies and the emergence of new industry standards could
render our existing products obsolete. Our future success will depend upon our
ability to develop and introduce a variety of new products and product
enhancements to address the increasingly sophisticated needs of our customers.
The increasing scope of our business has led us to allocate additional resources
to our current business opportunities and fewer resources to longer term
projects. We have experienced delays in releasing new products and product
enhancements and may experience similar delays in the future. Material delays
in introducing new products and enhancements may cause customers to forego
purchases of our products or purchase those of our competitors.
If we are unable to maintain our relationships with customers and the companies
that supply and distribute our products, we may have difficulty selling our
products and services.
We believe that our success in penetrating our target markets depends in
part on our ability to develop and maintain strategic relationships with key
hardware and software vendors, Internet technology and service providers,
distribution partners and customers. We believe these relationships are
important in order to validate our technology, facilitate broad market
acceptance of our products, enhance our product and service offering, and expand
our sales, marketing and distribution capabilities. If we are unable to develop
key relationships or maintain and enhance existing relationships, we may have
difficulty selling our products and services.
We have from time to time licensed components from others such as
reporting functions and security features and incorporated them into our
products and services. If these licensed components are not maintained, it
could impair the functionality of our products and services and require us to
obtain alternative products from other sources or to develop this software
internally, either of which could involve costs and delays as well as diversion
of engineering resources.
We may not be able to recruit and retain the personnel we need to succeed.
We intend to hire a significant number of additional sales, support,
marketing, and research and development personnel. Competition for these
individuals is intense, and we may not be able to attract or retain additional
highly qualified personnel in the future. Our future success also depends upon
the continued service of our executive officers and other key sales, marketing
and support personnel. In addition, our products and technologies are complex,
and we are substantially dependent upon the continued service of our existing
engineering personnel, and especially our founders. None of our officers or key
employees is bound by an employment agreement for any specific term. Our
relationships with these officers and key employees are at will. We do not have
key person life insurance policies covering any of our employees.
Any acquisitions that we make could adversely affect our operations or financial
results.
We have purchased three companies since September 1998 and intend to
continue to invest in or acquire complementary companies, products or
technologies in the future. If we buy a company, we could have difficulty in
assimilating that company's personnel and operations. In addition, the key
personnel of the acquired company may decide not to work for us. Also, we could
have difficulty in integrating the acquired technology or products into our
operations. These difficulties could disrupt our ongoing business, distract our
management and employees and increase our expenses. Furthermore, we may have to
incur debt or issue equity securities to pay for any future acquisitions, the
issuance of which could be dilutive to our stockholders.
Our efforts to increase our presence in markets outside of the United States may
be unsuccessful and could result in losses.
We market and sell our products in the United States and internationally.
We have offices in England, France, Germany, Japan and Korea to market and sell
our products in those countries and surrounding regions. We plan to establish
additional facilities in other parts of the world. The expansion of our
existing international operations and entry into additional international
markets will require significant management attention and financial resources.
We cannot be sure that our investments in establishing facilities in other
countries will produce desired levels of revenue. We currently have limited
experience in developing localized versions of our products and marketing and
distributing our products internationally. In addition, other inherent risks may
apply to international operations, including:
22
<PAGE>
. the impact of recessions in economies outside the United States;
. greater difficulty in accounts receivable collection and longer
collection periods;
. unexpected changes in regulatory requirements;
. difficulties and costs of staffing and managing foreign operations;
. potentially adverse tax consequences; and
. political and economic instability.
Our international expenses are generally denominated in local currencies.
We do not currently engage in currency hedging activities. Although exposure to
currency fluctuations to date has been insignificant, future fluctuations in
currency exchange rates may adversely affect results of international
operations.
Our failure to protect our intellectual property rights could adversely affect
our ability to compete.
Our success and ability to compete are substantially dependent upon our
internally developed technology. We generally enter into confidentiality or
license agreements with our employees, consultants and corporate partners, and
generally control access to and distribution of our software, documentation and
other proprietary information. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology. Policing unauthorized use of our products is difficult,
and we cannot be sure that the steps we have taken will prevent misappropriation
of our technology, particularly in foreign countries where the laws may not
protect our proprietary rights as fully as in the United States.
Intellectual property claims against us could cause our business to suffer.
Substantial litigation regarding intellectual property rights exists in the
software industry. We expect that software products may be increasingly
vulnerable to third-party infringement claims as the number of competitors in
our industry segments grows and the functionality of products in different
industry segments overlaps. Lycos has announced that it is the exclusive
licensee of a patent covering a method of crawling information on the Internet,
and that it may bring actions against companies that it believes are infringing
this patent in the future. We also believe that many companies have filed or
intend to file patent applications covering aspects of their technology that
they may claim our technology infringes. Some of these companies have sent
copies of their patents to Inktomi for informational purposes. We cannot be
sure that Lycos or other third parties will not make a claim of infringement
against us with respect to our products and technology. Any claims, with or
without merit, could be time consuming to defend, result in costly litigation,
divert management's attention and resources, and could cause product shipment
delays or require us to reengineer our products or enter into royalty or
licensing agreements. These royalty or licensing agreements, if required, may
not be available on acceptable terms, if at all.
If our products or the products upon which we depend malfunction because of Year
2000 problems, our operations may be interrupted and we may be subject to
warranty and product liability claims.
Our software products operate in complex network environments and directly
and indirectly interact with a number of other hardware and software systems.
Despite investigation and testing by us and our partners, our software products
and the underlying systems and protocols running our products may contain errors
or defects associated with Year 2000 date functions. We are unable to predict
to what extent our business may be affected if our software or the systems that
operate in conjunction with our software experience a material Year 2000
failure. Known or unknown errors or defects that affect the operation of our
software could result in delay or loss of revenue, interruption of search or
shopping services, cancellation of customer contracts, diversion of development
resources, damage to our reputation, increased service and warranty costs, and
litigation costs, any of which could adversely affect our business, financial
condition and results of operations.
Our stock price is volatile.
The market price of our common stock has fluctuated in the past and is
likely to fluctuate in the future. In addition, the securities markets have
experienced significant price and volume fluctuations, and the market prices of
the securities of Internet-related companies have been especially volatile. In
the past, companies that have experienced volatility in the market price of
their stock have been the subject of securities class action litigation. If we
were the subject of securities class action litigation, it could result in
substantial costs and a diversion of management's attention and resources.
