<PAGE> 1
FILED PURSUANT TO RULE 424b(1)
FILE NO. 333-85679
PROSPECTUS
9,000,000 Shares
[AKAMAI LOGO]
COMMON STOCK
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AKAMAI TECHNOLOGIES, INC. IS OFFERING 9,000,000 SHARES OF COMMON STOCK. THIS IS
OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR
SHARES.
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OUR COMMON STOCK HAS BEEN APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "AKAM."
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INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
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PRICE $26 A SHARE
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS AKAMAI
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Per Share.................... $26.00 $1.82 $24.18
Total........................ $234,000,000 $16,380,000 $217,620,000
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares of common stock
to purchasers on November 3, 1999.
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MORGAN STANLEY DEAN WITTER
DONALDSON, LUFKIN & JENRETTE
SALOMON SMITH BARNEY
THOMAS WEISEL PARTNERS LLC
October 28, 1999
<PAGE> 2
[GATEFOLD ARTWORK]
[Narrative description of graphic material omitted in electronically filed
document
The following text is at the top of the page and spans the front cover foldout:
AKAMAI's GLOBAL INTERNET CONTENT DELIVERY SERVICE
Web Users Receive Rich Content Faster and More Reliably, Even in Times of Peak
Demand
The following text appears on the left hand side of the inside front cover
foldout above the first graphic:
Internet Content Delivery Without FreeFlow Service
The left hand side of the inside front cover contains a graphic that consists
of a map of the United States with a Web user on the far right and a Web site on
the far left with routers, network access points, an exchange point and a local
internet service provider and arrows depicting the flow of information in the
center.
Below this graphic the following text appears:
Without FreeFlow Service
- Delivery of rich content (such as graphics, advertisements and streaming
media) may be delayed or lost at numerous points across the Internet
- Content often is not delivered via optimal route
- Web site may not be designed to handle periods of peak demand
The following text appears on the right hand side of the inside front cover
above a second graphic:
Internet Content Delivery With FreeFlow Service.
The right hand side of the front cover contains a graphic that consists of a
map of the United States with a Web user on the far right and a Web site on the
far left with routers, network access points, an exchange point, a local
internet service provider and an Akamai server in the center. Arrows depict the
flow of information between the Web user and the local internet service provider
and between the local internet service provider and the Akamai server.
Below this graphic the following text appears:
With FreeFlow Service
- Speeds delivery of rich content by intelligently routing it from nearby
Akamai server
- Improves reliability of delivery and comes with Akamai's proof-of-performance
guarantee
- Always serves up-to-date content
- Handles periods of peak demand
<PAGE> 3
TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY..................... 3
RISK FACTORS........................... 7
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS........................... 17
USE OF PROCEEDS........................ 18
DIVIDEND POLICY........................ 18
CAPITALIZATION......................... 19
DILUTION............................... 20
SELECTED FINANCIAL DATA................ 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................... 22
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PAGE
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BUSINESS............................... 26
MANAGEMENT............................. 38
RELATED PARTY TRANSACTIONS............. 43
PRINCIPAL STOCKHOLDERS................. 46
DESCRIPTION OF CAPITAL STOCK........... 48
SHARES ELIGIBLE FOR FUTURE SALE........ 50
UNDERWRITERS........................... 52
LEGAL MATTERS.......................... 54
EXPERTS................................ 54
WHERE YOU CAN FIND MORE INFORMATION.... 54
INDEX TO FINANCIAL STATEMENTS.......... F-1
</TABLE>
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UNTIL NOVEMBER 22, 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information about Akamai and the common stock being sold in this offering and
our financial statements and accompanying notes appearing elsewhere in this
prospectus.
AKAMAI TECHNOLOGIES, INC.
We provide a global delivery service for Internet content that improves Web
site speed and reliability and protects against Web site crashes due to demand
overloads. Our FreeFlow service, which we market to large businesses and other
businesses with an Internet focus, delivers our customers' Web content through a
worldwide server network by locating the content geographically closer to their
users. Using software that is based on our proprietary mathematical formulas, or
algorithms, we monitor Internet traffic patterns and deliver our customers'
content by the most efficient route available. Our service is easy to implement
and does not require our customers or their Web site visitors to make any
hardware or software modifications. Using our FreeFlow service, our customers
have been able to more than double the speed at which they deliver content to
their users and, in some instances, have been able to improve speeds by ten
times or more.
The ability of a Web site to attract users is in part based on the richness
of its content. Increasingly, Web site owners want to enhance their content by
adding graphics, such as photographs, images and logos, as well as deploying
newer technologies, such as video and audio streaming, animation and software
downloads. While richer content attracts more visitors, it also places
increasing demands on the Web site to deliver the content quickly and reliably.
As a result, Web site owners frequently elect to constrain the amount of rich
content on their Web sites, thus sacrificing the quality of the user experience
to maintain minimally acceptable performance levels.
To use our service, customers identify and tag portions of their Web site
content that require significant amounts of bandwidth, such as advertising
banners, icons, graphics, video and audio streaming and software downloads.
These tagged items are delivered over our server network. When users request
this content, which we call "Akamaized" content, our FreeFlow service routes the
request to the server that is best able to deliver the content most quickly
based on the geographic proximity, performance and congestion of all available
servers on our network.
Our technology originated from research that our founders began developing
at the Massachusetts Institute of Technology in 1995. We introduced our FreeFlow
service commercially in April 1999. As of October 5, 1999, we had 1,475 Akamai
servers deployed in 24 countries across 55 telecommunications networks,
providing our customers with a guaranteed global Internet content delivery
service. Our customers, which operate many highly trafficked Web sites, include
Apple Computer, CNN Interactive, Discovery Channel Online, Infoseek Corp., J.
Crew.com, The Motley Fool and Yahoo!.
We currently sell our service primarily through a direct sales force. Our
plan is to continue to pursue heavily trafficked Web sites through our direct
sales force and to penetrate other markets through indirect distribution
channels. Currently our sales force is actively targeting primarily domestic
companies, focusing on the 300 Web sites that have the greatest number of
visitors, Fortune 100 companies and other companies with large operations in the
United States.
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RECENT DEVELOPMENTS
In August 1999, we entered into a strategic alliance with Cisco Systems to
enhance and jointly develop new content routing, switching and caching
technologies to improve the performance of Web content delivery. Cisco purchased
shares of our Series E convertible preferred stock for an aggregate purchase
price of approximately $49.0 million in August 1999.
In September 1999, we entered into a strategic alliance with Microsoft
Corporation to integrate Microsoft technologies into the Akamai network. As part
of the agreement, we intend to integrate Microsoft Windows Media(TM)
technologies with our global Internet content delivery service, and we will
create a version of our software to support our FreeFlow service that works on
Microsoft Windows Server operating systems. In addition, Microsoft's Streaming
Media Division has agreed to become one of our Internet content delivery service
customers. Microsoft purchased shares of our Series F convertible preferred
stock for an aggregate purchase price of approximately $15.0 million in
September 1999. For more detailed information about our strategic alliances with
Cisco and Microsoft, see "Business -- Strategic Alliances" on page 31.
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THE OFFERING
Common stock offered................ 9,000,000 shares
Common stock to be outstanding after
this offering....................... 91,441,851 shares
Use of proceeds..................... For working capital and general
corporate purposes. For more detailed
information, see "Use of Proceeds" on
page 18.
Nasdaq National Market symbol....... AKAM
SUMMARY FINANCIAL DATA
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PERIOD FROM INCEPTION
(AUGUST 20, 1998) THROUGH NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.............................................. $ -- $ 1,287
Total operating expenses............................. 900 29,601
Operating loss....................................... (900) (28,314)
Net loss............................................. (890) (28,324)
Net loss attributable to common stockholders......... (890) (29,969)
Basic and diluted net loss per share................. $ (0.06) $ (1.47)
Weighted average common shares outstanding........... 15,015 20,445
Pro forma basic and diluted net loss per share....... $ (0.05) $ (0.59)
Pro forma weighted average common shares
outstanding........................................ 19,262 48,369
</TABLE>
Weighted average shares used in computing the pro forma basic and diluted
net loss per share have been calculated assuming the conversion of all shares of
convertible preferred stock outstanding as of September 30, 1999 into common
stock as if the shares had converted immediately upon issuance. Accordingly,
accrued dividends and accretion to redemption value are not included in the
calculation of pro forma basic and diluted loss per share. The pro forma as
adjusted column in the balance sheet data below gives effect to the conversion
of all shares of convertible preferred stock outstanding as of September 30,
1999 into common stock upon the closing of this offering and the sale of the
9,000,000 shares of common stock in this offering at the initial public offering
price of $26.00, after deducting the underwriting discounts and commissions and
estimated offering expenses payable by us. Total stockholders' equity could
change as a result of potential redeemable common stock as described in "Risk
Factors -- There is a substantial likelihood that some shares in this offering
have been offered in violation of the Securities Act of 1933 and therefore the
purchaser of those shares may have the right to recovery of the amount paid for
those shares."
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AS OF SEPTEMBER 30, 1999
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PRO FORMA
ACTUAL AS ADJUSTED
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(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 91,759 $308,229
Working capital............................................. 83,846 300,316
Total assets................................................ 109,947 326,417
Long-term liabilities....................................... 12,255 12,255
Convertible preferred stock................................. 106,233 --
Total stockholders' equity (deficit)........................ $(18,275) $304,428
</TABLE>
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Except as set forth in our financial statements or as otherwise indicated,
all information in this prospectus:
- Reflects the conversion of all shares of our convertible preferred stock
into an aggregate of 37,519,041 shares of common stock; and
- Reflects a 3-for-1 stock split of our common stock effected on January
28, 1999, a 3-for-1 stock split of our common stock effected on May 25,
1999 and a 2-for-1 stock split of our common stock effected on September
8, 1999.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock and
seeking offers to buy shares of common stock only in jurisdictions where offers
and sales are permitted.
Our principal executive offices are located at 201 Broadway, Cambridge,
Massachusetts 02139 and our telephone number is (617) 250-3000. Our World Wide
Web site address is www.akamai.com. The information in our Web site is not
incorporated by reference into this prospectus.
Akamai, the Akamai logo and FreeFlow are our trademarks. This prospectus
also contains trademarks and trade names of other companies.
6
<PAGE> 8
RISK FACTORS
You should consider carefully the risks described below before you decide
to buy our common stock. If any of the following risks actually occur, our
business, financial condition or results of operations would likely suffer. In
such case, the trading price of our common stock could fall, and you may lose
all or part of the money you paid to buy our common stock.
RISKS RELATED TO OUR BUSINESS
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING
HISTORY.
We were founded in August 1998 and began offering our FreeFlow service in
April 1999. We have limited meaningful historical financial data upon which to
base planned operating expenses and upon which investors may evaluate us and our
prospects. In addition, our operating expenses are largely based on anticipated
revenue trends and a high percentage of our expenses are and will continue to be
fixed in the short-term. You should consider the risks and difficulties
frequently encountered by companies like ourselves in a new and rapidly evolving
market. Our ability to sell our service and the level of success we achieve,
depends, among other things, on the level of demand for Internet content
delivery services, which is a new and rapidly evolving market. Our business
strategy may be unsuccessful, and we may not successfully address the risks we
face.
WE ARE ENTIRELY DEPENDENT ON OUR INTERNET CONTENT DELIVERY SERVICE AND OUR
FUTURE REVENUE DEPENDS ON ITS COMMERCIAL SUCCESS.
Our future growth depends on the commercial success of our Internet content
delivery service. Our FreeFlow service or other services under development may
not achieve widespread market acceptance. We have recently begun to commercially
introduce our service for the delivery of streaming audio and video, and our
future revenue growth will depend, in part, on customer acceptance of this
service. Failure of our current and planned services to operate as expected
could delay or prevent their adoption. If our target customers do not adopt,
purchase and successfully deploy our current and planned services, our revenue
will not grow significantly and our business, results of operations and
financial condition will be seriously harmed. In addition, to the extent we
promote any portion of our technology as an industry standard by making it
readily available to users for little or no charge, we may not receive revenue
that might otherwise have been received by us.
THE INTERNET CONTENT DELIVERY MARKET IS NEW AND OUR BUSINESS WILL SUFFER IF IT
DOES NOT DEVELOP AS WE EXPECT.
The market for Internet content delivery services is new. We cannot be
certain that a viable market for our service will emerge or be sustainable. If
this market does not develop, or develops more slowly than we expect, our
business, results of operations and financial condition will be seriously
harmed.
ANY FAILURE OF OUR NETWORK INFRASTRUCTURE COULD LEAD TO SIGNIFICANT COSTS AND
DISRUPTIONS WHICH COULD REDUCE OUR REVENUE AND HARM OUR BUSINESS, FINANCIAL
RESULTS AND REPUTATION.
Our business is dependent on providing our customers with fast, efficient
and reliable Internet content delivery. To meet these customer requirements we
must protect our network infrastructure against damage from:
- Human error;
- Physical or electronic security breaches;
- Fire, earthquake, flood and other natural disasters;
- Power loss;
- Sabotage and vandalism; and
- Similar events.
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Despite precautions we have taken, the occurrence of a natural disaster or
other unanticipated problems at one or more of our servers could result in
service interruptions or significant damage to equipment. We provide a FreeFlow
service guarantee that our networks will deliver Internet content 24 hours a
day, seven days a week, 365 days a year. If we do not provide this service, the
customer does not pay for our services on that day. Any widespread loss of
services would reduce our revenue, and could harm our business, financial
results and reputation.
BECAUSE OUR INTERNET CONTENT DELIVERY SERVICE IS COMPLEX AND IS DEPLOYED IN
COMPLEX ENVIRONMENTS, IT MAY HAVE ERRORS OR DEFECTS THAT COULD SERIOUSLY HARM
OUR BUSINESS.
Our Internet content delivery service is highly complex and is designed to
be deployed in very large and complex networks. Because of the nature of our
service, we can only fully test it when it is fully deployed in very large
networks with high traffic. As of October 5, 1999, our network consisted of
1,475 servers. We and our customers have from time to time discovered errors and
defects in our software. In the future, there may be additional errors and
defects in our software that may adversely affect our service. If we are unable
to efficiently fix errors or other problems that may be identified, we could
experience:
- Loss of or delay in revenue and loss of market share;
- Loss of customers;
- Failure to attract new customers or achieve market acceptance;
- Diversion of development resources;
- Loss of credibility;
- Increased service costs; and
- Legal actions by our customers.
ANY FAILURE OF OUR TELECOMMUNICATIONS PROVIDERS TO PROVIDE REQUIRED
TRANSMISSION CAPACITY TO US COULD RESULT IN INTERRUPTIONS IN OUR SERVICE.
Our operations are dependent upon transmission capacity provided by
third-party telecommunications providers. Any failure of such telecommunications
providers to provide the capacity we require may result in a reduction in, or
termination of, service to our customers. This failure may be a result of the
telecommunications providers or Internet service providers choosing services
that are competitive with our service, failing to comply with or terminating
their existing agreements with us or otherwise not entering into relationships
with us at all or on terms commercially acceptable to us. If we do not have
access to third-party transmission capacity, we could lose customers or fees
charged to such customers, and our business and financial results could suffer.
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 have experienced and expect to continue to
experience increased competition. Many of our current competitors, as well as a
number of our potential competitors, have longer operating histories, greater
name recognition and substantially greater financial, technical and marketing
resources than we do. Some of our current or potential competitors have the
financial resources to withstand substantial price competition. Moreover, many
of our competitors have more extensive customer bases, broader customer
relationships and broader industry alliances that they could use to their
advantage in competitive situations, including relationships with many of our
current and potential customers. Our competitors may be able to respond more
quickly than we can to new or emerging technologies and changes in customer
requirements. Some of our current or potential competitors may bundle their
services with other software or hardware in a manner that may discourage Web
site owners from purchasing any service we offer or Internet service providers
from installing our servers.
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As competition in the Internet content delivery market continues to
intensify, new solutions will come to market. We are aware of other companies
that are focusing or may in the future focus significant resources on developing
and marketing products and services that will compete with Akamai. We also
believe that we may face competition from other providers of competing Internet
content delivery services, including networking hardware and software
manufacturers, content distribution providers, traditional hardware
manufacturers, telecommunications providers, software database companies, and
large diversified software and technology companies.
Increased competition could result in:
- Price and revenue reductions and lower profit margins;
- Increased cost of service from telecommunications providers;
- Loss of customers; and
- Loss of market share.
Any one of these could materially and adversely affect our business, financial
condition and results of operations.
A SIGNIFICANT DECLINE IN SALES TO APPLE COMPUTER COULD REDUCE OUR REVENUE AND
CAUSE OUR BUSINESS AND FINANCIAL RESULTS TO SUFFER.