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Accountants, Consolidated Financial Statements
and Notes to Consolidated Financial Statements begin on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning our directors and executive officers is incorporated
by reference to the sections entitled "Proposal No. 1: Election of Directors--
Nominees" and "Management--Executive Officers" contained in our definitive Proxy
Statement with respect to our 2000 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission not later than 120 days after the
end of the fiscal year covered by this Form 10-K (the "Proxy Statement").
Information concerning compliance with Section 16(a) of the, Exchange Act of
1934 is incorporated by reference to the section entitled "Compliance with
Section 16(a) of the Exchange Act" contained in our Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference
to the sections entitled "Proposal No. 1: Election of Directors--Director
Compensation," "Management--Summary Compensation Table," "Management--Option
Grants in Last Fiscal Year," "Management--Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values," and "Management--Employment Agreement"
contained in our Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the security ownership of certain beneficial owners
and management is incorporated by reference to the section entitled "Information
Concerning Solicitation and Voting Security Ownership of Certain Beneficial
Owners and Management" contained in our Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships is incorporated by reference
to the section entitled "Certain Transactions" contained in our Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
<TABLE>
<CAPTION>
(1) Financial Statements:
<S> <C> <C>
Page
----
Report of Independent Accountants............................ F-1
Consolidated Balance Sheets at September 30, 1999 and 1998... F-2
Consolidated Statements of Operations - Fiscal Years
Ended September 30, 1999, 1998, and 1997..................... F-3
Consolidated Statements of Stockholders' Equity - Fiscal
Years ended September 30, 1999, 1998, and 1997............... F-4
Consolidated Statements of Cash Flows -
Fiscal Years ended September 30, 1999, 1998, and 1997........ F-5
Notes to Consolidated Financial Statements................... F-6
</TABLE>
24
<PAGE>
(2) Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes
thereto.
(3) Exhibits:
Exhibit
Number
------
2.1(2) Agreement and Plan of Reorganization dated August 31, 1998 by and
among Inktomi, IC Merger Corp. and C2B Technologies Inc.
2.2(5) Agreement and Plan of Reorganization by and among Inktomi, IC
Acquisition Corp. and Impulse! Buy Network, Inc.
2.3(7) Agreement and Plan of Reorganization by and among Inktomi, WS
Acquisition Corp. and WebSpective Software, Inc.
3.2(3) Amended and Restated Certificate of Incorporation of Inktomi.
3.2a(6) Amendment to Amended and Restated Certificate of Incorporation of
Inktomi.
3.4(3) Bylaws of Inktomi.
4.1(3) Specimen Common Stock Certificate.
10.1(3) Form of Indemnification Agreement between Inktomi and each of its
directors and officers.
10.2(3) 1998 Stock Plan and form of agreement thereunder.
10.3(3) 1998 Employee Stock Purchase Plan and form of agreements
thereunder.
10.4(3) 1996 Equity Incentive Plan and form of agreement thereunder.
10.5(3) Fifth Amended and Restated Investors' Rights Agreement dated as
February 13, 1998 among Inktomi and certain of its security
holders named therein.
10.6(3) Executive Employment Agreement dated as of July 1, 1996 between
Inktomi and David C. Peterschmidt.
10.7 Reserved for future use.
10.8 Reserved for future use.
10.9 Reserved for future use.
10.10 Reserved for future use.
10.11 Reserved for future use.
10.12 Reserved for future use.
10.13 Reserved for future use.
10.14 Reserved for future use.
10.15 Reserved for future use.
10.16 Reserved for future use.
10.17 Reserved for future use.
10.18 Reserved for future use.
10.19 Reserved for future use.
10.20(1) Office Lease dated October 9, 1998 between Inktomi and WHFST Real
Estate Limited Partnership, a Delaware limited partnership.
10.21(1) C2B Technologies Inc. (formerly BeyondNews, Inc.) 1997 Stock Plan
and form of agreement thereunder.
10.22(2) Registration Rights Agreement dated September 25, 1998 between
Inktomi and former stockholders of C2B Technologies Inc. (included
in Exhibit 2.1)
10.23(4) 1998 Nonstatutory Stock Option Plan and form of agreement
thereunder
10.24(5) Declaration of Registration Rights dated April 30, 1999 for the
benefit of former Impulse! Buy Network, Inc. stockholders
(included in Exhibit 2.2).
10.25(6) Amendment dated January 28, 1999 to Amended and Restated Loan and
Security Agreement dated as of September 2, 1998 between Inktomi
and Silicon Valley Bank.
10.26(8) Impulse! Buy Network, Inc. 1997 Stock Plan and form of agreement
thereunder
10.27(9) WebSpective Software, Inc. (formerly Atreve Software, Inc.) 1997
Stock Option Plan and form of agreement thereunder.
10.28(7) Declaration of Registration Rights dated October 1, 1999 for the
benefit of former WebSpective Software, Inc. stockholders
(included in Exhibit 2.3).
21.1 Subsidiaries of Inktomi
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
24.1 Power of Attorney (see page 27)
27.1 Financial Data Schedules.
25
<PAGE>
-----------------------
(1) Incorporated by reference from Inktomi's Registration Statement
on Form S-1 (Reg. No. 333-66661), as amended.
(2) Incorporated by reference from Inktomi's Current Report on Form
8-K filed with the Commission on October 9, 1998, as amended
November 2, 1998.
(3) Incorporated by reference from Inktomi's Registration Statement
on Form S-1 (Reg. No. 333-50247), as amended.
(4) Incorporated by reference from Inktomi's Registration Statement
on Form S-8 (Reg. No. 333-71037)
(5) Incorporated by reference from Inktomi's Current Report on Form
8-K filed with the Commission on May 13, 1999.
(6) Incorporated by reference from Inktomi's Quarterly Report on
Form 10-Q filed with the Commission on May 17, 1999.
(7) Incorporated by reference from Inktomi's Current Report on Form
8-K filed with the Commission on October 15, 1999, as amended
November 5, 1999.
(8) Incorporated by reference from Inktomi's Registration Statement
on Form S-8 (Reg. No. 333-80195).
(9) Incorporated by reference from Inktomi's Registration Statement
on Form S-8 (Reg. No. 333-89581).
(b) Reports on Form 8-K
We filed a Current Report on Form 8-K dated October 15, 1999 to report
under Item 2 thereof the acquisition of WebSpective Software, Inc. We filed an
amendment dated November 5, 1999 to this Current Report on Form 8-K to include
the required Supplementary Consolidated Financial Statements required under the
report.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on December 28, 1999.
INKTOMI CORPORATION
/S/ DAVID C. PETERSCHMIDT
-------------------------
David C. Peterschmidt
Chairman of the Board, President
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints David C. Peterschmidt and Jerry M.
Kennelly, and each of them individually, as his attorney-in-fact, each with full
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said attorney-in
fact, or his substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dated indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C> <C>
/S/ DAVID C. PETERSCHMIDT Chairman of the Board, President, Chief Executive December 28, 1999
- ------------------------------ Officer (Principal Executive Officer)
David C. Peterschmidt
/S/ JERRY M. KENNELLY Vice President of Finance and Chief Financial December 28, 1999
- ------------------------------ Officer (Principal Financial and Accounting
Jerry M. Kennelly Officer)
/S/ FRANK GILL Director December 28, 1999
- ------------------------------
Frank Gill
/S/ ALAN F. SHUGART Director December 28, 1999
- ------------------------------
Alan F. Shugart
/S/ ERIC A. BREWER Director December 28, 1999
- ------------------------------
Eric A. Brewer
/S/ JOHN A. PORTER Director December 28, 1999
- ------------------------------
John A. Porter
/S/ FREDRIC W. HARMAN Director December 28, 1999
- ------------------------------
Fredric W. Harman
</TABLE>
27
<PAGE>
INKTOMI CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants ............................................................................. F-2
Consolidated Balance Sheets ................................................................................... F-3
Consolidated Statements of Operations ......................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity .................................................... F-5
Consolidated Statements of Cash Flows ......................................................................... F-6
Notes to Consolidated Financial Statements .................................................................... F-7
</TABLE>
The reader of these consolidated financial statements should also refer
Inktomi's Form 8K/A filed on November 5, 1999. The supplementary financial
statements contained therein give retroactive effect to the merger on October 1,
1999 with WebSpective Software, Inc. which was accounted for as a pooling of
interests.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Inktomi Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements 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, 1999 and 1998 and the
results of their operations and cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards accepted in the United States, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Jose, California
October 21, 1999
F-2
<PAGE>
INKTOMI CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30,
-------------
1999 1998
---- ----
Assets
Current assets
<S> <C> <C>
Cash and cash equivalents ............................................................ $ 79,926 $ 29,267
Short-term investments ............................................................... 225,070 19,690
-------- --------
Total cash, cash equivalents and short-term investments ............................. 304,996 48,957
Accounts receivable, net of allowances of $3,282 and $632, respectively .............. 23,007 5,089
Prepaid expenses and other current assets ............................................ 3,280 588
-------- --------
Total current assets ................................................................ 331,283 54,634
Property and equipment, net ............................................................ 42,882 17,516
Security deposits and other long-term assets ........................................... 2,106 211
-------- --------
Total assets ........................................................................ $376,271 $ 72,361
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Current portion of notes payable ..................................................... $ 4,722 $ 3,832
Current portion of capital lease obligations ......................................... 2,481 2,054
Accounts payable ..................................................................... 6,240 4,938
Accrued liabilities .................................................................. 12,974 6,764
Deferred revenue ..................................................................... 2,852 1,370
-------- --------
Total current liabilities ........................................................... 29,269 18,958
Notes payable ........................................................................ 3,671 4,236
Capital lease obligations, less current portion ...................................... 2,453 4,646
Other liabilities .................................................................... 728 --
-------- --------
Total liabilities ................................................................... 36,121 27,840
Commitments (Notes 4 and 6)
Stockholders' equity
Common Stock, $0.001 par value; Authorized:
300,000 and 100,000 at September 30, 1999 and 1998, respectively;
Outstanding: 53,036 and 47,476 at September 30, 1999 and 1998, respectively... 53 47
Additional paid-in capital ........................................................... 403,501 86,106
Deferred compensation and other equity ............................................... (2,234) (3,137)
Accumulated other comprehensive income (loss) ........................................ 1,447 (49)
Accumulated deficit .................................................................. (62,617) (38,446)
-------- --------
Total stockholders' equity .......................................................... 340,150 44,521
-------- --------
Total liabilities and stockholders' equity .......................................... $376,271 $ 72,361
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
INKTOMI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended September 30,
---------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues
Network products ..................................... $ 40,964 $ 7,962 $ 60
Portal services ...................................... 30,261 12,476 5,725
-------- -------- --------
Total revenues ................................... 71,225 20,438 5,785
Operating expenses
Cost of revenues ..................................... 12,662 4,888 1,512
Sales and marketing .................................. 52,759 21,940 7,835
Research and development ............................. 27,140 13,455 5,134
General and administrative ........................... 6,394 4,095 1,487
Acquisition related costs ............................ 1,110 1,018 --
-------- -------- --------
Total operating expenses ......................... 100,065 45,396 15,968
-------- -------- --------
Operating loss ........................................ (28,840) (24,958) (10,183)
Other income, net ..................................... 4,669 424 (194)
-------- -------- --------
Net loss ......................................... $(24,171) $(24,534) $(10,377)
======== ======== ========
Basic and diluted net loss per share .................. $(0.48) $(0.63) $(0.40)
======== ======== ========
Shares used in calculating basic and diluted net
loss per share......................................... 49,915 39,130 25,954
======== ======== ========
Pro forma net loss per share to effect two-for-one
stock split declared on December 3, 1999:
Pro forma basic and diluted net loss per share
(unaudited) ........................................ $(0.24) $(0.31) $(0.20)
======== ======== ========
Pro forma shares used in calculating basic and
diluted net loss per share (unaudited)................. 99,830 78,260 51,908
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
INKTOMI CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended September 30, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
Convertible Accumulated
Preferred Stock Additional Deferred Other
------------------- Common Stock Paid-in Compensation Accumulated Comprehensive
Shares Amount Shares Amount Capital & Other Deficit Income (Loss) Total
------ ------ ------ ------ ------- ------- ------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, October 1, 1996........ 10,072 $ 10 4,934 $ 5 $ 4,402 $(2,542) $ (3,535) $ -- $ (1,660)
Net loss......................... (10,377) (10,377)
--------
Total comprehensive loss...... (10,377)
--------
Issuance of Common Stock for
cash, notes, or services,
including for exercise of
options and warrants............ 6,990 7 3,346 (69) 3,284