We entered into a strategic alliance with Apple Computer effective as of
April 1, 1999. Sales of our service to Apple Computer represented approximately
45% of our revenue for the nine-month period ended September 30, 1999 and we
expect that sales to Apple Computer will represent a significant portion of our
revenue for the year ending December 31, 1999. Apple Computer has the right to
terminate our agreement on short notice if we materially breach our agreement. A
significant decline in sales to Apple Computer could reduce our revenue and
cause our business and financial results to suffer.
IF ANY OF OUR STRATEGIC ALLIANCES TERMINATE, THEN OUR BUSINESS COULD BE
ADVERSELY AFFECTED.
We entered into a strategic alliance with Apple Computer effective as of
April 1, 1999, with Cisco Systems in August 1999 and with Microsoft Corporation
in September 1999. Under each of these agreements, we are seeking to jointly
develop technology, services and/or products with our strategic alliance
partners and we may not be successful. The strategic alliance with Cisco may be
terminated by Cisco or us on short notice for any reason. The strategic alliance
with Apple may be terminated by Apple or us if the other party materially
breaches the agreement and the strategic alliance with Microsoft may be
terminated by Microsoft or us if the other party materially breaches the
agreement. A termination of, or significant adverse change in, our relationship
with Apple Computer, Cisco Systems or Microsoft could have a material adverse
effect on our business.
OUR BUSINESS WILL SUFFER IF WE ARE NOT ABLE TO SCALE OUR NETWORK AS DEMAND
INCREASES.
We have had only limited deployment of our Internet content delivery
service to date, and we cannot be certain that our network can connect and
manage a substantially larger number of customers at high transmission speeds.
Our network may not be scalable to expected customer levels while maintaining
superior performance. In addition, as customers' usage of bandwidth increases,
we will need to make additional investments in our infrastructure to maintain
adequate downstream data transmission speeds. We cannot assure you that we will
be able to make these investments successfully or at an acceptable cost.
Upgrading our infrastructure may cause delays or failures in our network. As a
result, in the future our network may be unable to achieve or maintain a
sufficiently high transmission capacity. Our failure to achieve or maintain high
capacity data transmission could significantly reduce demand for our service,
reducing our revenue and causing our business and financial results to suffer.
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OUR BUSINESS WILL SUFFER IF WE DO NOT RESPOND RAPIDLY TO TECHNOLOGICAL
CHANGES.
The market for Internet content delivery services is likely to be
characterized by rapid technological change, frequent new product and service
introductions and changes in customer requirements. We may be unable to respond
quickly or effectively to these developments. If competitors introduce products,
services or technologies that are better than ours or that gain greater market
acceptance, or if new industry standards emerge, our service may become
obsolete, which would materially and adversely affect our business, results of
operations and financial condition.
In developing our service, we have made, and will continue to make,
assumptions about the standards that our customers and competitors may adopt. If
the standards adopted are different from those which we may now or in the future
promote or support, market acceptance of our service may be significantly
reduced or delayed and our business will be seriously harmed. In addition, the
introduction of services or products incorporating new technologies and the
emergence of new industry standards could render our existing service obsolete.
IF OUR LICENSE AGREEMENT WITH MIT TERMINATES, THEN OUR BUSINESS COULD BE
ADVERSELY AFFECTED.
We have licensed from MIT technology covered by various patent applications
and copyrights relating to Internet content delivery technology. Some of our
technology is based in part on the technology covered by these patent
applications and copyrights. MIT may terminate the license agreement if we cease
our business due to insolvency or if we materially breach the terms of the
license agreement. A termination of our license agreement with MIT could have a
material adverse effect on our business.
OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS FROM THIRD-PARTY CHALLENGES.
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
These legal protections afford only limited protection; competitors may gain
access to our intellectual property which may result in the loss of our
customers.
Although we have licensed technology covered by patent applications filed
with the United States Patent and Trademark Office with respect to Internet
content delivery services, we have no patents or patent applications with
respect to our Internet content delivery service. Accordingly, neither our
technology nor technology licensed by us is covered by patents that would
preclude or inhibit competitors from entering our market. Our future patents, if
any, and patents licensed by us may be successfully challenged or may not
provide us with any competitive advantages. Moreover, although we have licensed
technology covered by international patent applications, none of our technology
is patented abroad, nor do we currently have any international patent
applications pending. We cannot be certain that any pending or future patent
applications will be granted, that any future patent will not be challenged,
invalidated or circumvented, or that rights granted under any patent that may be
issued will provide competitive advantages to us. Monitoring unauthorized use of
our service is difficult and we cannot be certain that the steps we have taken
will prevent unauthorized use of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as in
the United States.
OUR FAILURE TO INCREASE OUR REVENUE WOULD PREVENT US FROM ACHIEVING AND
MAINTAINING PROFITABILITY.
We have never been profitable. We have incurred significant losses since
inception and expect to continue to incur losses in the future. As of September
30, 1999, we had an accumulated deficit of $29.3 million. We cannot be certain
that our revenue will grow or that we will achieve sufficient revenue to achieve
profitability. Our failure to significantly increase our revenue would seriously
harm our business and operating results. We have large fixed expenses, and we
expect to continue to incur significant and increasing sales and marketing,
product development, administrative and other expenses, including fees to obtain
access to bandwidth for the transport of data over our network. As a result, we
will need to generate significantly higher revenues to achieve and maintain
profitability. If our revenue grows more slowly than we anticipate or if our
operating
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expenses increase more than we expect or cannot be reduced in the event of lower
revenue, our business will be materially and adversely affected.
THE LONG AND VARIABLE SALES CYCLES FOR OUR SERVICE MAY CAUSE REVENUE AND
OPERATING RESULTS TO VARY SIGNIFICANTLY FROM QUARTER TO QUARTER WHICH COULD
ADVERSELY AFFECT OUR STOCK PRICE.
A customer's decision to purchase our Internet content delivery service
involves a lengthy evaluation and testing process. As a result, our sales cycle
is likely to be lengthy. Throughout the sales cycle, we spend considerable time
and expense educating and providing information to prospective customers about
the use and benefits of our service. Because of our limited operating history
and the nature of our business, we cannot predict these sales and deployment
cycles. The long sales cycles may cause our revenue and results of operations to
vary significantly and unexpectedly from quarter to quarter. If our operating
results fall below the expectations of securities analysts or investors in some
future quarter or quarters, the market price of our common stock could be
adversely affected.
THE RATES WE CHARGE FOR OUR SERVICE MAY DECLINE OVER TIME WHICH WOULD REDUCE
OUR REVENUE AND COULD CAUSE OUR BUSINESS AND FINANCIAL RESULTS TO SUFFER.
We expect that our cost to obtain bandwidth capacity for the transport of
data over our network will decline over time as a result of, among other things,
the large amount of capital currently being invested to build infrastructure
providing additional bandwidth. We expect the prices we charge for data
transported over our network will also decline over time as a result of, among
other things, the lower cost of obtaining bandwidth and existing and new
competition in the markets we address. As a result, our historical revenue rates
are not indicative of future revenue based on comparable traffic volumes. If we
fail to accurately predict the decline in costs of bandwidth or, in any event,
if we are unable to sell our service at acceptable prices relative to our
bandwidth costs, or if we fail to offer additional services from which we can
derive additional revenue, our revenue will decrease and our business and
financial results will suffer.
OUR BUSINESS AND PROSPECTS DEPEND ON DEMAND FOR AND MARKET ACCEPTANCE OF THE
INTERNET AND ITS INFRASTRUCTURE DEVELOPMENT.
The increased use of the Internet for retrieving, sharing and transferring
information among businesses, consumers, suppliers and partners has only begun
to develop in recent years, and our success will depend in large part on
continued growth in the use of the Internet. Critical issues concerning the
commercial use of the Internet, including security, reliability, cost, ease of
access, quality of service, regulatory initiatives and necessary increases in
bandwidth availability, remain unresolved and are likely to affect the
development of the market for our service. The adoption of the Internet for
information retrieval and exchange, commerce and communications generally will
require the acceptance of a new medium of conducting business and exchanging
information. Demand for and market acceptance of the Internet are subject to a
high level of uncertainty and are dependent on a number of factors, including:
- The growth in consumer access to and acceptance of new interactive
technologies;
- The development of technologies that facilitate interactive communication
between organizations; and
- Increases in user bandwidth.
If the Internet as a commercial or business medium fails to develop or
develops more slowly than expected, our business and prospects will suffer.
OUR BUSINESS WILL SUFFER IF WE DO NOT ANTICIPATE AND MEET SPECIFIC CUSTOMER
REQUIREMENTS.
Our current and prospective customers may require features and capabilities
that our current service offering does not have. To achieve market acceptance
for our service, we must effectively and timely anticipate and adapt to customer
requirements and offer services that meet customer demands. Our failure to offer
services that satisfy customer requirements would seriously harm our business,
results of operations and financial condition.
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We intend to continue to invest in technology development. The development
of new or enhanced services is a complex and uncertain process that requires the
accurate anticipation of technological and market trends. We may experience
design, manufacturing, marketing and other difficulties that could delay or
prevent the development, introduction or marketing of new services as well as
enhancements. The introduction of new or enhanced services also requires that we
manage the transition from older services in order to minimize disruption in
customer ordering patterns and ensure that we can deliver services to meet
anticipated customer demand. Our inability to effectively manage this transition
would materially adversely affect our business, results of operations and
financial condition.
WE HAVE LIMITED SALES AND MARKETING EXPERIENCE; OUR BUSINESS WILL SUFFER IF WE
DO NOT EXPAND OUR DIRECT AND INDIRECT SALES ORGANIZATIONS AND OUR CUSTOMER
SERVICE AND SUPPORT OPERATIONS.
We currently have limited sales and marketing experience. Our limited
experience may restrict our success in commercializing our service. Our service
requires a sophisticated sales effort targeted at a limited number of key people
within our prospective customers' organizations. This sales effort requires the
efforts of trained sales personnel. We need to expand our marketing and sales
organization in order to increase market awareness of our service to a greater
number of organizations and generate increased revenue. We are in the process of
developing our direct sales force and plan to hire additional qualified sales
personnel. Competition for these individuals is intense, and we might not be
able to hire the kind and number of sales personnel we need. In addition, we
believe that our future success is dependent upon our ability to establish
successful relationships with a variety of distribution partners. If we are
unable to expand our direct and indirect sales operations, we may not be able to
increase market awareness or sales of our service, which may prevent us from
achieving and maintaining profitability.
Hiring personnel is very competitive in our industry because there is a
limited number of people available with the necessary technical skills and
understanding of our market. Once we hire them, they require extensive training
in our Internet content delivery service. If we are unable to expand our
customer service and support organization and train them as rapidly as
necessary, we may not be able to increase sales of our service, which would
seriously harm our business.
OUR BUSINESS WILL SUFFER IF WE FAIL TO MANAGE OUR GROWTH PROPERLY.
We have expanded our operations rapidly since our inception. We continue to
increase the scope of our operations and have grown our headcount substantially.
Our total number of employees grew from 35 on February 1, 1999 to 227 on
September 30, 1999. In addition, we plan to continue to hire a significant
number of employees this year. This growth has placed, and our anticipated
growth in future operations will continue to place, a significant strain on our
management systems and resources. Our ability to successfully offer our service
and implement our business plan in a rapidly evolving market requires an
effective planning and management process. We expect that we will need to
continue to improve our financial and managerial controls, reporting systems and
procedures, and will need to continue to expand, train and manage our work force
worldwide. Competition for highly skilled personnel is intense, especially in
the New England area. We may fail to attract, assimilate or retain qualified
personnel to fulfill our current or future needs. Our planned rapid growth
places a significant demand on management and financial and operational
resources. In order to grow and achieve future success, we must:
- Retain existing personnel;
- Hire, train, manage and retain additional qualified personnel; and
- Effectively manage multiple relationships with our customers, suppliers
and other third parties.
Failure to do so would have a materially adverse effect on our business, results
of operations and financial condition.
We have recently hired and plan to hire in the near future a number of key
employees and officers. To integrate into our company, these individuals must
spend a significant amount of time learning our business model and management
system, in addition to performing their regular duties. Accordingly, the
integration of
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<PAGE> 14
new personnel has resulted and will continue to result in some disruption to our
ongoing operations. If we fail to complete this integration in an efficient
manner, our business and financial results will suffer.
WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET AND IF WE ARE UNABLE TO RETAIN OUR KEY EMPLOYEES, OUR ABILITY TO
COMPETE COULD BE HARMED.
Our future success depends upon the continued services of our executive
officers and other key technology, sales, marketing and support personnel, who
have critical industry experience and relationships that we rely on in
implementing our business plan. None of our officers or key employees is bound
by an employment agreement for any specific term. We have "key person" life
insurance policies covering only the lives of F. Thomson Leighton and Daniel M.
Lewin. The loss of the services of any of our key employees could delay the
development and introduction of and negatively impact our ability to sell our
service. We face intense competition for qualified personnel, including research
and development, service and support and sales and marketing personnel.
WE FACE RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS THAT COULD HARM OUR
BUSINESS.
To be successful, we believe we must expand our international operations.
Therefore, we expect to commit significant resources to expand our international
sales and marketing activities. However, we may not be able to maintain or
increase market demand for our service which may harm our business. We are
increasingly subject to a number of risks associated with international business
activities which may increase our costs, lengthen our sales cycle and require
significant management attention. These risks include:
- Increased expenses associated with marketing services in foreign
countries;
- General economic conditions in international markets;
- Currency exchange rate fluctuations;
- Unexpected changes in regulatory requirements resulting in unanticipated
costs and delays;
- Tariffs, export controls and other trade barriers;
- Longer accounts receivable payment cycles and difficulties in collecting
accounts receivable;
- Potentially adverse tax consequences, including restrictions on the
repatriation of earnings; and
- The risks related to the recent global economic turbulence and adverse
economic circumstances in Asia.
WE FACE A NUMBER OF UNKNOWN RISKS ASSOCIATED WITH YEAR 2000 PROBLEMS.
The year 2000 computer issue creates a variety of risks for us. The year
2000 computer problem refers to the potential for system and processing failures
of date-related data as a result of computer-controlled systems using two digits
rather than four to define the applicable year. For example, computer programs
that have time-sensitive software may recognize a date represented as "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. The risks involve:
- Potential warranty or other claims by our customers;
- Errors in systems we use to run our business;
- Errors in systems used by our suppliers;
- Errors in systems used by our customers; and
- Potential reduced spending by other companies on Internet content
delivery services as a result of significant spending on year 2000
remediation.
13
<PAGE> 15
We have designed our service for use in the year 2000 and beyond and
believe it will be year 2000 ready. However, our service is used in conjunction
with larger networks involving sophisticated hardware and software products
supplied by other vendors. Each of our customers' networks involves different
combinations of third-party products. We cannot evaluate whether all of their
products are year 2000 ready. We may face claims based on year 2000 problems in
other companies' products or based on issues arising from the integration of
multiple products within the overall network. Although no claims of this kind
have been made, we may in the future be required to defend our service in legal
proceedings which could be expensive regardless of the merits of these claims.
If our suppliers, vendors, major distributors, partners, customers and
service providers fail to correct their year 2000 problems, these failures could
result in an interruption in, or a failure of, our normal business activities or
operations. If a year 2000 problem occurs, it may be difficult to determine
which party's products have caused the problem. These failures could interrupt
our operations and damage our relationships with our customers. Due to the
general uncertainty inherent in the year 2000 problem resulting from the
readiness of third-party suppliers and vendors, we are unable to determine at
this time whether year 2000 failures could harm our business and our financial
results.
Our customers' purchasing plans could be affected by year 2000 issues if
they need to expend significant resources to fix their existing systems to
become year 2000 ready. This situation may reduce funds available to purchase
our service. In addition, some customers may wait to purchase our service until
after the year 2000, which may reduce our revenue.
RISKS RELATED TO LEGAL UNCERTAINTY
WE COULD INCUR SUBSTANTIAL COSTS DEFENDING OUR INTELLECTUAL PROPERTY FROM
INFRINGEMENT OR A CLAIM OF INFRINGEMENT.
Other companies, including our competitors, may obtain patents or other
proprietary rights that would prevent, limit or interfere with our ability to
make, use or sell our service. As a result, we may be found to infringe on the
proprietary rights of others. In the event of a successful claim of infringement
against us and our failure or inability to license the infringed technology, our
business and operating results would be significantly harmed. Companies in the
Internet market are increasingly bringing suits alleging infringement of their
proprietary rights, particularly patent rights. Any litigation or claims,
whether or not valid, could result in substantial costs and diversion of
resources. Intellectual property litigation or claims could force us to do one
or more of the following:
- Cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
- Obtain a license from the holder of the infringed intellectual property
right, which license may not be available on reasonable terms; and
- Redesign products or services.
If we are forced to take any of the foregoing actions, our business may be
seriously harmed. Although we carry general liability insurance, our insurance
may not cover potential claims of this type or may not be adequate to indemnify
us for 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
14
<PAGE> 16
intellectual property, privacy, libel and taxation apply to the Internet. In
addition, the growth and development of the market for online commerce may
prompt calls for more stringent consumer protection laws, both in the United
States and abroad, that may impose additional burdens on companies conducting
business online. The adoption or modification of laws or regulations relating to
the Internet, or interpretations of existing law, could adversely affect our
business.