Issuance of Preferred Stock,
net of issuance costs of $109... 4,786 5 9,672 9,677
Issuance of Preferred Stock upon
conversion of note payable...... 80 200 200
Forgiveness of note payable
related to transfer of
technology................... 3,133 3,133
Issuance of Preferred Stock
warrants........................ 490 490
Stock compensation in
connection with issuance of
stock options................... 103 (103) --
------ --- ------ --- -------- -------- --------- ------- ---------
Balances, September 30, 1997..... 14,938 15 11,924 12 17,723 909 (13,912) -- 4,747
Foreign currency translation..... (49) (49)
Net loss......................... (24,534) (24,534)
--------
Total comprehensive loss...... (24,583)
--------
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............ 9,476 9 48,632 (1,653) 46,988
Exercise of Preferred Stock
warrants........................ 1,225 1 4,071 4,072
Conversion of Preferred Stock
to Common Stock................. (19,461) (19) 26,076 26 (7) --
Stock compensation in
connection with issuance of
stock options by Inktomi and
acquired company................ 2,803 (2,393) 410
------ --- ------ --- -------- -------- --------- ------- ---------
Balances, September 30, 1998..... -- -- 47,476 47 86,106 (3,137) (38,446) (49) 44,521
Foreign currency translation..... (126) (126)
Unrealized gain on short-term
investments..................... 1,622 1,622
Net loss......................... (24,171) (24,171)
--------
Total comprehensive loss...... (22,675)
--------
Issuance of Common Stock in
public offerings, net of
issuance costs of $1143......... 3,780 4 305,104 305,108
Issuance of Common Stock for
cash or notes, including for
exercise of options and
warrants.................... 1,780 2 10,244 (239) 10,007
Stock compensation in connection
with issuance of stock options
by Inktomi and acquired company. 2,047 (843) 1,204
Amortization of stock
compensation.................... 1,319 1,319
Repayment of stockholder loans... 666 666
------ --- ------ --- -------- -------- --------- ------- ---------
Balances, September 30, 1999..... $ -- $ -- 53,036 $53 $403,501 $(2,234) $(62,617) $1,447 $340,150
====== === ====== === ======== ======== ========= ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
INKTOMI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Year Ended September 30,
--------------------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss ........................................................ $ (24,171) $(24,534) $(10,377)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .................................. 10,685 3,763 1,347
Provision for doubtful accounts ................................ 2,650 551 30
Stock based compensation ....................................... 1,319 980 145
Abandonment loss on property and equipment ..................... 1,881 -- 46
Changes in operating assets and liabilities
Accounts receivable ........................................... (20,568) (4,811) (732)
Prepaid expenses and other assets ............................. (2,837) (53) (285)
Accounts payable .............................................. 1,302 2,436 227
Deferred revenue .............................................. 1,482 656 715
Accrued liabilities and other ................................. 6,938 5,655 689
--------- -------- --------
Net cash used in operating activities ........................ (21,319) (15,357) (8,195)
Cash flows from investing activities:
Purchases of short-term investments ............................. (680,622) (32,771) --
Proceeds from the sale of short-term investments ................ 476,864 13,091 --
Loan receivable from employee ................................... (1,750) (86) --
Purchase of equipment ........................................... (32,667) (6,882) (6,002)
Proceeds from sale of property and equipment .................... -- 928 --
--------- -------- --------
Net cash used in investing activities ........................ (238,175) (25,720) (6,002)
Cash flows from financing activities:
Proceeds from notes payable ..................................... 4,065 2,845 9,786
Repayments on notes payable ..................................... (3,740) (2,296) (2,267)
Payments on obligations under capital leases .................... (7,031) (336) --
Proceeds from stockholder loans ................................. 666 -- --
Proceeds from issuance of Preferred Stock, net of issuance costs.. -- 16,186 10,167
Proceeds from exercise of stock options and warrants ............ 11,211 4,962 777
Proceeds from issuance of Common Stock, net of issuance costs ... 305,108 41,988 2,362
--------- -------- --------
Net cash provided by financing activities .................... 310,279 63,349 20,825
--------- -------- --------
Effect of exchange rates on cash and cash equivalents ............ (126) (49) --
Increase in cash and cash equivalents ............................ 50,659 22,223 6,628
Cash and cash equivalents at beginning of period ................. 29,267 7,044 416
--------- -------- --------
Cash and cash equivalents at end of period ....................... $ 79,926 $ 29,267 $ 7,044
========= ======== ========
Supplemental Disclosure of Cash Flow Information:
Accounts payable related to purchase of property and equipment ... $ 686 $ 1,473 $ 413
========= ======== ========
Forgiveness of note payable related to technology acquired ....... $ -- $ -- $ 3,133
========= ======== ========
Exercise of Common Stock options in exchange for note receivable . $ -- $ 666 $ 93
========= ======== ========
Stock options issued as compensation for services rendered ....... $ -- $ 36 $ 93
========= ======== ========
Conversion of note payable into Preferred Stock .................. $ -- $ -- $ 200
========= ======== ========
Assets acquired under capital lease .............................. $ 5,265 $ 6,939 $ --
========= ======== ========
Cash paid for interest ........................................... $ (1,481) $ (605) $ (267)
========= ======== ========
Common Stock issued in exchange for prepaid advertising .......... $ -- $ 285 $ --
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Significant Accounting Policies:
Organization:
Inktomi 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.
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.
On December 3, 1999, Inktomi announced a two-for-one Common Stock split. On
December 30, 1999, stockholders of record at the end of the day on December 14,
1999 will be entitled to receive one additional share (in the form of a 100%
stock dividend) of Inktomi's Common Stock for every share they hold on that day.
Historical weighted average shares outstanding and loss per share amounts have
been restated to reflect the May 1998 and December 1998 stock splits and the
pooling of interests with C2B and Impulse! Buy. Pro forma weighted average
shares outstanding and loss per share amounts have been stated to reflect the
stock split to occur on December 30, 1999.
Reclassifications:
Certain fiscal 1998 and 1997 amounts have been reclassified to conform to
the 1999 presentation.
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Inktomi Limited, a United Kingdom subsidiary
formed in October 1997 and Inktomi KK, a Japanese subsidiary formed in July
1999. All intercompany balances and transactions have been eliminated in the
consolidated financial statements.
F-7
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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
and equity securities are adjusted to fair value with a resulting adjustment to
stockholders' equity. The amortized cost of debt securities are adjusted for
amortization of premiums and accretion of discounts to maturity, both of which
are included in interest income. Realized gains and losses are recorded using
the specific identification method and have been minimal through September 30,
1999. All available-for-sale investments have maturity dates of less than one
year.
At September 30, 1999, short-term investments also include equity investments
totaling $5.1 million in companies whose shares not yet freely tradable. These
equity investments are accounted for according to Accounting Principles Board
Opinion ("APB") No. 18, The Equity Method of Accounting for Investments in
Common Stock, and are recorded at cost and reduced for other than temporary
reductions in value.
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 to ten 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.
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, such amounts have been insignificant,
and accordingly, the Company has charged all software development costs to
research and development expense.
Marketing and Advertising Costs:
The Company's policy is to expense marketing and advertising costs as they
are incurred. Expenses for Inktomi's marketing and advertising programs were
approximately $9.7 million, $3.0 million, and $0.9 million in the years ended
September 30, 1999, 1998, and 1997, respectively.
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.
F-8
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 assesses the impairment of long-lived assets when events or changes
in circumstances indicate that the carrying value of an asset may not be
recoverable. The Company recognized losses for the abandonment of leasehold
improvements and equipment with a net book value of $1,881,000 due to corporate
relocation in fiscal 1999.
Revenue Recognition:
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. SOP No. 97-
2, as amended, provides guidance on applying generally accepted accounting
principles for software revenue recognition transactions. Based on the
Company's interpretation of the requirements of SOP No. 97-2, as amended,
application of this statement has not materially impacted the Company's
revenues, results of operations or financial position.
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.
Barter revenues and expenses are recorded at the fair value of services
provided or received, whichever is more readily determinable in the
circumstances. Revenues and expenses from advertising barter transactions are
recognized upon delivery. Inktomi did not record revenue and expenses from
barter agreements in the year ended September 30, 1999. Barter revenues and
expenses were approximately $1.8 million and $1.6 million for the years ended
September 30, 1998 and 1997, respectively.
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.
Accounting for Stock-Based Compensation:
The Company accounts for stock-based compensation agreements in accordance
with the provisions of APB No. 25, Accounting for Stock Issues to Employees, and
complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-
Based Compensation. Under APB No. 25, compensation expense is based on the
difference, if any, on the date of grant, between the estimated fair value of
the Company's stock and the exercise price of options to purchase that stock.
Acquisition-Related Charges:
In April 1999, we acquired Impulse! Buy Network, a developer of online
merchandising software, to supplement the functionality of our shopping engine.
We accounted for the acquisition as a pooling of interests. This discussion
reflects our acquisition of Impulse! Buy Network. We recorded acquisition costs
of approximately $1.1 million in fiscal 1999 as a result of the acquisition,
primarily for accounting, legal and other expenses. As of September 30, 1999,
all acquisition-related costs had been paid.
F-9
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the fourth quarter of fiscal 1998, Inktomi acquired C2B Technologies, a
developer of online shopping software. The transaction was accounted for as a
pooling of interests. We incurred expenses of $1.0 million related to the
transaction. The charge included C2B Technologies' financial advisory fees,
facilities consolidation costs, and legal and accounting fees. As of September
30, 1999, all acquisition-related costs had been paid.
In October 1999, Inktomi acquired Webspective Software, Inc, a developer of
online operations management solutions software for commerce-critical web sites.
We expect to account for the acquisition as a pooling of interests. We expect to
incur acquisition related costs of $4.0 million in the quarter ending December
31, 1999 as a result of the acquisition, primarily for investment banking fees,
accounting, legal and other expenses.
Comprehensive Income (Loss):
SFAS No. 130, Reporting Comprehensive Income, requires companies to report
foreign currency translation gains and losses and unrealized gains and losses on
equity securities that have been previously excluded from net income and
reflected instead in stockholders' equity. Comprehensive income (loss) for the
periods ended September 30, 1999, 1998 and 1997 have been included in the
Company's Consolidated Statement of Changes in Stockholders' Equity.
Net Loss Per Share:
The Company computes net loss per share in accordance with SFAS No. 128,
Earnings per Share, and SEC Staff Accounting Bulletin ("SAB") No. 98. Under the
provisions of SFAS No. 128 and SAB No. 98, basic and diluted net loss per share
are computed by dividing the net loss available to common stockholders by the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares, comprised of incremental common
shares issuable upon the exercise 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. and Japanese subsidiaries 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 other comprehensive income (loss) which
is 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 foreign exchange gains and 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, 1999, there were no customers that individually accounted for 10%
of all revenue generated by the Company and two customers accounted for 13% and
35% of accounts receivable at September 30, 1999, respectively. For the year
ended September 30, 1998, four customers represented 35%, 16%, 14% and 12% of
all revenue generated by the Company, and 10%, 0%, 22% and 8% of accounts
receivable at September 30, 1998, respectively. For the year ended September
30, 1997, three customers represented 79%, 6% and 13% of all revenue generated
by the Company, and 62%, 37% and 0% of accounts receivable at September 30,
1997, respectively.
F-10
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1999, there were no customers that individually accounted
for 10% of all revenue generated by the Company and two customers accounted for
13% and 35% of accounts receivable at September 30, 1999, respectively. For the
year ended September 30, 1998, four customers represented 35%, 16%, 14% and 12%
of all revenue generated by the Company, and 10%, 0%, 22% and 8% of accounts
receivable at September 30, 1998, respectively. For the year ended September
30, 1997, three customers represented 79%, 6% and 13% of all revenue generated
by the Company, and 62%, 37% and 0% of accounts receivable at September 30,
1997, respectively.
Recently Issued Accounting Pronouncements:
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 statement. The Company has not held any derivative instruments or
participated in any hedging activities to date.
(2) Property and Equipment:
Property and equipment consists of (in thousands):
<TABLE>
<CAPTION>
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Computer equipment........................................................ $ 44,651 $21,386
Furniture and fixtures.................................................... 2,371 1,253
Leasehold improvements.................................................... 11,957 289
-------- -------
58,979 22,928
Less accumulated depreciation and amortization....................... (16,097) (5,412)
-------- -------
Property and equipment, net.......................................... $ 42,882 $17,516
======== =======
</TABLE>
The Company recognized losses for the abandonment of leasehold improvements
and equipment with a net book value of $1,881 due to corporate relocation in
fiscal 1999. Assets acquired under capitalized lease obligations are included in
computer equipment and furniture and fixtures and totaled $12,204 and $6,939
(including equipment previously purchased) at September 30, 1999 and 1998,
respectively.