WE MAY BE SUBJECT TO REGULATION, TAXATION, ENFORCEMENT OR OTHER LIABILITIES IN
UNEXPECTED JURISDICTIONS.
We provide our Internet content delivery service to customers located
throughout the United States and in several foreign countries. As a result, we
may be required to qualify to do business, or be subject to tax or other laws
and regulations, in these jurisdictions even if we do not have a physical
presence or employees or property in these jurisdictions. The application of
these multiple sets of laws and regulations is uncertain, but we could find we
are subject to regulation, taxation, enforcement or other liability in
unexpected ways, which could materially adversely affect our business, financial
condition and results of operations.
RISKS RELATED TO THE SECURITIES MARKETS AND THIS OFFERING
OUR STOCK PRICE MAY BE VOLATILE WHICH COULD RESULT IN LITIGATION AGAINST
AKAMAI AND SUBSTANTIAL LOSSES FOR INVESTORS PURCHASING SHARES IN THIS OFFERING.
Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after this offering. The market for technology stocks has been
extremely volatile. The following factors could cause the market price of our
common stock in the public market to fluctuate significantly from the price paid
by investors in this offering:
- The addition or departure of key Akamai personnel;
- Variations in our quarterly operating results;
- Announcements by us or our competitors of significant contracts, new
products or services offerings or enhancements, acquisitions,
distribution partnerships, joint ventures or capital commitments;
- Changes in financial estimates by securities analysts;
- Our sales of common stock or other securities in the future;
- Changes in market valuations of networking, Internet and
telecommunications companies; and
- Fluctuations in stock market prices and volumes.
Volatility in the market price of our common stock may prevent investors
from being able to sell their common stock at or above our initial public
offering price.
In the past, class action litigation has often been brought against
companies following periods of volatility in the market price of those
companies' common stock. We may become involved in this type of litigation in
the future. Litigation is often expensive and diverts management's attention and
resources which could materially adversely affect our business and results of
operations.
MANAGEMENT MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DO NOT
INCREASE OUR PROFITS OR MARKET VALUE.
Our management will have considerable discretion in the application of the
net proceeds of this offering, and you will not have the opportunity, as part of
your investment decision, to assess whether the proceeds are being used
appropriately. The net proceeds may be used for corporate purposes that do not
increase our profitability or our market value. Pending application of the
proceeds, they may be placed in investments that do not produce income or that
lose value.
15
<PAGE> 17
THERE IS A SUBSTANTIAL LIKELIHOOD THAT SOME SHARES IN THIS OFFERING HAVE BEEN
OFFERED IN VIOLATION OF THE SECURITIES ACT OF 1933 AND THEREFORE THE PURCHASER
OF THOSE SHARES MAY HAVE THE RIGHT TO RECOVERY OF THE AMOUNT PAID FOR THOSE
SHARES.
In April 1999, prior to the filing of the registration statement covering
the shares of our common stock being sold in this offering, we entered into an
agreement with Baker Communications Fund, L.P. granting Baker an option to
purchase up to five percent of the shares of our common stock sold by us in our
initial public offering. There is a substantial likelihood that this agreement
constitutes an offer to purchase shares of common stock in a public offering
prior to the filing of a registration statement in violation of the requirements
of the Securities Act of 1933. We have requested that the underwriters reserve
for sale to Baker, at the initial public offering price, up to an aggregate of
400,000 shares of our common stock.
If a court determines that a violation of the Securities Act of 1933
occurred, Baker would have the right, for a period of one year from the date of
its purchase of common stock in this offering, to obtain recovery of the
consideration paid in connection with its purchase of common stock offered in
violation of the Securities Act of 1933 or, if Baker had already sold the stock,
sue us for damages resulting from its purchase of common stock. These damages
could total up to approximately $10.4 million plus interest, based on the
initial public offering price of $26.00 per share, if Baker seeks recovery or
damages after an entire loss of its investment. If this occurs, our business,
results of operations and financial condition will be harmed.
INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER AKAMAI AFTER THIS
OFFERING AND COULD LIMIT YOUR ABILITY TO INFLUENCE THE OUTCOME OF KEY
TRANSACTIONS, INCLUDING CHANGES OF CONTROL.
We anticipate that the executive officers, directors and entities
affiliated with them will, in the aggregate, beneficially own approximately
63.5% of our outstanding common stock following the completion of this offering.
These stockholders, if acting together, would be able to influence significantly
all matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other business combination
transactions.
PROVISIONS OF OUR CHARTER DOCUMENTS MAY HAVE ANTI-TAKEOVER EFFECTS THAT COULD
PREVENT A CHANGE IN CONTROL EVEN IF THE CHANGE IN CONTROL WOULD BE BENEFICIAL TO
OUR STOCKHOLDERS.
Provisions of our amended and restated certificate of incorporation,
by-laws, and Delaware law could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders.
THERE MAY BE SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK AFTER THIS
OFFERING THAT COULD CAUSE OUR STOCK PRICE TO FALL.
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Sales of a
substantial number of shares of our common stock within a short period of time
after this offering could cause our stock price to fall. In addition, the sale
of these shares could impair our ability to raise capital through the sale of
additional stock.
THE UNPREDICTABILITY OF OUR QUARTERLY RESULTS MAY ADVERSELY AFFECT THE TRADING
PRICE OF OUR COMMON STOCK.
Our revenue and operating results will vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control and
any of which may cause our stock price to fluctuate. The primary factors that
may affect us include the following:
- Demand for Internet content delivery services;
- The timing and size of sales of our services;
- The timing of recognizing revenue and deferred revenue;
- New product and service introductions and enhancements by our competitors
and ourselves;
- Changes in our pricing policies or the pricing policies of our
competitors;
- Our ability to develop, introduce and ship new products, services and
enhancements that meet customer requirements in a timely manner;
- The length of the sales cycle for our services;
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<PAGE> 18
- Increases in the prices of, and availability of, the products, services,
components or raw materials we purchase, including bandwidth;
- Our ability to attain and maintain quality levels for our services;
- Expenses related to testing of our services;
- Costs related to acquisitions of technology or businesses; and
- General economic conditions as well as those specific to the Internet and
related industries.
We plan to increase significantly our operating expenses to fund greater
levels of engineering and development, expand our sales and marketing
operations, broaden our customer support capabilities and continue to develop
new distribution channels. We also plan to expand our general and administrative
functions to address the increased reporting and other administrative demands,
which will result from this offering and the increasing size of our business.
Our operating expenses are largely based on anticipated revenue trends and a
high percentage of our expenses are, and will continue to be, fixed in the short
term. As a result, a delay in generating or recognizing revenue for the reasons
set forth above, or for any other reason, could cause significant variations in
our operating results from quarter to quarter and could result in substantial
operating losses.
Due to the above 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 quarters, our operating results may be below the
expectations of public market analysts and investors. In this event, the price
of our common stock will probably fall.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "should," "will" and "would" or similar words. You
should read statements that contain these words carefully because they discuss
our future expectations, contain projections of our future results of operations
or of our financial position or state other "forward-looking" information. We
believe that it is important to communicate our future expectations to our
investors. However, there may be events in the future that we are not able to
accurately predict or control. The factors listed above in the section captioned
"Risk Factors," as well as any cautionary language in this prospectus, provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our forward-looking
statements. Before you invest in our common stock, you should be aware that the
occurrence of the events described in these risk factors and elsewhere in this
prospectus could have a material adverse effect on our business, results of
operations and financial position.
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<PAGE> 19
USE OF PROCEEDS
We estimate that the net proceeds from our sale of the 9,000,000 shares of
common stock will be approximately $216.5 million, after deducting underwriting
discounts and commissions and estimated offering expenses payable by us.
The principal purposes of this offering are to establish a public market
for our common stock, to increase our visibility in the marketplace, to
facilitate future access to public capital markets, to provide liquidity to
existing stockholders and to obtain additional working capital.
We expect to use the net proceeds for anticipated working capital and
general corporate purposes. Although we may use a portion of the net proceeds to
acquire businesses, products or technologies that are complementary to our
business, we have no specific acquisitions planned. Pending such uses, we plan
to invest the net proceeds in investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future. We currently intend to retain all future earnings, if any, for use in
the operation of our business.
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<PAGE> 20
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999.
The pro forma information gives effect to the conversion of all of our
outstanding convertible preferred stock outstanding as of September 30, 1999.
The pro forma as adjusted information reflects the issuance and sale of the
9,000,000 shares of common stock offered by us in this offering at the initial
public offering price of $26.00 per share. Total stockholders' equity could
change as a result of potential redeemable common stock as described in "Risk
Factors--There is a substantial likelihood that some shares in this offering
have been offered in violation of the Securities Act of 1933 and therefore the
purchaser of those shares may have the right to recovery of the amount paid for
those shares." The outstanding share information excludes:
- 13,311,750 shares of common stock issuable upon exercise of options and
warrants outstanding as of September 30, 1999;
- 3,968,250 shares of common stock reserved for future issuance under our
1998 Stock Incentive Plan as of September 30, 1999; and
- 145,195 shares of Series C convertible preferred stock issuable upon
exercise of an outstanding option as of September 30, 1999, which are
convertible into 908,339 shares of common stock.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and accompanying notes and other financial data included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term liabilities....................................... $ 12,255 $ 12,255 $ 12,255
-------- -------- --------
Convertible preferred stock, $0.01 par value; 10,000,000
shares authorized:
Series A convertible preferred stock, $0.01 par value;
1,100,000 shares authorized, issued and outstanding
actual; none authorized, issued and outstanding pro forma
and pro forma as adjusted................................. 8,297 -- --
Series B convertible preferred stock, $0.01 par value;
1,327,500 shares authorized, issued and outstanding
actual; none authorized, issued and outstanding pro forma
and pro forma as adjusted................................. 20,610 -- --
Series C convertible preferred stock, $0.01 par value;
145,195 shares authorized, none issued and outstanding
actual; none authorized, issued and outstanding pro forma
and pro forma as adjusted................................. -- -- --
Series D convertible preferred stock, $0.01 par value;
685,194 shares authorized, issued and outstanding actual;
none authorized, issued and outstanding pro forma and pro
forma as adjusted......................................... 12,748 -- --
Series E convertible preferred stock, $0.01 par value;
1,867,480 shares authorized, issued and outstanding
actual; none authorized, issued and outstanding pro forma
and pro forma as adjusted................................. 49,558 -- --
Series F convertible preferred stock, $0.01 par value;
985,545 shares authorized, issued and outstanding actual;
none authorized, issued and outstanding pro forma and pro
forma as adjusted......................................... 15,020 -- --
-------- -------- --------
Total convertible preferred stock.................. 106,233 -- --
-------- -------- --------
Stockholders' equity (deficit):
Common stock, $0.01 par value; 300,000,000 shares
authorized, 44,832,310 shares issued and outstanding,
actual; 82,351,851 shares issued and outstanding, on a pro
forma basis; 91,351,851 shares issued and outstanding, on
a pro forma as adjusted basis............................. 448 823 913
Additional paid-in capital.................................. 48,106 153,964 370,344
Note receivable from officers for stock..................... (5,723) (5,723) (5,723)
Deferred compensation....................................... (31,759) (31,759) (31,759)
Accumulated deficit......................................... (29,347) (29,347) (29,347)
-------- -------- --------
Total stockholders' equity (deficit)............... (18,275) 87,958 304,428
-------- -------- --------
Total capitalization............................... $100,213 $100,213 $316,683
======== ======== ========
</TABLE>
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DILUTION
Akamai's pro forma net tangible book value as of September 30, 1999, giving
effect to the conversion of all shares of convertible preferred stock
outstanding as of September 30, 1999 into common stock on the closing of this
offering, was approximately $87.5 million, or $1.06 per share of common stock.
Pro forma net tangible book value per share represents our tangible net worth
(tangible assets less total liabilities) divided by the 82,351,851 shares of
common stock outstanding after giving effect to the conversion of all
outstanding shares of convertible preferred stock into common stock. After
giving effect to the issuance and sale of the shares of common stock offered by
Akamai in this offering at the initial public offering price of $26.00 per
share, Akamai's pro forma net tangible book value at September 30, 1999 would
have been $304.0 million, or $3.33 per share. The initial public offering price
per share significantly exceeds the net tangible book value per share.
Accordingly, new investors who purchase common stock in this offering will
suffer an immediate dilution of their investment of $22.67 per share. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $26.00
Pro forma net tangible book value per share before this
offering............................................... $1.06
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 2.27
-----
Pro forma net tangible book value per share after this
offering.................................................. 3.33
------
Dilution per share to new investors......................... $22.67
======
</TABLE>
The following table summarizes on a pro forma basis as of September 30,
1999, giving effect to the conversion of all shares of convertible preferred
stock outstanding as of September 30, 1999 into common stock, the difference
between the number of shares of common stock purchased from Akamai, the total
consideration paid to Akamai, and the average price per share paid by existing
stockholders and by new investors. The calculation below is based on the initial
public offering price of $26.00 per share, before deduction of underwriting
discounts and commissions and estimated offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ 82,351,851 90.1% $111,443,048 32.3% $ 1.35
New investors........................ 9,000,000 9.9 234,000,000 67.7 26.00
---------- ----- ------------ -----
Total...................... 91,351,851 100.0% $345,443,048 100.0%
========== ===== ============ =====
</TABLE>
The tables above assume no exercise of stock options and warrants
outstanding at September 30, 1999. As of September 30, 1999, there were options
and warrants outstanding to purchase 14,220,089 shares of common stock,
including 908,339 shares of common stock issuable upon conversion of shares of
Series C convertible preferred stock, at a weighted average exercise price of
$3.53 per share and 3,968,250 shares reserved for future grant or award under
Akamai's stock plans. To the extent any of these options and warrants are
exercised, there will be further dilution to new investors. To the extent all of
such outstanding options and warrants had been exercised as of September 30,
1999, net tangible book value per share after this offering would be $3.35 and
total dilution per share to new investors would be $22.65.
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<PAGE> 22
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
Akamai's financial statements and related notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial data included elsewhere in this prospectus. The statement of
operations data for the period from inception (August 20, 1998) to December 31,
1998 are derived from audited financial statements included elsewhere in this
prospectus. The statement of operations data for the nine months ended September
30, 1999 and the balance sheet data as of September 30, 1999 are derived from
unaudited financial statements included elsewhere in this prospectus. Operating
results for the nine months ended September 30, 1999 are not necessarily
indicative of the results that may be expected for any other period or the
entire year ending December 31, 1999.
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(AUGUST 20, 1998) TO NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
--------------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.................................................. $ -- $ 1,287
------ --------
Operating expenses:
Cost of service........................................ 31 4,533
Engineering and development............................ 228 5,374
Sales, general and administrative...................... 435 12,075
Equity related compensation............................ 206 7,619
------ --------
Total operating expenses....................... 900 29,601
------ --------
Operating loss........................................... (900) (28,314)
Interest income (expense), net........................... 10 (10)
------ --------
Net loss................................................. (890) (28,324)
Dividends and accretion to preferred stock redemption
value.................................................. -- (1,645)
------ --------
Net loss attributable to common stockholders............. $ (890) $(29,969)
====== ========
Basic and diluted net loss per share..................... $(0.06) $ (1.47)
Weighted average common shares outstanding............... 15,015 20,445
Pro forma basic and diluted net loss per share
(unaudited)............................................ $(0.05) $ (0.59)
Pro forma weighted average common shares outstanding
(unaudited)............................................ 19,262 48,369
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
-------------------------------------
PRO FORMA
ACTUAL AS ADJUSTED
----------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 91,759 $308,229
Working capital............................................. 83,846 300,316
Total assets................................................ 109,947 326,417
Long-term liabilities....................................... 12,255 12,255
Convertible preferred stock................................. 106,233 --
Total stockholders' equity (deficit)........................ $(18,275) $304,428
</TABLE>
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<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read together with our financial
statements and accompanying notes appearing elsewhere in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results may differ from those indicated in forward-looking
statements.
OVERVIEW
We provide a global delivery service for Internet content that improves Web
site speed and reliability and protects against Web site crashes due to demand
overloads. Our FreeFlow service, which we market to large businesses and other
businesses with an Internet focus, delivers our customers' Web content through a
worldwide server network by locating the content geographically closer to their
users.
Akamai commenced operations in August 1998 and had no significant activity
for the quarter ended September 30, 1998. As a result, the financial statements
for the quarter ended September 30, 1998 have been omitted.
Since our inception, we have incurred significant losses, and as of
September 30, 1999, we had an accumulated deficit of $29.3 million. We have not
achieved profitability on a quarterly or an annual basis, and anticipate that we
will continue to incur net losses. We expect to incur significant engineering
and development and sales, general and administrative expenses and, as a result,
we will need to generate significant revenue to achieve and maintain
profitability.