F-11
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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>
Year Ended September 30,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal tax benefit at statutory rate.................... $(8,148) $(8,341) $(3,528)
State taxes, net of federal tax effect................... (1,398) (1,427) (527)
Research and experimentation credits..................... (569) (469) (76)
Unutilized net operating losses.......................... 10,115 10,237 4,131
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>
Net deferred tax assets comprise (in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1999 1998
---- ----
<S> <C> <C>
Net operating loss carryforwards............................. $ 19,982 $ 13,276
Research and experimentation credit carryforwards............ 2,144 1,087
Other liabilities and reserves............................... 2,501 731
Property and equipment....................................... (212) (667)
Acquired technology.......................................... -- 173
Deferred revenue............................................. 171 524
Valuation allowance.......................................... (24,586) (15,124)
-------- --------
Net deferred tax assets................................... $ -- $ --
======== ========
</TABLE>
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its otherwise recognizable net deferred tax assets. Should the Company
achieve profitability, these deferred tax assets may be available to offset
future income tax liabilities and expenses.
At September 30, 1999, the Company had the following carryforwards available
to reduce future taxable income and income taxes (in thousands):
<TABLE>
<CAPTION>
September 30, 1999
------------------
Federal State
------- -----
<S> <C> <C>
Net operating loss carryforwards.......................................................... $115,288 $55,421
Research and experimentation credit carryforwards......................................... $ 1,286 $ 858
</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-12
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Notes Payable and Line of Credit (dollars in thousands):
<TABLE>
<CAPTION>
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Bank line (1).................................................................... $ -- $ 198
Equipment notes (2).............................................................. 6,583 3,389
Bank term note (3)............................................................... 500 1,167
Other bank note (4).............................................................. -- 490
Notes payable (5)................................................................ 1,160 2,444
Other notes payable (6).......................................................... 150 380
------- -------
8,393 8,068
Less current portion............................................................. (4,722) (3,832)
------- -------
Notes payable, less current portion.............................................. $ 3,671 $ 4,236
======= =======
</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 (8.25% and 8.5% at September 30, 1999 and 1998,
respectively). The Company also has $5,000 of additional unused
availability under an equipment loan facility with the same bank.
Borrowings under the facility were repayable in 36 equal monthly
installments plus interest at 0.25% over prime (8.5% and 8.75% at September
30, 1999 and 1998, respectively). The master bank credit agreement required
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.
The line of credit was paid in full in September 1999.
(2) The equipment notes include three 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 (8.75% and
9.0% at September 30, 1999 and 1998, respectively) through April 2001. The
second loan for $2,000 has monthly payments of $56 plus interest at 0.25%
over prime (8.5% and 8.75% at September 30, 1999 and 1998, respectively) and
matures in June 2001. The third loan for $4,722 has monthly payments of
$139 plus interest at 0.25% over prime (8.5% at September 30, 1999) and
matures in June 2002. The notes have collateralization and covenant
requirements consistent with the bank line of credit as described above. As
of September 30, 1999, the Company was in compliance with all required
covenants.
(3) The bank term note of $2,000 is payable in equal monthly payments of $56
plus interest at 0.5% over prime (8.75% and 9.0% at September 30, 1999 and
1998, respectively) through June 2000. The note has collateralization and
covenant requirements consistent with the bank line of credit as described
above. As of September 30, 1999, the Company was in compliance with all
required covenants.
(4) The other bank note consists of a term note obtained by C\2\B Technologies
Inc., a Company acquired by Inktomi. 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 fixed 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 fixed 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, 1999 are as follows
(in thousands):
<TABLE>
<S> <C>
Years ending:
September 30, 2000...................................................................................... $4,722
September 30, 2001...................................................................................... 2,560
September 30, 2002...................................................................................... 1,111
------
$8,393
======
</TABLE>
The carrying value of notes payable approximated fair value as the related
interest rates approximate market rates.
F-13
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Accrued Liabilities:
Accrued liabilities comprise (in thousands):
<TABLE>
<CAPTION>
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Accrued compensation................................................................. $ 9,235 $3,815
Accrued expenses related to International operations................................. 1,440 246
Accrued acquisition related costs.................................................... -- 1,116
Accrued taxes........................................................................ 602 308
Accrued royalties.................................................................... 514 90
Accrued legal costs.................................................................. 577 850
Other accrued liabilities............................................................ 606 339
------- ------
Total accrued liabilities......................................................... $12,974 $6,764
======= ======
</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 capital leases are collateralized by the respective
underlying assets. The future minimum lease payments under these leases at
September 30, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
------ ------
<S> <C> <C>
Years ending September 30,:
2000............................................................................... $ 5,387 $ 2,918
2001............................................................................... 6,535 2,607
2002............................................................................... 6,748 --
2003............................................................................... 6,961 --
2004............................................................................... 7,173 --
Thereafter......................................................................... 46,782 --
------- -------
Total minimum lease payments.......................................................... $79,586 $ 5,525
=======
Less amount representing interest..................................................... (591)
-------
Present value of minimum lease payments............................................... 4,934
Less current portion.................................................................. (2,481)
-------
Capital lease obligations, less current portion.................................. $ 2,453
=======
</TABLE>
In October 1998, the Company signed a lease for 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 $80 million. In
connection with this lease agreement, Inktomi paid a cash security deposit of
$1.3 million in October 1998 and provided a supplemental deposit in the form of
a letter of credit in the amount of $4.8 million in January 1999. In September
1999, the Company signed an agreement with a third party which sub-leases the
Company's previous corporate headquarters through October 2003. At September
30, 1999, future minimum payments due to Inktomi under sub-lease agreements was
$5,339.
Rent expense was approximately $3,029, $1,348, and $312 for the years ended
September 30, 1999, 1998 and 1997, respectively.
(7) Stockholders' Equity:
In June 1998, all 19.5 million shares of Preferred Stock were converted into
26.1 million shares of Common Stock of the Company.
F-14
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1998, the stockholders of the Company approved an amendment to the
Company's certificate of incorporation authorizing 10 million 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 fiscal 1998, the Company raised $48.6 million, net of issuance costs,
from an initial public offering of 4.7 million 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.
In November 1998 and August 1999, the Company completed secondary offerings
of its Common Stock in which it sold approximately 1.3 million shares raising
$88.9 million, and approximately 2.4 million shares raising $216.2 million,
respectively, net of issuance costs and underwriters' discounts. Additionally,
in fiscal 1999, the Company raised $11.2 million through the issuance of
approximately 1.8 million shares of Common Stock for cash, notes or services,
including for exercise of options and warrants.
(8) Deferred Compensation and Other Equity:
Deferred compensation, and other equity includes (in thousands):
<TABLE>
<CAPTION>
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Deferred compensation................................................................. $(2,020) $(2,496)
Warrants issued and options granted to consultants.................................... -- 239
Stockholder loans..................................................................... (214) (880)
------- -------
Total deferred compensation and other equity.................................... $(2,234) $(3,137)
======= =======
</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 September 30, 1999 the following warrants were outstanding:
<TABLE>
<CAPTION>
Common Stock Exercise Price Expiration Dates
------------ -------------- ----------------
<S> <C> <C> <C>
Common Stock.................................................. 6,668 $ 25,005 August 2001
Common Stock.................................................. 835,402 $ 137,841 April 2002
Common Stock.................................................. 194,446 $2,925,024 June 2002
</TABLE>
At September 30, 1999 the following warrants were exercisable.
F-15
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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, and the Impulse! Buy Network
1997 Stock Option Plan (the "Plans"), as amended, employees, directors and
consultants of the Company may be granted options to purchase shares of Common
Stock. At September 30, 1999, 2,000,000 shares of Common Stock were reserved
under the 1998 plan and 111,023 shares were authorized under the Impulse Plan.
At September 30, 1998, shares were no longer available for issuance from the
1996 and 1997 plans. Options granted under the Plans include incentive stock
options and nonqualified stock options. Stock options granted under the Plans
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 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 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 September 30, 1997............................... 3,870 $0.06- $ 1.95 1,018 $ 0.26
Granted......................................................... 3,406 $3.33- $ 53.75 36,720 $10.80
Exercised....................................................... (1,480) $0.11- $ 10.50 (1,288) $ 0.87
Canceled........................................................ (371) $0.45- $ 18.00 (223) $ 0.60
------ --------
Outstanding at September 30, 1998............................... 5,425 $0.06- $ 53.75 36,227 $ 6.69
Granted......................................................... 3,520 $0.80- $107.84 241,996 $68.75
Exercised....................................................... (951) $0.17- $ 84.75 (6,565) $ 6.90
Canceled........................................................ (350) $0.23- $ 84.75 (9,602) $27.43
------ --------
Outstanding at September 30, 1999............................... 7,644 $0.06- $107.84 $262,056 $34.28
====== ========
</TABLE>
At September 30, 1999, there were 1,368,440 shares of Common Stock which were
subject to repurchase.
The following table summarizes information with respect to stock options
outstanding at September 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of Outstanding at Remaining Exercise Exercisable at Exercise
Exercise Prices September 30, 1999 Contractual Life) Years Price September 30, 1999 Price
--------------- ------------------ ----------------------- ----- ------------------- -----
<S> <C> <C> <C> <C> <C>
$ 0.06-$ 5.25 2,942,949 8.42 $ 0.96 2,942,949 $ 0.96
$ 6.50-$ 31.00 1,719,749 8.57 $23.82 1,719,749 $23.82
$ 39.53-$ 84.75 2,579,646 9.42 $70.08 2,579,646 $70.08
$ 92.19-$ 107.84 402,105 10.02 $97.13 402,105 $97.13
</TABLE>
In connection with the completion of the Company's public offerings, stock
option grants, and the acquisitions of C/2/B and Impulse! Buy, certain options
granted in 1997, 1998 and 1999 have been considered to be compensatory.
Compensation associated with such options for the years ended September 30,
1999, 1998 and 1997 was $1,270,000, $2,803,000 and $103,000, respectively. Of
these amounts, $1,746,000 and $410,000 were charged to operations for the years
ended September 30, 1999 and 1998, respectively, and $2,020,000 will be charged
to operations during the remaining period to 2002.
The following information concerning the Plans is provided in accordance with
SFAS No. 123. The Company accounts for all Plans in accordance with APB No. 25
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.
F-16
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of each employee and director stock option grant has been
estimated on the date of grant using the minimum value method for grants in the
period February 2, 1996 (date of inception) to September 30, 1996 and the year
ended September 30, 1997. For the years ended September 30, 1998 and 1999, the
fair value has been estimated using the Black-Scholes Option Pricing Model.
The Black-Scholes Option Pricing Model was developed for use in estimating
the fair value of traded options and warrants that have no vesting restrictions
and are fully transferable. In addition, valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
The Company's options have characteristics significantly different from those of
traded options, and changes in the subjective input assumptions can materially
affect the fair value estimate. Utilizing the Black-Scholes Option Pricing
Model, the weighted average fair value of employee stock options granted during
fiscal 1999, 1998 and 1997 was $68.66, $10.50 and $0.09 per share, respectively.
The following assumptions were used in determining the fair value of options
granted and warrants issued:
<TABLE>
<CAPTION>
September 30,
-------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rates.............................. 4.23%-5.87% 5.47%-6.60% 6.00%-6.47%
Expected life......................................... 5 years 5 years 5 years
Dividends............................................. 0% 0% 0%
Volatility............................................ 112% 140% 0%
</TABLE>
The following comprises the pro forma information pursuant to the provisions
of SFAS No. 123 (in thousands):
<TABLE>
<CAPTION>
September 30,
-------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net loss--Historical.................................... $(24,171) $(24,534) $(10,377)
Net loss--Pro forma..................................... $(25,441) $(26,054) $(10,752)
Basic and diluted net loss per share - Historical....... $ (0.48) $ (0.63) $ (0.40)
Basic and diluted net loss per share - Pro forma........ $ (0.51) $ (0.67) $ (0.41)
Pro forma net loss per share to effect two-for-one
stock split declared on December 3, 1999:
Pro forma basic and diluted net loss per share to
effect two-for-one stock split declared on
December 3, 1999 on Historical EPS (unaudited): $ (0.24) $ (0.31) $ (0.20)
Pro forma basic and diluted net loss per share to
effect two-for-one stock split declared on
December 3, 1999 on Pro forma EPS (unaudited): $ (0.25) $ (0.33) $ (0.21)
</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.
(11) Related Party Transactions:
In April 1998, the Company provided a loan to a corporate officer to exercise
Common Stock options. The loan totaled $666,000 and was repayable to the Company
in April 2002, plus interest at a rate of 5.69%. The loan was collateralized by
the underlying Common Stock purchased. The loan was paid in full during fiscal
1999.
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.
F-17
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company holds equity securities as short-term investments in certain
customers at September 30, 1999. These customers comprised $1.4 million of
accounts receivable and $6.9 million of revenue as of and for the year ended
September 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 to the 401(k)
Plan since inception.
(13) Segment Reporting:
Effective September 30, 1999, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. SFAS No. 131
established standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services, and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance. The Company's
chief operating decision-maker is the Chief Executive Officer of the Company.
The Company has two reportable operating segments: the Network Products
division and the Portal Services division. The product line of the Network
Products division consists of Traffic Server, a large-scale commercial network
cache and related applications. The Portal Services division's products consist
of Search Engine, Directory Engine and Shopping Engine.