We derive our revenue from the sale of our FreeFlow service under contracts
with terms typically ranging from three to 12 months. We recognize revenue based
on fees for the amount of Internet content delivered through our service. These
contracts also provide for minimum monthly fees. In the future, we may also
derive revenue from one-time implementation fees which would be recognized
ratably over the period of the related contracts.
To date, substantially all of our revenue has been derived from customers
based in the United States. We expect that revenue from customers based outside
the United States will increase in future periods. To date, all of our revenue
has been derived from direct sales and we expect that revenue through indirect
distribution channels will increase in future periods. We entered into a
strategic alliance with Apple Computer effective as of April 1, 1999. For the
nine-month period ended September 30, 1999, Apple Computer accounted for 45% of
our revenue, Yahoo! accounted for 18% of our revenue, and Artisan Entertainment
accounted for 11% of our revenue.
Cost of services consists of depreciation of network equipment used in
providing our FreeFlow service, fees paid to network providers for bandwidth and
monthly fees paid to third-party network data centers for housing our servers.
We enter into contracts for bandwidth with third-party network providers with
terms typically ranging from six months to three years. These contracts commit
us to minimum monthly fees plus additional fees for bandwidth usage above our
contracted level. Under our Akamai accelerated networks program, we provide use
of our servers to smaller Internet service providers which, in turn, provide us
with rack space for our servers and access to their bandwidth. We do not
recognize as revenue any value to the Internet service providers associated with
the use of our servers and do not expense the value of the rack space and
bandwidth we receive. We believe that to date the values provided under this
program have been insignificant.
Engineering and development expenses consist primarily of salaries and
related personnel costs and costs related to the design, development, testing,
deployment and enhancement of our service and our network. We have to date
expensed our engineering and development costs as they were incurred. We believe
that research and development is critical to our strategic product development
objectives and intend to enhance our technology to meet the changing
requirements of the market demand. As a result, we expect our engineering and
development expenses to increase in the future.
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Sales, general and administrative expenses consist primarily of salaries
and related costs of sales and marketing, operations and finance personnel and
recruiting expenses, professional fees and legal and accounting services. We
expect that sales, general and administrative expenses will increase in the
future as we hire additional personnel, expand our operations domestically,
initiate additional marketing programs, establish sales offices in new locations
and incur additional costs related to the growth of our business and our
operations as a public company.
RESULTS OF OPERATIONS
PERIOD FROM INCEPTION (AUGUST 20, 1998) THROUGH DECEMBER 31, 1998 AND THE
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999
Revenue. We recorded no revenue for the period from inception (August 20,
1998) to December 31, 1998. Revenue was $1,287,145 for the nine months ended
September 30, 1999. The increase in revenue was due to sales of our FreeFlow
service, which was commercially introduced in April 1999.
Cost of Service. Cost of service expenses were $30,600 for the period from
inception (August 20, 1998) to December 31, 1998 and represented 3.4% of total
operating expenses in fiscal 1998. Cost of service expenses were $4.5 million
for the nine months ended September 30, 1999 and represented 15.3% of total
operating expenses for the nine months ended September 30, 1999. The increase in
cost of service expenses was due to the commencement of testing of our FreeFlow
service in early 1999 and commercial introduction of our FreeFlow service in
April 1999.
Engineering and Development. Engineering and development expenses were
$228,600 for the period from inception (August 20, 1998) to December 31, 1998
and represented 25.4% of total operating expenses in fiscal 1998. Engineering
and development expenses for the nine months ended September 30, 1999 were $5.4
million and represented 18.2% of total operating expenses for the nine months
ended September 30, 1999. Approximately $4.3 million of the increase was
attributable to personnel and payroll related expenses.
Sales, General and Administrative. Sales, general and administrative
expenses were $435,300 for the period from inception (August 20, 1998) to
December 31, 1998 and represented 48.4% of total operating expenses in fiscal
1998. Sales, general and administrative expenses for the nine months ended
September 30, 1999 were $12.1 million and represented 40.8% of total operating
expenses for the period. Approximately $5.1 million of the increase was due to
sales, general and administrative personnel and payroll related expenses.
Approximately $3.1 million of the increase was attributable to advertising and
marketing campaigns.
Equity Related Compensation. Equity related compensation expenses consist
of the amortization of deferred stock compensation resulting from the grant of
stock options or shares of restricted stock at exercise or sale prices
subsequently deemed to be less than the fair value of the common stock on the
grant date. At September 30, 1999, deferred stock compensation, which is a
component of stockholders' equity, was $31.8 million. This amount is being
amortized ratably over the vesting periods of the applicable stock options and
restricted shares, typically four years, with 25% vesting on the first
anniversary of the grant date and the balance vesting 6.25% quarterly
thereafter. We expect to incur equity related compensation expense of at least
$9.8 million in 1999, $8.7 million in 2000, $8.7 million in 2001, $8.7 million
in 2002 and $3.5 million in 2003.
Interest Income (Expense), Net. Interest income (expense), net was $9,600
and $(10,624) for the period from inception (August 20, 1998) through December
31, 1998 and the nine months ended September 30, 1999, respectively. Interest
income (expense), net consists of interest earned on our cash equivalent
balances and short-term investments, net of interest expense, and decreased
during the nine months ended September 30, 1999 due to the issuance of the
senior subordinated notes and borrowings for the purchase of equipment.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
sales of our capital stock and issuance of senior subordinated notes totaling
approximately $120.0 million in net proceeds through September 30, 1999. We have
also financed our operations through borrowings on long-term debt agreements
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for the purchase of capital equipment in the amount of $1.5 million. At
September 30, 1999, cash, cash equivalents and short-term investments totaled
$92.0 million.
Cash provided by (used in) operating activities was $1,600 for the period
from inception (August 20, 1998) to December 31, 1998 and $(14.9) million for
the nine months ended September 30, 1999. Net cash flows from operating
activities in each period reflect increasing net losses and to a lesser extent
receivables and prepaid expenses offset in part by increased accounts payable
and accrued expenses.
Cash used in investing activities was $1.7 million for the period from
inception (August 20, 1998) to December 31, 1998 and $12.8 million for the nine
months ended September 30, 1999. Net cash used for investing activities in each
period reflect purchases of property and equipment, primarily computers and
servers for deployment and expansion of our network.
Cash provided by financing activities was $8.3 million for the period from
inception (August 20, 1998) through December 31, 1998 and $112.8 million for the
nine months ended September 30, 1999. Cash provided by financing activities for
these periods was derived primarily from private sales of convertible preferred
stock and the issuance of 15% senior subordinated notes. We have an equipment
line of credit aggregating $1.5 million, collateralized by the property and
equipment which bears interest at the current 36 month treasury yield plus 275
basis points, with a minimum interest rate of 7.0%. At September 30, 1999,
approximately $1.2 million was outstanding under this line of credit.
We believe that the net proceeds from this offering, together with our
current cash, cash equivalents and marketable securities, will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures for
at least the next 12 months. If cash generated from operations is insufficient
to satisfy our liquidity requirements, we may seek to sell additional equity or
debt securities. If additional funds are raised through the issuance of debt
securities, these securities could have rights, preferences and privileges
senior to those accruing to holders of common stock, and the term of this debt
could impose restrictions on our operations. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders, and we cannot be certain that additional financing will be
available in amounts or on terms acceptable to us, if at all. If we are unable
to obtain this additional financing, we may be required to reduce the scope of
our planned technology, services or product development and sales and marketing
efforts, which could harm our business, financial condition and operating
results.
YEAR 2000 READINESS
Impact of Year 2000 Computer Problem. The year 2000 computer problem
refers to the potential for system and processing failures of date-related data
as a result of computer-controlled systems using two digits rather than four to
define the applicable year. For example, computer programs that have
time-sensitive software may recognize a date represented as "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculation causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices or engage in
similar normal business activities.
State of Readiness of our Service. We have designed our network and our
service for use in the year 2000 and beyond and believe our network and service
are year 2000 ready. We are in the process of testing our network and our
service for year 2000 compliance and plan to complete this testing before
November 1999. To date, our tests of our service and our networks have not
revealed any significant year 2000 problems. Our network is generally integrated
into larger networks involving sophisticated hardware and software products
supplied by other vendors. Each of our customers' networks involves different
combinations of third party products. We cannot fully evaluate whether all of
their products are year 2000 ready. We may face claims based on year 2000
problems in other companies' products or based on issues arising from the
integration of multiple products within the overall network. Although no such
claims have been made against us, we may in the future be required to defend our
service in legal proceedings which could be expensive regardless of the merits
of such claims.
State of Readiness of our Internal Systems. Our business may be affected
by year 2000 issues related to noncompliant internal systems developed by us or
by third-party vendors. Our material third-party vendors
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have stated that they are, or expect to be, year 2000 ready in a timely manner.
We are not currently aware of any material year 2000 problem relating to any of
our material internal systems. We are in the process of testing all such systems
for year 2000 readiness and plan to complete this testing before November 1999.
We are not aware of any significant systems that contain embedded chips that are
not year 2000 compliant. Our internal operations and business are also dependent
upon the computer-controlled systems of third parties such as our suppliers,
customers and other service providers. We believe that, absent a systemic
failure outside our control, such as a prolonged loss of electrical or
telecommunications service, year 2000 problems at third parties such as
manufacturers, suppliers, customers and service providers will not have a
material impact on our operations. If our manufacturers, suppliers, vendors,
partners, customers and service providers fail to correct their year 2000
problems, these failures could result in an interruption in, or a failure of,
our normal business activities and services. If a year 2000 problem occurs, it
may be difficult to determine which party's products have caused the problem.
These failures could interrupt our operations and damage our relationships with
our customers. Due to the general uncertainly inherent in the year 2000 problem
resulting from the readiness of third-party manufacturers, suppliers and
vendors, we are unable to determine at this time whether year 2000 failures
could harm our business and our financial results. Our customers' purchasing
plans could be affected by year 2000 issues if they need to expend significant
resources of fix their existing systems to become year 2000 ready. This
situation may reduce funds available to purchase our service.
Risks. The failure of our internal systems to be year 2000 ready could
temporarily prevent us from providing service to our customers, issuing invoices
and developing products and services and could require us to devote significant
resources to correct such problems. Due to the general uncertainty inherent in
the year 2000 computer problem, which results from the uncertainty of the year
2000 readiness of third-party suppliers and vendors, we are unable to determine
at this time whether the consequences of year 2000 failures will have a material
impact on our business, results of operations or financial condition.
Contingency Plan. We have not yet fully developed a contingency plan to
address all situations that may result if we experience significant year 2000
problems. We expect to complete this contingency plan later this year. As part
of our contingency plan, we intend to maintain a fully operational back-up site
and conduct network monitoring 24 hours per day during the transition period
from 1999 to 2000. Our back-up site will be located at one of our server sites
and be equipped with power generation and communication alternatives.
To date, we have incurred expenses of approximately $250,000 in connection
with our efforts to become year 2000 ready. We believe that our total expenses
for year 2000 readiness will be approximately $350,000.
MARKET RISK
Akamai does not use derivative financial instruments. We generally place
our marketable security investments in high credit quality instruments,
primarily U.S. Government obligations and corporate obligations with contractual
maturities of less than one year. We do not expect any material loss from our
marketable security investments and therefore believe that our potential
interest rate exposure is not material.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. We will adopt SFAS No. 133 as required by
SFAS No. 137, "Deferral of the Effective Date of the FASB Statement No. 133," in
fiscal year 2001. We do not expect the adoption of SFAS No. 133 to have an
impact on our financial condition or results of operations.
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BUSINESS
OVERVIEW
We provide a global delivery service for Internet content that improves Web
site speed and reliability and protects against Web site crashes due to demand
overloads. Our FreeFlow service, which we market to large businesses and other
businesses with an Internet focus, delivers our customers' Web content through a
worldwide server network by locating the content geographically closer to their
users. Using software that is based on our proprietary mathematical formulas, or
algorithms, we monitor Internet traffic patterns and deliver our customers'
content by the most efficient route available. Our service is easy to implement
and does not require our customers or their Web site visitors to make any
hardware or software modifications. Using our FreeFlow service, our customers
have been able to more than double the speed at which they deliver content to
their users and, in some instances, have been able to improve speeds by ten
times or more.
Our technology originated from research that our founders began developing
at the Massachusetts Institute of Technology in 1995. We introduced our FreeFlow
service commercially in April 1999. As of October 5, 1999, we had 1,475 Akamai
servers deployed in 24 countries across 55 telecommunications networks,
providing our customers with a guaranteed global Internet content delivery
service. Our customers, which operate many highly trafficked Web sites, include
Apple Computer, CNN Interactive, Discovery Channel Online, Infoseek Corp., J.
Crew.com, The Motley Fool and Yahoo!.
INDUSTRY BACKGROUND
The Internet has emerged as a global medium for commerce and
communications. International Data Corporation estimates that there were
approximately 142 million users of the Internet at the end of 1998 and that the
number of users will grow to 502 million by the end of 2002. The growth in the
number of users, together with the wealth of content and information available
on the Internet, have led to sharp increases in the daily traffic volume of Web
sites. Media Metrix estimated that the number of unique visitors to the top 25
Web sites increased from 224 million in June 1998 to 330 million in June 1999.
The ability of a Web site to attract users is in part based on the richness
of its content. Increasingly, Web site owners want to enhance their content by
adding graphics, such as photographs, images and logos, as well as deploying
newer technologies, such as video and audio streaming, animation and software
downloads. While richer content attracts more visitors, it also places
increasing demands on the Web site to deliver the content quickly and reliably.
As a result, Web site owners frequently elect to constrain the amount of rich
content on their Web sites, thus sacrificing the quality of the user experience
to maintain minimally acceptable performance levels.
The Internet was not originally designed to provide a rich multimedia
environment for individual Web site visitors. Since its origins as a United
States Department of Defense research project, the Internet has evolved into an
aggregation of many networks, each developed and managed by different
telecommunications service providers. As a result, the Internet, unaided, lacks
the ability to manage traffic between disparate networks to find the optimal
route to deliver content. Congestion or transmission blockages significantly
delay the information reaching the user. The storage of Web site information in
central locations further complicates Internet content delivery. As the volume
of information requested on a Web site increases, large quantities of repetitive
data traverse the Internet from that central location.
The combination of richer content and increasing volumes of Web site
visitors can lengthen significantly the time required for a user to download
information from a site and may cause the site to crash. These performance
problems are exacerbated during peak demand times, such as a breaking news
event, the release of an on-line movie trailer, the first day of ticket sales
for a hit film, an on-line special event or sudden demand for a new software
release. Because it is typically not cost-effective for a Web site to design its
infrastructure to handle relatively infrequent periods of "flash" or sudden
demand, periods of peak network traffic and surges in traffic volumes often
overwhelm the capacity of the site, causing long delays or complete site
outages. Delays and site crashes often cause user frustration and
disappointment. Jupiter Communications found that in
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June 1999, if response times at a particular Web site did not meet Internet
users' expectations, 37% of those users visited a substitute Web site to meet
their needs.
While various products and services have been developed to address
performance problems, they generally do not address the fundamental
architectural limitations of the Internet. For example, caching is a hardware
and/or software solution sold to Internet service providers to help them improve
network performance by placing electronic copies of selected Internet content on
geographically distributed servers on their own network. Caching is not,
however, designed to address the needs of Web site owners, and in particular to
deliver their content with high performance and reliability across the multiple
networks that comprise the Internet. Outsourcing Web server management to
hosting companies enables Web sites to add server capacity as needed and
increase server reliability. However, hosting does not address the transmission
disruption problems that can arise as data leave the hosting company's servers
and traverse the public network to the user. Broadband services are being
deployed to increase the speed of a user's connection to the Internet,
addressing the problems that occur in what is commonly known as the "last mile."
While these services increase bandwidth in the last mile, they do not address
the content delivery problems that occur when congestion overwhelms a Web site
or specific points across the Internet.
To serve the increasing volumes of traffic on the Internet and, at the same
time, enhance the user experience with increased graphic, video and audio
content, Web sites require content delivery services that can provide rich
content to users, enhance Web site response times and avoid delays and outages
caused by peak demand and public network congestion. These services must be not
only fast, reliable and easy to implement, but also capable of delivering rich
content that is continually updated. In addition, these services may be
cost-effective to the customer only if they do not require significant capital
or labor expenditures and can be implemented at a cost that is based on actual
usage.
THE AKAMAI SOLUTION
Akamai provides a content delivery service that allows Web sites to
accelerate the delivery of rich content to Internet users, improve reliability
and handle peak crowds. To use our service, customers identify and tag portions
of their Web site content that require significant amounts of bandwidth, such as
advertising banners, icons, graphics, video and audio streaming and software
downloads. These tagged items are delivered over our server network. When users
request this content, which we call "Akamaized" content, our FreeFlow service
routes the request to the server that is best able to deliver the content most
quickly based on the geographic proximity, performance and congestion of all
available servers on our network. Our network has the following capabilities:
- Real-time Internet monitoring, which enables our servers to monitor in
real-time the performance of our network and communicate the information
to other servers in our network;
- Dynamic server load management, which enables each server to react to
Internet and server congestion, overloads and outages and respond by
rerouting traffic around problems; and
- Internet user connection management, which enables each server to map the
geographic location of users so that content is delivered to each user
from our most efficient server.
These capabilities enable our global network to provide delivery of Web content
through the optimal route without relying on any central point of control.
The key benefits of our solution include:
Faster Content Delivery. FreeFlow can more than double the speed at which
Web sites can deliver Web content to Internet users and, in some cases, has
improved speeds by ten times or more. In addition, by using our service,
customers can deliver more graphics, video, audio, animation, software downloads
and other rich content without compromising the performance of their Web sites.
The ability to improve the speed of a Web site and increase the use of rich
content can result in an enhanced user experience and longer Web site visits,
which can translate into greater advertising and e-commerce revenue for our
customers.
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Superior Reliability. The underlying technology in our FreeFlow service
enables us to monitor the performance of our global network 24 hours a day,
seven days a week, 365 days a year. We route traffic around network bottlenecks
or outages, delivering content in an optimal manner while avoiding delays and
downtime.
Peak Demand Protection. Traditional Web site architectures support a
finite number of users. It is costly to upgrade Web sites to accommodate
sporadic peak demand. Our service enables a customer to use the extensive
capacity of our global server network and thus eliminate the need for a Web site
to incur significant capital or labor expenditures to design an infrastructure
to handle peak demand.
Global Reach. We have implemented our service on our global network of
over 1,475 servers deployed in 24 countries across 55 telecommunications
networks.
Compelling Cost Proposition. Our customers can use our service without any
up-front investment in hardware or software. We offer our service under
pay-for-use contracts based on the amount of Internet content delivered. To
further reduce costs, our customers receive volume discounts as their usage
increases. We thus provide our customers with a scalable approach to content
delivery without the capital investment and increasing cost per user typically
associated with equipment-based alternatives.
Ease of Implementation and Compatibility. Our service forms a transparent
layer on the Internet between our customer's Web site and visitors accessing
that site. Through our easy-to-use FreeFlow Launcher software, our customers can
quickly tag the objects to be delivered over our network and begin to implement
our service. Customers can continuously update or modify their Web site content
without affecting site performance. Moreover, our service does not require that
the customer modify its computer hardware or software.
STRATEGY
Our goal is to capitalize on our proprietary technology and leading market
position to establish a new industry standard for the delivery of all types of
Web content and applications to Internet users. To accomplish this goal, we are
pursuing a strategy built on the following initiatives:
Target Leading Web Sites Across a Broad Spectrum of Internet
Categories. We commercially introduced our FreeFlow service in April 1999 and
have attracted as customers three of the world's top six most heavily trafficked
Web sites, as reported by Media Metrix for June 1999. We are seeking to further
extend our penetration into leading Web sites across a broad spectrum of
Internet categories, including media, entertainment, financial services and
e-commerce. We are expanding our direct sales force to target Web sites in these
categories. We introduced a program designed for the resale of our FreeFlow
service by qualified resellers such as major Internet hosting providers. We are
also developing partner programs with companies that have influence with Web
site owners, such as Web design firms and systems integrators who can promote
our service to their customers.
Further Expand and Enhance Our Worldwide Network. We plan to continue to
expand our network to increase capacity and improve performance. By adding
servers, we can increase the number of routes through which we can deliver Web
content and thus shorten the distance between our servers and Internet users. We
have a three-part strategy for expanding our network. First, we are placing our
servers in secure data centers served by Internet service providers that provide
us with bandwidth to deliver content from our servers to Internet users. Second,
through our Akamai accelerated networks program, we provide use of our servers
to smaller Internet service providers who, in turn, provide us with rack space
for our servers and bandwidth to deliver content. Finally, we are enhancing our
network by integrating our technology with network infrastructure products such
as routers, switches and caches, to facilitate implementation of our service by
Internet service providers.
Establish Akamai as a Leading Brand for Content Delivery. We plan to
establish Akamai as the industry standard for providing Internet content
delivery. We intend to promote our brand to create strong penetration among all
top Internet content providers. We believe that this strong brand awareness,
combined with our existing global network of servers and customer base of
leading companies with an Internet focus, will help to create a competitive
advantage in our market.
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Extend Our World-Class Technology Leadership. We believe that Akamai has
established a reputation as a technological leader in Internet content delivery.
We plan to continue to enhance our current technologies, and develop new
technologies, that can improve the performance and reliability of our network
and expand the features and benefits that we can offer through our service. We
intend to leverage our technology to introduce innovative services and products
that take advantage of our worldwide network and our distributed computing
services capacity. To maintain our technological leadership, we plan to continue
to invest significant time and resources in recruiting computer scientists,
engineers and software developers with expertise in the areas of mathematics,
computer science and networking. We also plan to actively participate in the
development and promotion of Internet industry standards.
Leverage Our Services Model. We are creating a business model that will
generate a stream of recurring revenues, while maintaining relatively low
capital and bandwidth costs. We believe that we can maintain relatively low
capital costs because our service is based on software that runs on low cost,
off-the-shelf servers and we use the existing network infrastructure of
telecommunications providers instead of building our own fiber- or
satellite-based network infrastructure. In addition, we believe that we can
maintain relatively low bandwidth costs because we buy in large volumes and our
costs are based primarily on usage levels. Our recurring revenue model is based
on offering services to our customers that provide for payment based on the
amount of Internet content delivered through our service. As a result, our
revenue base has the potential to grow as the number of Internet users
increases, as these users access the Internet more often and for longer periods,
and as more Web sites incorporate richer content. We believe that the relatively
low capital costs required to build and maintain our network, together with the
relatively low costs that we are required to pay for bandwidth used on our
network, should enable us to leverage this recurring revenue base.
Build Strategic Alliances to Strengthen Market Position. We intend to
continue to develop strategic alliances with other Internet-related companies to
accelerate market acceptance of our services and expand and enhance our global
network. To date, we have entered into three major strategic alliances.
Effective as of April 1, 1999, we entered into a strategic alliance with Apple
Computer to integrate Apple's QuickTime TV network, QuickTime 4 Player and
QuickTime Streaming Server with our global Internet content delivery service. In
August 1999, we entered into a strategic alliance with Cisco Systems to, among
other things, integrate Akamai technology with Cisco's networking products. In
September 1999, we entered into a strategic alliance with Microsoft Corporation
to, among other things, integrate Microsoft's streaming media and Windows Server
operating systems technologies into the Akamai network. We will continue to
pursue select relationships with other Internet technology providers, Internet
hosting companies, Internet service providers, network providers, Web site
developers and systems integrators. We believe these relationships will
accelerate the proliferation of our technology and services, increase our brand
recognition and improve access to our target customer base.
FREEFLOW SERVICE
SERVICES
Our FreeFlow service provides for the delivery of Web site content to
Internet users. When implementing our FreeFlow service, our customers select
bandwidth intensive portions of their Web sites, such as complex graphics,
advertisements, logos, software downloads and pictures, which are delivered to
users over our network. FreeFlow service customers pay only for the Internet
content delivered through our service. Monthly usage charges are based on
megabits per second of content delivered. Customers commit to pay for a minimum
usage level over a fixed contract term, and pay additional fees when usage
exceeds this commitment. Monthly prices currently begin at $1,995 per megabit
per second, with discounts available for volume usage.
This FreeFlow service is backed by a proof-of-performance guarantee.
Through our guarantee we promise that:
- Our service will be available to deliver content 24 hours a day, seven
days a week, 365 days a year;
- Our service will deliver content faster than the customer can do it
without our service;
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- If we fail to deliver on either of these two promises on any day, the
customer does not pay for the service for that day.
We have recently begun to introduce a service that enables the delivery of
streaming audio and video over our network.
TECHNOLOGY
The FreeFlow service incorporates the following Akamai technologies:
Akamaized URLs. Akamai's technology changes the way in which content on a
Web page is delivered to an Internet user without interrupting the normal data
flow. Normally, when a user clicks on any Web page, the Web site returns a
Hypertext Markup Language, or HTML, text file containing text and formatting
instructions which the browser uses to display the page. This text file also
contains the Universal Resource Locators, or URLs, of non-text objects on the
page, such as photographs, banner advertisements, graphics and software
downloads.
Akamai's customers identify which of their Web objects are to be delivered
over Akamai's network. The customer then runs a software utility provided by
Akamai, called FreeFlow Launcher, which searches for the URLs of the selected
objects and tags them with a special code. We refer to this tagged content as
"Akamaized" content. This modification transforms each URL for Akamaized content
into an "ARL," or Akamai Resource Locator. The result is that when a user's
browser downloads an HTML file containing ARLs of Web objects for that page, the
browser is automatically pointed to Akamai's network to retrieve those objects.
Our process does not require any modification to the browser or other personal
computer configuration changes. While Akamai can serve the HTML as well as the
objects embedded in it, our customers typically choose to serve the HTML
themselves to maintain direct contact with the user. Thus, even while users are
receiving Akamaized content from our servers, our customers can continue to
count Web site visitors, track user demographics and dynamically assemble Web
page content, including the insertion of targeted advertising and other
personalized content.
Domain Name Servers. The Internet relies on a distributed hierarchical
database, called the Domain Name System, or DNS, to translate Web site names
into numerical Internet Protocol, or IP, addresses. Akamai employs tiers of DNS,
or name, servers that interact seamlessly with the Internet's standard DNS
servers and intelligently direct a user's request for Web site content toward
the most efficient Akamai server to deliver the requested content. When an
Internet user requests a page containing Akamaized content, the user's browser
asks a Domain Name Server to find an IP address for the Akamai network. The DNS
automatically directs the query to one of Akamai's top-level DNS servers rather
than to the central Web site. The Akamai top-level DNS servers use proprietary
mapping software to determine the approximate location of the user in the
Internet. The top-level DNS server then refers the user's request to an Akamai
low-level DNS server that is responsible for traffic near the user. The
low-level DNS server then answers with the IP addresses of a group, or "region,"
of Akamai servers that can deliver the desired content to the user most quickly
and reliably based on the geographic proximity, load and availability of all
servers on the network. The low-level DNS servers use up-to-the-second
information about Internet and server conditions to make the best routing
decision for each user.
Server Load Management. Once Akamai's servers determine the optimal region
for serving content to a user at a given moment, a simple process for selecting
an individual server for such delivery would be to "round-robin" all requests to
each content server in that region. However, such an approach would require that
all objects reside on every content server, resulting in poor use of system
resources and poor load balancing. Instead, Akamai uses proprietary algorithms
to balance the loads of all servers within each region and ensure that objects
reside in the minimum number of servers required to deliver optimal performance.
Real-Time Monitoring. Akamai's FreeFlow service performs real-time
monitoring of its own servers and of the Internet to make certain that content
is delivered to users with the best performance and reliability. A key design
principle of Akamai's system is the use of distributed control. Therefore, if
any computer, data center or portion of the Internet fails, the FreeFlow service
will continue operating.
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FreeFlow constantly monitors the performance of connections between various
locations around the Internet and our regions. We use numerous types of network
information to determine the performance of these connections. The result is a
"map" of the optimal Akamai region for each location at that point in time.
Akamai rebuilds this map periodically to reflect changing conditions.
Real-time monitoring also ensures reliability. A region is suspended if the
data center in which Akamai's servers are located fails or is performing poorly.
However, even when this disruption occurs, the FreeFlow service continues to
function. To ensure fault tolerance, Akamai deploys back-up low-level DNS
servers in each region that physically reside in separate data centers. These
back-up DNS servers automatically direct users to servers in alternate regions
unaffected by the remote outage.
To ensure reliability against the failure of an individual server, each
server is assigned a "buddy" server within a region. Buddy servers query one
another every second to sense all failures. If a server's buddy does not respond
to a query, that server takes over its buddy's IP address and serves all content
requested of the buddy.
STRATEGIC ALLIANCES
We have strategic alliances with Apple Computer, Cisco Systems and
Microsoft Corporation and intend to enter into additional strategic alliances
with leading technology companies to accelerate market acceptance of our
services and to expand and enhance our global network. We believe strategic
alliances can accelerate market acceptance of our technology and services,
increase our brand recognition and improve access to our target customer base.
APPLE COMPUTER
We entered into a strategic alliance with Apple Computer effective as of
April 1, 1999 to improve the delivery of streaming media over the Internet.
Under the agreement, we will integrate our global Internet content delivery
service and Apple's QuickTime TV network, QuickTime 4 Player and QuickTime
Streaming Server. The combined technologies are designed to give Apple Macintosh
and Microsoft Windows users worldwide access to fast, reliable, high-resolution
streaming services through e-commerce, media and other Web sites.
Under the terms of the strategic alliance, Apple has purchased our FreeFlow
service and we have agreed to be the exclusive network provider to Apple for
QuickTime TV. We have also agreed to cause our network to meet minimum capacity
levels to support streaming media. Apple has also designated us as the preferred
network provider to Apple customers developing streaming QuickTime content.
The term of our strategic alliance agreement with Apple extends through
April 1, 2001. We have agreed on the fees to be paid by Apple for our services
through the first 16 months of the agreement. Thereafter, we will negotiate with
Apple the fees for our services for the remainder of the term of the agreement.
Apple has agreed to pay to us minimum aggregate fees of $12.36 million under the
agreement. The minimum fees are based in part on Apple continuing to provide
QuickTime TV, which is a service to be provided by Apple for transmitting over
the Internet through computer networks owned or operated by Apple live streams
of Web content in QuickTime format. If Apple ceases to provide QuickTime TV for
any reason, the minimum fees to be paid by Apple under the agreement may, at
Apple's option, be adjusted to an amount equal to 50% of the amount of our
services purchased by Apple for QuickTime TV in the 12-month period immediately
preceding the date that Apple discontinued QuickTime TV. Minimum fees owed by
Apple will also be reduced by fees paid by third parties directly to us for
distribution of QuickTime TV.
Sales to Apple Computer were approximately $573,800, or 45% of revenue, for
the nine-month period ended September 30, 1999. We expect that sales to Apple
Computer will increase for the foreseeable future.
Apple purchased shares of our Series D convertible preferred stock for an
aggregate purchase price of approximately $12.5 million in June 1999.
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<PAGE> 33
CISCO SYSTEMS
In August 1999, we entered into a strategic alliance with Cisco Systems to
enhance and jointly develop new content routing, switching and caching
technologies to improve the performance of Internet content delivery. Under the
strategic alliance, Cisco and Akamai have agreed to jointly develop protocols
and algorithms designed to enhance content-based routing and switching
technologies within Cisco's infrastructure to optimize our Internet content
delivery service. In addition, Cisco has agreed to integrate our Internet
content delivery technology into its networking technology. We have also agreed
to explore new technologies to enable next-generation switching designed to
dynamically adapt to changing network conditions. Under the agreement, each of
Akamai and Cisco has also agreed to joint marketing arrangements, including the
promotion to its customers of the use of the other's products and services,
whenever commercially reasonable.
Cisco purchased shares of our Series E convertible preferred stock for an
aggregate purchase price of approximately $49.0 million in August 1999.
MICROSOFT CORPORATION
In September 1999, we entered into a strategic alliance with Microsoft
Corporation to integrate Microsoft technologies into the Akamai network. As part
of the agreement, we intend to integrate Microsoft Windows Media(TM)
technologies with our global Internet content delivery service, and we will
create a version of our software to support our FreeFlow service that works on
Microsoft Windows Server operating systems. In addition, Microsoft's Streaming
Media Division has agreed to become one of our Internet content delivery service
customers.
Under the terms of our agreement with Microsoft, we have agreed to modify
our server software to operate on the Microsoft Windows Server operating systems
platform and to support Microsoft's streaming media format. In addition, we will
explore with Microsoft other possible integration and support opportunities.
Microsoft has agreed to pay to us prepayment fees totaling $1,000,000 for
services that we will provide.
Microsoft purchased shares of our Series F convertible preferred stock for
an aggregate purchase price of approximately $15.0 million in September 1999.
CUSTOMERS
We introduced our FreeFlow service commercially in April 1999. Our customer
base spans a broad spectrum of Internet categories. The following is a
representative list of our customers.
<TABLE>
<S> <C>
INTERNET-CENTRIC
About.com
Citysearch/Ticketmaster
GO Network and Infoseek Corp.
Looksmart
Monster.com
Yahoo!
MEDIA, ENTERTAINMENT & TECHNOLOGY
Apple Computer
Artisan Entertainment
CNN Interactive
Discovery Channel Online
Hard Rock Hotel
The Washington Post
E-COMMERCE
Furniture.com
Gomez.com
HomePortfolio.com
J.Crew.com
Wrenchead.com
VerticalNet
Wine.com
FINANCIAL SERVICES
CCBN
The Motley Fool
</TABLE>
Sales to these customers represented more than 90% of our revenue for the
six months ended June 30, 1999. As of October 12, 1999, we had 49 customers.
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<PAGE> 34
The following case studies illustrate how some of our customers are using
our service.
APPLE COMPUTER
Apple chose Akamai as its exclusive network provider for the launch of
Quicktime TV (QTV) to build a global network that delivers high quality
streaming video and audio over the Internet. Apple has also used Akamai's global
network to deliver copies of QuickTime and Mac(R) OS 8.6 software upgrades as
well as the Star Wars: Episode I The Phantom Menace movie trailer to Apple
customers around the world.
YAHOO!
Yahoo! is one of the most visited Web sites on the Internet. In the second
quarter of 1999, Yahoo! began broad use of our FreeFlow service for fast and
reliable delivery of various images and Web site content, including banner
advertisements and logos. Yahoo! moved the majority of its advertising banners
onto our network after tests conducted using diagnostics from Keynote Systems
indicated our service improved Yahoo!'s performance by more than 50%.
LOOKSMART
As a leading Web directory, LookSmart provides search results across more
than 1 million unique URLs and over 70,000 individual categories. Looksmart is
dedicated to improving Web site performance and views Akamai as a major
contributor in this area. Since June 1999, the average download time for a
typical LookSmart Web page has been cut in half. LookSmart, which has now
implemented Akamai's service, relies on us as a key component for maintaining
Web site speed and reliability for its growing end user base.
THE MOTLEY FOOL
The Motley Fool is a leading online forum designed to give to readers
financial advice that they can understand and to discuss ways to make investment
and personal financial decisions. The Motley Fool has been using our service
since May 1999 and has experienced faster Web download times for its customers
based on a report by Keynote Systems. The Motley Fool is aimed at educating,
amusing and enriching the individual investor, has been able to off load
approximately 90% of its site's content to the servers from Akamai's network. In
the month of August 1999, Akamai served 260 million hits for The Motley Fool's
Web site enabling the Web site to decrease its bandwidth requirements on
servers, switches, load balancers and routers.
SALES, SERVICE AND MARKETING
We currently sell our service primarily through a direct sales force. Our
plan is to continue to pursue heavily trafficked Web sites through our direct
sales force and to penetrate other markets through our reseller program and
other indirect distribution channels. As of September 30, 1999, we had 65
employees in our sales and distribution organization, of whom 19 are in direct
sales. Currently our sales force is actively targeting primarily domestic
companies, focusing on the 300 Web sites that have the greatest number of
visitors, Fortune 100 companies and other companies with large operations in the
United States.
In addition to our direct sales efforts, we are developing our partner
program with design and system integration firms and consultants. We encourage
these partners to recommend the Akamai solution to their customers as part of
their design, integration and consulting work for those customers. As of
September 30, 1999, we had four employees in our partner program group and one
employee in our reseller program group.
Our technical consulting group directly supports our sales and distribution
efforts by providing technical consulting and integration assistance to our
current and prospective customers. As of September 30, 1999, we had 22 employees
in our technical consulting group.
We believe that a high level of customer service and support is critical to
the successful marketing and sale of our products and services. We are building
a comprehensive service and support organization to meet the needs of our
customers. As of September 30, 1999, we had seven employees in our customer
service and support organization and 12 employees in our account management
organization. We are seeking to hire
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additional customer service and support personnel as our customer base grows and
as we introduce new products and services.
To support our sales efforts and actively promote the Akamai brand name, we
conduct comprehensive marketing programs. Our marketing strategies include an
active public relations campaign, print advertisements, online advertisements,
trade shows, strategic partnerships and on-going customer communications
programs. We focus our marketing efforts on business and trade publications,
online media outlets, industry events and sponsored activities. We participate
in a variety of Internet, computer and financial industry conferences and
encourage our officers and employees to pursue speaking engagements at these
conferences. As of September 30, 1999, we had 15 employees in our marketing
organization.
NETWORK DEPLOYMENT
As of October 5, 1999, our network was comprised of 1,475 servers in 24
countries across 55 telecommunication networks. Some of the telecommunications
networks across which Akamai servers are deployed include: AboveNet
Communications, AT&T, Digex, Exodus Communications, GTE Internetworking,
interNode networks, Korea Telecom, Level 3 Communications, OzEmail Limited,
Pacific Internet, PSINet, UUNET Technologies, Verio, VisiNet and WonderNet.
Most of our servers are currently deployed in secure data centers served by
major domestic and international Internet service providers. These Internet
service providers provide bandwidth to deliver content from our servers to
Internet users.
We also deploy our servers at smaller and medium-sized domestic and
international Internet service providers through our Akamai accelerated networks
program. Under this program, we offer use of our servers to Internet service
providers. In exchange, we typically do not pay for rack space to house our
servers or bandwidth to deliver content from our servers to Internet users. By
hosting Akamai servers, Internet service providers obtain access to popular
content from the Internet that is served from the Akamai network. As a result,
when this content is requested by a user, the Internet service provider does not
need to pay for the bandwidth otherwise necessary to retrieve the content from
the originating Web site.
We are planning to expand and enhance our network by entering into
strategic relationships with network providers and integrating our technology
with networking and other network infrastructure products, such as routers and
switches, to facilitate implementation of our service by Internet service
providers. We are also seeking to expand our network through the development of
technology designed to facilitate communications between our global network of
servers and third-party caching systems. If this technology is successfully
developed, third-party caches could effectively function as additional servers
on our network. We have established relationships with cache vendors Cacheflow,
Cisco, InfoLibria, Network Appliance and Novell to develop interfaces to
facilitate communications between their caching products and our network.
RESEARCH AND DEVELOPMENT
Akamai's beginnings trace to a challenge that Tim Berners-Lee, the inventor
of the World Wide Web, posed to his colleagues at MIT in early 1995 to invent a
fundamentally new and better way to deliver Internet content to users. F.
Thomson Leighton, an MIT Professor of Applied Mathematics and founder of Akamai,
recognized that a solution to Web congestion could be found in applied
mathematics and algorithms. Dr. Leighton believed that algorithms could be used
to create a network of distributed servers that could communicate as a system
and could deliver content without depending on a centralized controlling core.
Dr. Leighton, together with Daniel Lewin, one of his graduate students at MIT,
and several other researchers with expertise in computer science and data
networking, undertook the development of the mathematical algorithms necessary
to handle the dynamic routing of content.
We believe that strong product and service development capabilities are
essential to enhancing our core technologies, developing new applications for
our technology and maintaining our competitiveness. We have invested and intend
to continue to invest a significant amount of human and financial resources in
Akamai's research and development organization.
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As of September 30, 1999, we had 64 employees devoted to our research and
development efforts. Our research and development organization is comprised of
the following groups:
- The server group, which develops and maintains the server software used
in our FreeFlow service;
- The mapping group, which develops techniques for monitoring and routing
Internet traffic;
- The performance analysis group, which develops tools to test and monitor
the performance of systems;
- The graphic user interface group, which builds programs that allow our
customers and network operations center personnel to graphically view the
status and performance of our network in real time; and
- The algorithm design and implementation groups, which design and
implement the algorithms that operate our FreeFlow service and its
derivative technologies.
We are focusing our research and development efforts on enhancing our
FreeFlow service and building on our technology to develop new services. From
our inception in August 1998 through September 30, 1999, our engineering and
development expenses were approximately $5.6 million. We expect to continue to
commit significant resources to research and development in the future. To date,
all engineering and development expenses have been expensed as incurred.
COMPETITION
The market for Internet content delivery services is new, rapidly evolving
and intensely competitive. We expect competition to increase both from existing
competitors and new market entrants for various components of our service. We
compete primarily on the basis of:
- Performance of our service, including speed of delivery, reliability,
peak crowd protection, and global content delivery capabilities;
- Ease of implementation and use of our service;
- Types of content delivered; and
- Price.
We compete primarily with companies offering products and services that
address Internet performance problems, including companies that provide Internet
content delivery services, streaming content delivery services and
equipment-based solutions to Internet performance problems, such as load
balancers and server switches.
Our competitors may be able to respond more quickly than we can to new or
emerging technologies and changes in customer requirements. Some of our current
or potential competitors may bundle their products with other software or
hardware in a manner that may discourage Web site owners from purchasing
products we offer or Internet service providers from being willing to install
our servers.
Increased competition could result in price reductions, fewer customer
orders, reduced gross margins and loss of market share, any of which could
materially and adversely affect our business, financial condition and
operations.
PROPRIETARY RIGHTS AND LICENSING
Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology and operate without
infringing on the proprietary rights of others. We rely on a combination of
patent, trademark, trade secret and copyright laws and contractual restrictions
to protect the proprietary aspects of our technology. These legal protections
afford only limited protection for our technology. We have no patents and we
have not filed any patent applications with the United States Patent and
Trademark Office with respect to our Internet content delivery service. We seek
to limit disclosure of our intellectual property by requiring employees and
consultants with access to our proprietary information to
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execute confidentiality agreements with us and by restricting access to our
source code. Due to rapid technological change, we believe that factors such as
the technological and creative skills of our personnel, new product developments
and enhancements to existing products are more important than the various legal
protections of our technology to establishing and maintaining a technology
leadership position.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. The laws of many countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
Litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. Any such resulting litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on our business,
operating results and financial condition. There can be no assurance that our
means of protecting our proprietary rights will be adequate or that our
competitors will not independently develop similar technology. Any failure by us
to meaningfully protect our property could have a material adverse effect on our
business, operating results and financial condition.
In October 1998, we entered into a license agreement with MIT under which
we were granted a royalty-free, worldwide right to use and sublicense the
intellectual property rights of MIT under various patent applications and
copyrights relating to Internet content delivery technology. We cannot predict
whether any of these applications will result in any issued patents or, if
patents are issued, any meaningful protection. Some of our technology is based
on technology licensed from MIT. The license has been granted to us on an
exclusive basis, but is subject to the rights of the U.S. government to use the
licensed intellectual property in government-funded inventions. As part of the
license agreement, MIT retained the right to use the licensed intellectual
property for non-commercial, teaching and educational purposes. In connection
with the license agreement, we issued 682,110 shares of our common stock to MIT
in October 1998. The license agreement is irrevocable, but MIT may terminate the
agreement if we cease our business due to insolvency or if we materially breach
the terms of the license agreement.
EMPLOYEES
As of September 30, 1999, we had a total of 193 full-time employees and 34
part-time employees. We expect to hire additional employees through 1999.
Our future success will depend in part on our ability to attract, retain
and motivate highly qualified technical and management personnel, for whom
competition is intense. Our employees are not represented by any collective
bargaining unit. We believe our relations with our employees are good.
BOARD OF ADVISORS
Our board of advisors consists of individuals with recognized expertise in
the Internet, networking, science and entertainment fields. Members of our board
of advisors provide guidance to our management and board of directors about
technology standards and marketplace needs to assist us with our business and
strategy. We intend to hold one or two meetings a year of our board of advisors.
In addition, we consult with members of our board of advisors from time to time
by telephone.
Our board of advisors includes:
Tim Berners-Lee holds the 3Com Founders chair at the Laboratory for
Computer Science at MIT. He directs the World Wide Web Consortium, an open forum
of companies and organizations with the mission to lead the Web to its full
potential. In 1989, Dr. Berners-Lee invented the World Wide Web.
Gil Friesen is a director of the Digital Entertainment Network. Previously,
Mr. Friesen served as president of A&M Records. Mr. Friesen co-founded Classic
Sports Network, a cable network sold to ESPN in 1997.
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Sam Gassel is chief systems engineer for CNN Internet Technologies. He has
been the architect of CNN's Internet systems since the launch of CNN.com in
1995. Before joining CNN/Turner Broadcasting in 1994, Mr. Gassel worked in
Academic Computing at the University of Chicago.
Ron Graham is a professor of Computer and Information Sciences at the
University of California, San Diego. Dr. Graham is also a chief scientist
emeritus for AT&T Labs and was president of the American Mathematical Society
from 1993 to 1995.
Amos Hostetter is the former chief executive officer of MediaOne. Mr.
Hostetter co-founded Continental Cablevision in 1963 and served as its chairman
and chief executive officer prior to its merger with MediaOne Group in 1996. Mr.
Hostetter is currently chairman of Pilot House Associates, LLC.
Jan Hier-King is the head of enterprise technology of Charles Schwab &
Co.'s electronic brokerage unit. Ms. Hier-King led the start-up of the
technology organization supporting the institutional business at Charles Schwab.
Daniel Smith is president and chief executive officer of Sycamore Networks,
Inc. Prior to joining Sycamore, Mr. Smith was president and chief executive
officer of Cascade Communications and a member of its board of directors.
Cascade Communications was acquired by Ascend Communications in June 1997.
Peter Solvik is senior vice president and chief information officer of
Cisco Systems. At Cisco Systems, Mr. Solvik is responsible for the company's
worldwide use of information technology, including Internet-based customer
service and electronic commerce tools. He is also responsible for the Internet
Business Solutions Group at Cisco Systems.
Ralph Terkowitz is chief information officer of The Washington Post
Company. Mr. Terkowitz founded and in 1996 became chief executive officer of
Digital Ink Co., the electronic publishing subsidiary of The Washington Post
Company.
Members of the board of advisors generally receive options to purchase our
common stock under our 1998 stock incentive plan.
FACILITIES
Our headquarters are currently located in approximately 15,988 square feet
of leased office space located in Cambridge, Massachusetts. The lease for
portions of this space terminates at various times from April 2003 to May 2004.
We have also entered into a lease for 12,168 square feet of office space in San
Mateo, California for sales and research and development personnel.
We have entered into a lease for approximately 107,088 square feet of space
in a second office building in Cambridge, Massachusetts. We plan to relocate our
entire office and operations to the new location. The lease is for a seven-year
term commencing on January 1, 2000.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of Akamai, and their ages and
positions as of September 30, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
George H. Conrades(1)...................... 60 Chairman of the Board of Directors and
Chief Executive Officer
Paul Sagan................................. 40 President and Chief Operating Officer
F. Thomson Leighton(2)..................... 42 Chief Scientist and Director
Daniel M. Lewin............................ 29 Chief Technology Officer and Director
Timothy Weller............................. 34 Chief Financial Officer and Treasurer
Robert O. Ball III......................... 41 Vice President, General Counsel and
Secretary
Earl P. Galleher III....................... 39 Vice President of Sales and Distribution
David Goodtree............................. 37 Vice President of Marketing
Steven P. Heinrich......................... 54 Vice President of Human Resources
Bruce M. Maggs............................. 36 Vice President of Research and Development
Jonathan Seelig............................ 27 Vice President of Strategy and Corporate
Development
Peter Danzig............................... 39 Vice President of Technology
Arthur H. Bilger(2)........................ 46 Vice Chairman of the Board of Directors
Todd A. Dagres(1).......................... 39 Director
Terrance G. McGuire(1)..................... 43 Director
Edward W. Scott(1)(2)...................... 36 Director
</TABLE>
- ------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Set forth below is certain information regarding the professional
experience for each of the above-named persons.
George H. Conrades has served as Chairman and Chief Executive Officer of
Akamai since April 1999 and as a director since December 1998. Mr. Conrades has
also been a venture partner of Polaris Venture Partners, Inc., an early stage
investment company, since August 1998. From August 1997 to July 1998, Mr.
Conrades served as Executive Vice President of GTE and President of GTE
Internetworking, an integrated telecommunication services firm. Mr. Conrades
served as Chairman of the Board of Directors and Chief Executive Officer of BBN
Corporation, a national Internet services provider and Internet technology
research and development company, from January 1994 until its acquisition by GTE
Internetworking in July 1997. Prior to joining BBN Corporation, Mr. Conrades was
an IBM Senior Vice President and a Member of IBM's Corporate Management Board.
Mr. Conrades is currently a director of CBS and Infinity Broadcasting, a media
company. He is also an interim member of the board of ICANN, the Internet
Corporation for the Assignment of Names and Numbers, a non-profit organization
established by the United States government to oversee the administration of
Internet names and addresses.
Paul Sagan joined Akamai in October 1998 as Vice President and Chief
Operating Officer and has served as President and Chief Operating Officer since
May 1999. Mr. Sagan was the Senior Advisor to the World Economic Forum, a
Geneva, Switzerland-based organization, from July 1997 to August 1998. From
December 1995 to December 1996, Mr. Sagan was the President and Editor of Time
Inc. New Media, an affiliate of Time Warner, Inc., a global media and
entertainment company. From September 1992 to December 1995, Mr. Sagan served as
a vice president and senior vice president of Time Warner Cable, a division of
Time Warner, Inc.
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F. Thomson Leighton co-founded Akamai and has served as Chief Scientist and
a director since August 1998. Dr. Leighton has been a professor of Mathematics
at MIT since 1982 and has served as the Head of the Algorithms Group in MIT's
Laboratory for Computer Science since its inception in 1996. Dr. Leighton is
currently on sabbatical from MIT. Dr. Leighton is a former two-term chair of the
2,000-member Association of Computing Machinery Special Interest Group on
Algorithms and Complexity Theory, and a former two-term Editor-in-Chief of the
Journal of the ACM, one of the nation's premier journals for computer science
research.
Daniel M. Lewin co-founded Akamai and has served as a director since August
1998. Mr. Lewin served as President of Akamai from August 1998 to May 1999 and
as Chief Technology Officer since May 1999. Since July 1996, Mr. Lewin has been
a Ph.D. candidate in the Algorithms Group at MIT's Laboratory for Computer
Science. From May 1994 to May 1996, Mr. Lewin worked at IBM's research
laboratory in Haifa, Israel as a full-time Research Fellow and Project Leader
responsible for the development and support of IBM's Genesys system.
Timothy Weller joined Akamai in August 1999 as Chief Financial Officer.
From July 1993 until August 1999, Mr. Weller was an equity research analyst at
Donaldson, Lufkin & Jenrette, an investment banking firm. Mr. Weller holds a
Ph.D. in Electrical Engineering from the University of Illinois.
Robert O. Ball III has served as Vice President and General Counsel of
Akamai since July 1999 and has served as Secretary since August 1999. From June
1996 until August 1999, Mr. Ball was a Partner and Chair of the Electronic
Commerce Practice Team at Alston & Bird LLP, a law firm. From 1991 until May
1996, Mr. Ball was a Partner at Cashin, Morton & Mullins, a law firm.
Earl P. Galleher III has served as Vice President of Sales and Distribution
of Akamai since March 1999. From March 1996 until August 1998, Mr. Galleher was
employed with Digex, Inc., a national Internet carrier, where he served as Vice
President and General Manager from March 1996 to January 1997 and as the
President of the Web Site Management Division from January 1997 to August 1998.
From November 1991 to February 1996, Mr. Galleher served as Director of
Marketing at American Mobile Satellite Corporation, a mobile voice and data
service provider.
David Goodtree has served as the Vice President of Marketing since March
1999. From October 1994 to March 1999, Mr. Goodtree served as Group Director at
Forrester Research, Inc., an independent technology research firm. Prior to
joining Forrester Research, Inc., from October 1990 to September 1994, Mr.
Goodtree managed product development for MCI Communications Corporation, now
known as MCI WorldCom, Inc., a telecommunications company.
Steven P. Heinrich has served as Vice President of Human Resources of
Akamai since March 1999. Prior to joining Akamai, Mr. Heinrich established
Constellation Consulting, Inc., a human resources consulting firm specializing
in early stage, high technology businesses. From November 1979 to October 1997,
Mr. Heinrich was employed by BBN Corporation where he served as the Vice
President of Human Resources from March 1993 to October 1997.
Bruce M. Maggs joined Akamai in October 1998 as a Senior Research Scientist
and has served as Vice President of Research and Development since April 1999.
From September 1998 to January 1999, Dr. Maggs was a Visiting Associate
Professor of Computer Science at MIT. Dr. Maggs is currently on leave from his
appointment as Associate Professor of Computer Science at Carnegie Mellon
University, a position he has held since July 1997. From January 1994 until his
appointment as Associate Professor, Dr. Maggs was an Assistant Professor at
Carnegie Mellon. From September 1990 to December 1993, Dr. Maggs was a Research
Scientist at the NEC Research Institute, Inc., an institute which conducts
research in computer and physical sciences.
Jonathan Seelig co-founded Akamai in August 1998 and has served as Vice
President of Strategy and Corporate Development since that time. From January
1995 to September 1997, Mr. Seelig worked for ECI Telecom, Ltd., a provider of
digital telecommunications and data transmission systems to network service
providers. Mr. Seelig is presently on a leave of absence as an M.B.A. candidate
at MIT's Sloan School of Management.
39
<PAGE> 41
Peter Danzig joined Akamai in September 1999 as Vice President of
Technology. Prior to joining Akamai, from March 1997 to August 1999, Mr. Danzig
served as acting Chief Technology Officer of the NetCache group at Network
Appliance, Inc., a provider of network data solutions. Mr. Danzig founded
Internet Middleware Corporation, a provider of web caching solutions, in May
1996 and served as its Chief Technology Officer until it was acquired by Network
Appliance in March 1997. From January 1990 to May 1996, Mr. Danzig was an
Assistant Professor of Computer Science at the University of Southern
California.
Arthur H. Bilger has served as a director of Akamai since November 1998 and
has served as Vice Chairman of the Board of Directors since August 1999. From
December 1994 until March 1997, Mr. Bilger was president, chief operating
officer and a member of the board of directors of New World Communications Group
Incorporated, an entity engaged in television broadcasting and production. From
August 1990 until December 1994, Mr. Bilger was a founding principal of Apollo
Advisors, L.P. and Lion Advisors, L.P., entities engaged in the management of
securities investments. Mr. Bilger is currently a director of Mandalay Resort
Group, an owner and operator of hotel casino facilities.
Todd A. Dagres has served as a director of Akamai since November 1998.
Since February 1996, Mr. Dagres has been a general partner of Battery Ventures,
a venture capital firm. From February 1994 to February 1996, Mr. Dagres was a
Principal and Senior Technology Analyst at Montgomery Securities, now known as
Banc of America Securities LLC, an investment bank and brokerage firm.
Terrance G. McGuire has served as a director of Akamai since April 1999.
Mr. McGuire is a founder and has been a general partner of Polaris Venture
Partners, Inc. since June 1996. Since 1992, Mr. McGuire has also been a general
partner of Burr, Egan, Deleage & Co., a venture capital firm.
Edward W. Scott has served as a director of Akamai since April 1999. Mr.
Scott is a founder and general partner of the Baker Communications Fund, a
communications private equity fund. He has been a general partner of that firm
since March 1996. From December 1990 until March 1996, Mr. Scott was a private
equity investor with the Apollo Investment Fund, L.P.
Each executive officer serves at the discretion of the board of directors
and holds office until his successor is elected and qualified or until his
earlier resignation or removal. There are no family relationships among any of
the directors or executive officers of Akamai. Each of the directors serve on
the board of directors pursuant to the terms of an agreement that will terminate
upon the closing of this offering.
ELECTION OF DIRECTORS
Following this offering, the board of directors will be divided into three
classes, each of whose members will serve for a staggered three-year term.
Messrs. Conrades and McGuire will serve in the class whose term expires in 2000;
Messrs. Leighton and Scott will serve in the class whose term expires in 2001;
and Messrs. Bilger, Dagres and Lewin will serve in the class whose term expires
in 2002. Upon the expiration of the term of a class of directors, directors in
such class will be elected for three-year terms at the annual meeting of
stockholders in the year in which such term expires.
COMPENSATION OF DIRECTORS
We reimburse directors for reasonable out-of-pocket expenses incurred in
attending meetings of the board of directors. We may, in our discretion, grant
stock options and other equity awards to our non-employee directors from time to
time pursuant to our 1998 stock incentive plan. We have not yet determined the
amount and timing of such grants or awards.
BOARD COMMITTEES
The board of directors has established a compensation committee and an
audit committee. The compensation committee, which consists of Messrs. Conrades,
Dagres, McGuire and Scott, reviews executive salaries, administers our bonus,
incentive compensation and stock plans, and approves the salaries and other
benefits of our executive officers. In addition, the compensation committee
consults with our management regarding our pension and other benefit plans and
compensation policies and practices.
40
<PAGE> 42
The audit committee, which consists of Messrs. Bilger, Leighton and Scott,
reviews the professional services provided by our independent accountants, the
independence of such accountants from our management, our annual financial
statements and our system of internal accounting controls. The audit committee
also reviews such other matters with respect to our accounting, auditing and
financial reporting practices and procedures as it may find appropriate or may
be brought to its attention.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by us, for services
rendered for the period from August 20, 1998, the date of our inception, to
December 31, 1998, to the person who acted in the capacity of chief executive
officer during that period. None of our other executive officers who held office
as of December 31, 1998 met the definition of "highly compensated" within the
meaning of the Securities and Exchange Commission's executive compensation
disclosure rules. In the table below, columns required by the regulations of the
Securities and Exchange Commission have been omitted where no information was
required to be disclosed under those columns.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
NAME AND PRINCIPAL POSITION SALARY($)
- --------------------------- -------------------
<S> <C>
Daniel M. Lewin............................................. $ 30,000
President(1)
</TABLE>
- ------------
(1) Daniel M. Lewin resigned as President of Akamai and became our Chief
Technology Officer on May 18, 1999.
On September 2, 1998, we sold 11,391,750 shares of common stock to Mr.
Lewin for an aggregate purchase price of $63,285 pursuant to the terms of a
stock restriction agreement. The stock restriction agreement gives us the right
to repurchase a portion of these shares at the original purchase price if Mr.
Lewin ceases to provide services to us prior to August 31, 2002. However, our
right to repurchase shares held by Mr. Lewin terminates upon a change in control
of Akamai.
STOCK OPTIONS
We did not grant any stock options to Mr. Lewin during the period from our
inception to December 31, 1998.
BENEFIT PLANS
1998 Stock Incentive Plan. Our 1998 stock incentive plan provides for the
grant of restricted stock and other stock-based awards and stock options. A
maximum of 28,755,600 shares of common stock are authorized to be issued
pursuant to the 1998 stock incentive plan. Our officers, employees, directors,
consultants and advisors are eligible to receive awards under the 1998 stock
incentive plan.
The compensation committee of our board of directors administers the 1998
stock incentive plan. The compensation committee with the assistance of
management selects the recipients of awards and determines:
- The number of shares of common stock covered by options and the dates
upon which such options become exercisable;
- The exercise price of options;
- The duration of options; and
- The number of shares of common stock subject to any restricted stock or
other stock-based awards and the terms and conditions of such awards,
including the conditions for repurchase, issue price and repurchase
price.
41
<PAGE> 43
In the event of a merger or other acquisition event, our board of directors
is authorized to provide for outstanding awards to be assumed or substituted for
by the acquiror. If the acquiror does not assume or substitute for outstanding
awards, our board of directors may provide that all unexercised options will
become exercisable in full prior to the completion of such event and that these
options will terminate upon the completion of the event if not previously
exercised. In addition, immediately prior to the consummation of an acquisition
event, the vesting schedule of each outstanding option and stock-based award
will be accelerated.
1999 Employee Stock Purchase Plan. Our 1999 employee stock purchase plan
provides for the issuance of up to 600,000 shares of our common stock to
participating employees.
The 1999 employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, contains consecutive, overlapping,
twenty-four month offering periods. Each offering period includes four six-month
purchase periods. The offering periods generally start on the first trading day
on or after June 1 and December 1 of each year. However, the first such offering
period will commence on the first trading day after the effective date of this
offering and end on the last trading day on or before November 30, 2001.
All of our employees, including directors who are employees, and all
employees of any participating subsidiaries:
- Whose customary employment is for more than five months in a calendar
year; and
- Who have been employed by us for at least seven calendar days prior to
enrolling
are eligible to participate in the 1999 employee stock purchase plan. Employees
who would immediately after the grant own five percent or more of the total
combined voting power or value of our stock or any subsidiary are not eligible
to participate.
To participate in the 1999 employee stock purchase plan, an employee must
authorize us to deduct from one to ten percent of his or her base pay during the
offering period. Amounts deducted and accumulated by the participant are used to
purchase shares of common stock at the end of each purchase period. The price of
stock purchased under the 1999 employee stock purchase plan is 85% of the lower
of the fair market value of the common stock (i) at the beginning of the
offering period, or (ii) at the end of the purchase period; provided, however,
that under certain circumstances, the purchase price may be adjusted to a price
not less than 85% of the lower of the fair market value on the common stock on
(i) the date our stockholders approve an increase in shares reserved for
issuance under the 1999 employee stock purchase plan or (ii) at the end of the
purchase period. In the event the fair market value at the end of a purchase
period is less than the fair market value at the beginning of the offering
period, the participants will be withdrawn from the current offering period
following exercise and automatically re-enrolled in a new offering period. The
new offering period will use the lower fair market value as of the first date of
the new offering period to determine the purchase price for future purchase
periods. Participants may end their participation at any time during an offering
period, and they will be paid their payroll deductions to date. Participation
ends automatically upon termination of employment.
401(k) Plan. Our employee savings and retirement plan is qualified under
Section 401 of the Internal Revenue Code. Our employees may elect to reduce
their current compensation by up to the statutorily prescribed annual limit and
have the amount of such reduction contributed to the 401(k) plan. We may make
matching or additional contributions to the 401(k) plan in amounts to be
determined annually by our board of directors.
42
<PAGE> 44
RELATED PARTY TRANSACTIONS
ISSUANCES OF PREFERRED STOCK AND 15% SENIOR SUBORDINATED NOTES
Since our inception in August 1998, we have issued and sold preferred stock
and 15% senior subordinated notes coupled with warrants to purchase common stock
at an exercise price of approximately $2.50 per share to the following persons
and entities who are our executive officers, directors or 5% or greater
stockholders. For more detail on shares of stock held by these purchasers, see
"Principal Stockholders" on page 46.
<TABLE>
<CAPTION>
WARRANTS TO
PURCHASE THE
FOLLOWING
SERIES A SERIES B 15% SENIOR SHARES OF AGGREGATE
PREFERRED PREFERRED SUBORDINATED COMMON PURCHASE
NAME STOCK STOCK NOTES STOCK PRICE
- ---- --------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Arthur H. Bilger(1).................. 32,894 9,610 $ 100,000 13,350 $ 494,779
Baker Communications Fund, L.P. ..... -- 929,244 $7,000,000 934,668 $20,999,990
Battery Ventures IV, L.P.(2)......... 513,165 63,056 -- -- $ 4,850,056
George H. Conrades(3)................ 29,605 8,649 $ 65,154 8,694 $ 420,458
Earl P. Galleher III................. 3,289 961 $ 48,333 6,450 $ 87,808
Jonathan Seelig...................... 14,473 4,228 $ 31,852 4,248 $ 205,546
Entities affiliated with Polaris
Venture Management Co. II,
L.L.C.(4).......................... 263,163 237,318 $1,000,000 133,524 $ 6,575,472
Paul Sagan........................... 6,578 1,922 $ 14,477 1,932 $ 93,427
</TABLE>
- ------------
(1) Excludes securities held by Baker Communications Fund, L.P., of which Mr.
Bilger is a limited partner. Mr. Bilger is the managing member of the
general partner of ADASE Partners, L.P. and the managing member of AT
Investors LLC. Mr. Bilger's shares of Series A preferred stock represent
holdings of ADASE Partners, L.P. in Akamai. Mr. Bilger's shares of Series B
convertible preferred stock and his notes and warrants are held by AT
Investors LLC. Mr. Bilger disclaims beneficial ownership of the securities
held by ADASE Partners, L.P. and AT Investors LLC except to the extent of
his pecuniary interest in those entities.
(2) Includes 7,895 shares of Series A convertible preferred stock and 969 shares
of Series B convertible preferred stock held by Battery Investment Partners
IV, LLC, of which Battery Ventures IV, L.P. is a managing member.
(3) Excludes securities held by entities affiliated with Polaris Venture
Management Co. II, L.L.C., of which Mr. Conrades is a general partner.
(4) Represents 257,119 shares of Series A convertible preferred stock, 231,687
shares of Series B convertible preferred stock, 15% senior subordinated
notes in the principal amount of $976,271 and 7,242 warrants held by Polaris
Venture Partners II L.P. and 6,044 shares of Series A convertible preferred
stock, 5,631 shares of Series B convertible preferred stock, 15% senior
subordinated notes in the principal amount of $23,729 and 176 warrants held
by Polaris Venture Partners Founders Fund II L.P.
Series A Financing. On November 23, 1998, November 30, 1998 and December
14, 1998 we issued an aggregate of 1,100,000 shares of Series A preferred stock
to 22 investors, including Arthur H. Bilger, Battery Ventures IV, L.P., Battery
Investment Partners IV, LLC, George H. Conrades, Earl P. Galleher III, Jonathan
Seelig, Polaris Venture Partners II L.P., Polaris Venture Partners Founders Fund
II L.P. and Paul Sagan. The per share purchase price for our Series A
convertible preferred stock was $7.60. As of September 30, 1999, each share of
our Series A convertible preferred stock was convertible into approximately 18.8
shares of our common stock.
Series B Financing. On April 16, 1999 and April 30, 1999 we issued an
aggregate of 1,327,500 shares of Series B convertible preferred stock to 24
investors, including Arthur H. Bilger, Baker Communications Fund, L.P., Battery
Ventures IV, L.P., Battery Investment Partners IV, LLC, George H. Conrades, Earl
P. Galleher III, Jonathan Seelig, Polaris Venture Partners II L.P., Polaris
Venture Partners Founders Fund II
43
<PAGE> 45
L.P. and Paul Sagan. The per share purchase price for our Series B convertible
preferred stock was $15.07. As part of our Series B financing, we granted Baker
Communications Fund, L.P. an option to purchase up to 145,195 shares of our
Series C convertible preferred stock which are convertible into an aggregate of
908,339 shares of common stock. As of September 22, 1999, each share of our
Series B convertible preferred stock was convertible into six shares of our
common stock. As of September 30, 1999, each share of our Series C convertible
preferred stock was convertible into approximately 6.3 shares of our common
stock.
15% Senior Subordinated Note Financing. On May 7, 1999 we issued 15%
senior subordinated notes in the aggregate principal amount of $15,000,000
coupled with warrants to purchase an aggregate of 2,002,836 shares of common
stock for an exercise price of approximately $2.50 per share to 20 investors,
including Arthur H. Bilger, Baker Communications Fund, L.P., George H. Conrades,
Earl P. Galleher III, Jonathan Seelig, Polaris Venture Partners II L.P., Polaris
Venture Partners Founders Fund II L.P. and Paul Sagan. The 15% senior
subordinated notes have a term of five years and bear interest at the rate of
15% per year, compounded annually.
ISSUANCES OF COMMON STOCK
The following table presents selected information regarding our issuances
of common stock to our executive officers and directors. We issued the shares of
common stock set forth in the table below pursuant to stock restriction
agreements with each of the executive officers and directors which give us
rights to repurchase all or a portion of the shares at their purchase price in
the event that the person ceases to provide services to us. Some of these stock
restriction agreements prohibit us from repurchasing shares following a change
in control of Akamai.
<TABLE>
<CAPTION>
DATE OF NUMBER AGGREGATE
NAME ISSUANCE OF SHARES PURCHASE PRICE
- ---- -------- ---------- --------------
<S> <C> <C> <C>
Robert O. Ball III.................................... 7/23/99 250,000 $ 625,000
Arthur H. Bilger...................................... 11/19/98 594,000 $ 8,250
3/26/99 600,000 $ 200,000
George H. Conrades.................................... 3/26/99 5,940,000 $1,980,000
Earl P. Galleher III.................................. 3/15/99 1,260,000 $ 52,500
F. Thomson Leighton................................... 9/2/98 11,391,750 $ 63,288
Daniel M. Lewin....................................... 9/2/98 11,391,750 $ 63,288
Paul Sagan............................................ 10/28/98 2,383,200 $ 33,100
5/18/99 600,000 $ 500,000
Jonathan Seelig....................................... 9/2/98 2,376,000 $ 13,200
Timothy Weller........................................ 7/23/99 1,050,000 $2,625,000
</TABLE>
------------------------
Akamai agreed to the material terms of each of the preferred stock
issuances described above after arms'-length negotiations with previously
unaffiliated persons. All future transactions, including loans between us and
our officers, directors, principal stockholders and their affiliates will be
approved by a majority of our board of directors, including a majority of the
independent and disinterested directors on our board of directors, and will
continue to be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
AGREEMENTS WITH EXECUTIVE OFFICERS
On March 26, 1999, in connection with the issuance of restricted common
stock, we loaned $1,980,000 to George H. Conrades, our Chief Executive Officer
and Chairman of the Board of Directors. The loan bears interest at a rate of
5.3% per year, compounded annually until paid in full. The loan must be paid in
full by March 26, 2009 or earlier to the extent of proceeds, net of taxes,
received by Mr. Conrades upon his sale of capital stock of Akamai. On March 26,
1999 we entered into a severance agreement with Mr. Conrades. The severance
agreement requires us to pay Mr. Conrades a lump-sum cash payment equal to 299%
of his average
44
<PAGE> 46
annual salary and bonus for the most recent three years if his employment is
terminated by us other than for cause within two years following a change in
control of Akamai.
On May 18, 1999, in connection with the issuance of restricted common
stock, we loaned $500,000 to Paul Sagan, our President and Chief Operating
Officer. The loan bears interest at a rate of 5.3% per year, compounded annually
until paid in full. The loan must be paid in full by May 18, 2009 or earlier to
the extent of proceeds, net of taxes, received by Mr. Sagan upon his sale of
capital stock of Akamai.
On July 23, 1999, in connection with the issuance of restricted common
stock, we loaned $623,750 to Robert O. Ball III, our Vice President and General
Counsel. The loan bears interest at a rate of 6.1% per year, compounded annually
until paid in full. The loan must be paid in full by July 23, 2009 or earlier to
the extent of proceeds, net of taxes, received by Mr. Ball upon his sale of
capital stock of Akamai.
On July 23, 1999, in connection with the issuance of restricted common
stock, we loaned $2,619,750 to Timothy Weller, our Chief Financial Officer. The
loan bears interest at a rate of 6.1% per year, compounded annually until paid
in full. The loan must be paid in full by July 23, 2009 or earlier to the extent
of proceeds, net of taxes, received by Mr. Weller upon his sale of capital stock
of Akamai.
45
<PAGE> 47
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of our common stock as of September 30, 1999, and as adjusted to reflect the
sale of the shares of common stock in this offering, by:
- Each person who owns beneficially more than 5% of the outstanding shares
of our common stock;
- Each of our directors;
- The executive officer named in the Summary Compensation Table under
"Management -- Executive Compensation" on page 41; and
- All of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting and investment power
with respect to shares. Unless otherwise indicated below, to our knowledge, all
persons named in the table have sole voting and investment power with respect to
their shares of common stock, except to the extent authority is shared by
spouses under applicable law. Unless otherwise indicated, the address of each
person owning more than 5% of the outstanding shares of common stock is c/o
Akamai Technologies, Inc., 201 Broadway, Cambridge, Massachusetts 02139.
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON STOCK
OUTSTANDING
--------------------
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ------------------------------------ ------------------ -------- --------
<S> <C> <C> <C>
Battery Ventures IV, L.P.(1)............................ 10,030,012 12.2% 11.0%
20 William Street
Wellesley, MA 02481
F. Thomson Leighton..................................... 9,609,750 11.7% 10.5%
Daniel M. Lewin......................................... 9,556,750 11.6% 10.5%
Baker Communications Fund, L.P.(2)...................... 7,418,471 8.9% 8.0%
c/o Baker Capital Partners, LLC
540 Madison Avenue
New York, NY 10022
George H. Conrades(3)................................... 6,557,402 8.0% 7.2%
Entities affiliated with Polaris Venture Management Co.
II, L.L.C.(4)......................................... 6,507,037 7.9% 7.1%
1000 Winter Street
Suite 3350
Waltham, MA 02451
Arthur H. Bilger(5)..................................... 1,883,684 2.3% 2.1%
Todd A. Dagres(6)....................................... 10,030,012 12.2% 11.0%
c/o Battery Ventures IV, L.P.
20 William Street
Wellesley, MA 02481
Terrance G. McGuire(7).................................. 6,507,037 7.9% 7.1%
c/o Polaris Venture Management Co. II, L.L.C.
1000 Winter Street
Suite 3350
Waltham, MA 02451
Edward W. Scott(8)...................................... 7,418,471 8.9% 8.0%
c/o Baker Capital Partners, LLC
540 Madison Avenue
New York, NY 10022
All executive officers and directors as a group (15
persons)(9)........................................... 59,281,399 70.2% 63.5%
</TABLE>
- ------------
(1) Includes 154,304 shares held by Battery Investment Partners IV, LLC.
Battery Ventures IV, L.P. is the managing member of Battery Investment
Partners IV, LLC.
46
<PAGE> 48
(2) Includes 1,843,007 shares issuable upon the exercise of options and
warrants exercisable within 60 days after September 30, 1999.
(3) Includes 1,485,000 shares held by Lawrence T. Warble, Trustee Under
Agreement Dated August 10, 1999, and 8,694 shares issuable upon the
exercise of warrants exercisable within 60 days after September 30, 1999.
Excludes shares held by entities affiliated with Polaris Venture Management
Co. II, L.L.C., of which Mr. Conrades is a general partner.
(4) Represents 6,226,051 shares held by Polaris Venture Partners II L.P.,
147,462 shares held by Polaris Venture Partners Founders' Fund II L.P.,
130,356 shares issuable upon exercise of warrants held by Polaris Venture
Partners II L.P. and exercisable within 60 days after September 30, 1999
and 3,168 shares issuable upon the exercise of warrants held by Polaris
Venture Partners Founders' Fund II L.P. and exercisable within 60 days
after September 30, 1999. Polaris Venture Management Co. II, L.L.C. is the
general partner of Polaris Venture Partners and Polaris Venture Founders'
Fund II L.P.
(5) Represents 594,000 shares held by the Arthur H. Bilger 1996 Family Trust,
1,218,674 shares held by ADASE Partners, L.P., 57,660 shares held by AT
Investors LLC and 13,350 shares issuable upon the exercise of warrants held
by AT Investors LLC and exercisable within 60 days after September 30,
1999. Mr. Bilger, a director of Akamai, is the managing member of the
general partner of ADASE Partners, L.P. and managing member of AT Investors
LLC. Mr. Bilger disclaims beneficial ownership of the shares held by the
Arthur H. Bilger 1996 Family Trust, ADASE Partners, L.P. and AT Investors
LLC except to the extent of his pecuniary interest in those entities.
Excludes shares held by Baker Communications Fund, L.P., of which Mr.
Bilger is a limited partner.
(6) Represents 9,875,708 shares held by Battery Ventures IV, L.P. and 154,304
shares held by Battery Investment Partners IV, LLC. Battery Ventures IV,
L.P. is the managing member of Battery Investment Partners IV, LLC. Todd A.
Dagres, a director of Akamai, is a general partner of Battery Ventures IV,
L.P. Mr. Dagres disclaims beneficial ownership of the shares held by
Battery Ventures IV, L.P. and Battery Investment Partners IV, LLC except to
the extent of his pecuniary interest in those entities.
(7) Represents 6,226,051 shares held by Polaris Venture Partners II L.P.,
147,462 shares held by Polaris Venture Partners Founders' Fund II L.P.,
130,356 shares issuable upon exercise of warrants held by Polaris Venture
Partners II L.P. and exercisable within 60 days after September 30, 1999
and 3,168 shares issuable upon the exercise of warrants held by Polaris
Venture Partners Founders' Fund II L.P. and exercisable within 60 days
after September 30, 1999. Polaris Venture Management Co. II, L.L.C. is the
general partner of Polaris Venture Partners II L.P. and Polaris Venture
Partners Founders' Fund II L.P. Terrance G. McGuire, a director of Akamai,
is a general partner of Polaris Venture Management Co. II, L.L.C. Mr.
McGuire disclaims beneficial ownership of the shares held by Polaris
Venture Partners II L.P. and Polaris Venture Partners Founders' Fund II
L.P. except to the extent of his pecuniary interest in those entities.
(8) Represents 5,575,464 shares held by Baker Communications Fund, L.P. and
1,843,007 shares issuable upon the exercise of options and warrants held by
Baker Communications Fund, L.P. and exercisable within 60 days after
September 30, 1999. Baker Capital Partners, LLC is general partner of Baker
Communications Fund, L.P. Edward W. Scott, a director of Akamai, is a
general partner of Baker Communications Fund, L.P. Mr. Scott disclaims
beneficial ownership of the shares held by Baker Communications Fund, L.P.
except to the extent of his pecuniary interest in Baker Communications
Fund, L.P.
(9) Includes 2,006,957 shares issuable upon the exercise of options and
warrants exercisable within 60 days after September 30, 1999.
47
<PAGE> 49
DESCRIPTION OF CAPITAL STOCK
After this offering, the authorized capital stock of Akamai will consist of
300,000,000 shares of common stock, $0.01 par value per share, and 5,000,000
shares of preferred stock, $0.01 par value per share. As of September 30, 1999,
there were outstanding:
- 44,832,810 shares of common stock held by 101 stockholders of record; and
- options and warrants to purchase an aggregate of 14,220,089 shares of
common stock.
Upon completion of this offering and the conversion of all outstanding
shares of preferred stock into common stock, there will be 91,441,851 shares of
common stock outstanding.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share held on
matters submitted to a vote of stockholders. Holders of our common stock do not
have cumulative voting rights. Accordingly, holders of a majority of the shares
of common stock entitled to vote in any election of directors may elect all of
the directors standing for election. Holders of common stock are entitled to
receive their proportionate share of any dividends declared by the Board of
Directors, subject to any preferential dividend rights of outstanding preferred
stock. Upon the liquidation, dissolution or winding up of Akamai, the holders of
common stock are entitled to receive ratably the net assets of Akamai available
after the payment of all debts and other liabilities and subject to the
preferential rights of any outstanding preferred stock. The common stock has no
preemptive, subscription, redemption or conversion rights. All outstanding
shares of common stock are fully paid and nonassessable. The rights, preferences
and privileges of the common stock are subject to the rights of the holders of
shares of any series of preferred stock which Akamai may designate and issue in
the future.
PREFERRED STOCK
Our Board of Directors will be authorized to issue shares of preferred
stock in one or more series without stockholder approval. The Board will have
discretion to determine the rights, preferences, privileges and restrictions,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences of each series of preferred stock.
The purpose of authorizing the Board of Directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The Board's ability to issue preferred
stock will provide desirable flexibility in connection with possible
acquisitions and other corporate purposes and could make it more difficult for a
third party to acquire, or could discourage a third party from acquiring, a
majority of our outstanding voting stock. The issuance of preferred stock with
voting and conversion rights may adversely affect the voting power of the
holders of common stock. We have no present plans to issue any shares of
preferred stock.
DELAWARE LAW AND OUR CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS
Akamai is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for three years after the date of the transaction in which the
person became an interested stockholder, unless the business combination is
approved in a prescribed manner. A "business combination" includes mergers,
asset sales and other transactions resulting in a financial benefit to the
interested stockholder. An "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years did own, 15% or more
of the corporation's voting stock.
Akamai's certificate of incorporation and by-laws to be effective on the
closing of this offering provide:
- That the Board of Directors be divided into three classes, as nearly
equal in size as possible, with no class having more than one director
more than any other class, with staggered three-year terms;
- That directors may be removed only for cause by the vote of the holders
of at least 66% of the shares of our capital stock entitled to vote; and
48
<PAGE> 50
- That any vacancy on the Board of Directors, however occurring, including
a vacancy resulting from an enlargement of the Board, may only be filled
by vote of a majority of the directors then in office.
The classification of the Board of Directors and the limitations on the
removal of directors and filling of vacancies could make it more difficult for a
third party to acquire, or discourage a third party from acquiring, Akamai.
The certificate of incorporation and by-laws to be effective on the closing
of this offering also provide that, after the closing of this offering:
- Any action required or permitted to be taken by the stockholders at an
annual meeting or special meeting of stockholders may only be taken if it
is properly brought before such meeting and may not be taken by written
action in lieu of a meeting; and
- Special meetings of the stockholders may only be called by the Chairman
of the Board of Directors, the President, or by the Board of Directors.
Our by-laws will also provide that, in order for any matter to be
considered "properly brought" before a meeting, a stockholder must comply
with requirements regarding advance notice to us.
These provisions could delay until the next stockholders' meeting
stockholder actions which are favored by the holders of a majority of our
outstanding voting securities. These provisions may also discourage another
person or entity from making a tender offer for our common stock, because such
person or entity, even if it acquired a majority of our outstanding voting
securities, would be able to take action as a stockholder only at a duly called
stockholders meeting, and not by written consent.
Delaware law provides that the vote of a majority of the shares entitled to
vote on any matter is required to amend a corporation's certificate of
incorporation or by-laws, unless a corporation's certificate of incorporation or
by-laws, as the case may be, requires a greater percentage. Our certificate of
incorporation requires the vote of the holders of at least 75% of the shares of
our capital stock entitled to vote to amend or repeal any of the foregoing
provisions of our certificate of incorporation. Generally, our by-laws may be
amended or repealed by a majority vote of the Board of Directors or the holders
of a majority of the shares of our capital stock issued and outstanding and
entitled to vote. Changes to our by-laws regarding special meetings of
stockholders, written actions of stockholders in lieu of a meeting, and the
election, removal and classification of members of the Board of Directors
require the vote of the holders of at least 75% of the shares of our capital
stock entitled to vote. The stockholder vote would be in addition to any
separate class vote that might in the future be required pursuant to the terms
of any series preferred stock that might be then outstanding.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our certificate of incorporation provides that our directors and officers
shall be indemnified by us except to the extent prohibited by Delaware law. This
indemnification covers all expenses and liabilities reasonably incurred in
connection with their services for or on behalf of us. In addition, our
certificate of incorporation provides that our directors will not be personally
liable for monetary damages to us or to our stockholders for breaches of their
fiduciary duty as directors, unless they violated their duty of loyalty to us or
our stockholders, acted in bad faith, knowingly or intentionally violated the
law, authorized illegal dividends or redemptions or derived an improper personal
benefit from their action as directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is BankBoston, N.A.
49
<PAGE> 51
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 91,441,851 shares of common
stock outstanding, assuming no exercise of outstanding options. Of these shares,
the shares to be sold in this offering will be freely tradable without
restriction or further registration under the Securities