The Company evaluates performance and allocates resources based on revenues
and operating profits (losses). Acquisition related costs are not included in
management's evaluation of performance by the operating divisions as they are
primarily organizational in nature. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies. The Company does not track assets by operating segments.
Consequently, it is not practical to show assets by operating segments.
The Company's reportable segments are business units that are organized
primarily by technology. The reportable segments are each managed separately
because they offer and distribute distinct technologies and services with
different methods of delivery and customer bases.
Financial information about segments (in thousands):
<TABLE>
<CAPTION>
For the Year Ended September 30, 1999
---------------------------------------------------
Acquisition
Network Portal Related
Products Services Costs Total
-------- -------- ----- -----
<S> <C> <C> <C> <C>
Revenues............................. $40,964 $ 30,261 $ -- $ 71,225
Operating loss....................... $(4,716) $(23,014) $(1,110) $(28,840)
======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended September 30, 1999
---------------------------------------------------
Acquisition
Network Portal Related
Products Services Costs Total
-------- -------- ----- -----
<S> <C> <C> <C> <C>
Revenues............................ $ 7,962 $ 12,476 $ -- $ 20,438
Operating loss...................... $(12,258) $(11,682) $(1,018) $(24,958)
======== ======== ======= ========
</TABLE>
For the year ended September 30, 1999, three customers represented 14%, 13%
and 12% of all Portal Services revenue generated by the Company, and two other
customers represented 17% and 13% of all Network Products revenue generated by
the Company. For the year ended September 30, 1998, two customers represented
57% and 20% of all Portal Services revenue generated by the Company, and two
other customers represented 38% and 34% of all Network Products revenue
generated by the Company.
Financial results for the year ended September 30, 1997 are not presented
above as the reportable segments are deemed insignificant. As business
operations were predominantly Portal Services at that time, operations in the
Network Products business unit were deemed to be minor and were not tracked
separately by management.
F-18
<PAGE>
INKTOMI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(14) Earnings Per Share ("EPS"):
The following is a reconciliation of the numerator and denominator used to
determine basic and diluted EPS and pro forma basic and diluted EPS (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
For the Year Ended September 30,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Numerator -- Basic and diluted EPS
Net loss.................................................. $(24,171) $(24,534) $(10,377)
======== ======== ========
Denominator -- Basic and diluted EPS
Weighted average Common Stock outstanding................. 49,915 39,130 25,954
======== ======== ========
Basic and diluted loss per common share...................... $ (0.48) $ (0.63) $ (0.40)
======== ======== ========
Dilutive securities outstanding which are not included as
their effect would be anti-dilutive......................... 8,681 6,824 23,217
======== ======== ========
Pro forma net loss per share to effect two-for-one
stock split declared on December 3, 1999:
Denominator -- Pro forma basic and diluted EPS
Pro forma weighted average Common Stock
outstanding (unaudited)................................... 99,830 78,260 51,908
======== ======== ========
Pro forma basic and diluted loss per common share
(unaudited)................................................. $ (0.24) $ (0.31) $ (0.20)
======== ======== ========
Pro forma dilutive securities outstanding which are not
included as their effect would be anti-dilutive
(unaudited)................................................. 17,362 13,648 46,434
======== ======== ========
</TABLE>
(15) Subsequent Events:
On October 1, 1999, Inktomi acquired WebSpective Software, Inc.
("WebSpective"), a developer of software solutions for content and application
distribution, delivery and management. 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 $4.0 million in the
quarter ending December 31, 1999 as a result of the acquisition, primarily for
investment banking fees, accounting, legal and other expenses.
In October 1999, Inktomi signed an agreement with a private company under
which Inktomi made a $20 million investment in the private company's Common
Stock in a private placement closing concurrently with their proposed initial
public offering. Under this agreement, Inktomi also has the option to purchase
additional equity in the private company over the next two years.
On December 3, 1999, Inktomi announced a two-for-one Common Stock split. On
December 30, 1999, stockholders of record at the end of the day on December 14,
1999 will be entitled to receive one additional share of Inktomi's Common Stock
(in the form of a 100% stock dividend) for every share they hold on that day.
F-19
<PAGE>
EXHIBIT 21.1
Inktomi Corporation
Subsidiaries
Inktomi Limited, a corporation organized under the laws of the United Kingdom,
doing business as "Inktomi Limited."
Inktomi Japan KK, a corporation organized under the laws of Japan, doing
business as "Inktomi Japan KK."
C2B Technologies, Inc., a Delaware corporation, doing business under the name
"Inktomi Corporation."
Impulse! Buy Network, Inc., a California corporation, doing business under the
name "Inktomi Corporation."
WebSpective Software, Inc., a Delaware corporation, doing business under the
name "Inktomi Corporation."
<PAGE>
EXHIBIT 23.1
------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Inktomi Corporation on Form S-8 (File Numbers 333-66217, 333-71037, 333-80195,
333-89581, and 333-91939) of our report dated October 21, 1999, on our audits of
the consolidated financial statements of Inktomi Corporation and its
subsidiaries as of September 30, 1999 and 1998 and the years then ended, which
report is included in this Annual Report on Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
December 28, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INKTOMI
CORPORATION'S FORM 10-K AND IS QUALIFIED IN ITS ENTIRELY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> SEP-30-1999 SEP-30-1998
<PERIOD-START> OCT-01-1998 OCT-01-1997
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 79,926 29,267
<SECURITIES> 225,070 19,690
<RECEIVABLES> 26,289 5,721
<ALLOWANCES> (3,282) (632)
<INVENTORY> 0 0
<CURRENT-ASSETS> 331,283 54,634
<PP&E> 58,979 22,928
<DEPRECIATION> (16,097) (5,412)
<TOTAL-ASSETS> 376,271 72,361
<CURRENT-LIABILITIES> 29,269 18,958
<BONDS> 0 0
0 0
0 0
<COMMON> 53 47
<OTHER-SE> 340,097 44,474
<TOTAL-LIABILITY-AND-EQUITY> 376,271 72,361
<SALES> 71,225 20,438
<TOTAL-REVENUES> 71,225 20,438
<CGS> 12,662 4,888
<TOTAL-COSTS> 100,065 45,396
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> (28,840) (24,958)
<INTEREST-EXPENSE> 4,669 424
<INCOME-PRETAX> (24,171) (24,534)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (24,171) (24,534)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (24,171) (24,534)
<EPS-BASIC> (0.48) (0.63)
<EPS-DILUTED> (0.48) (0.63)
</TABLE>
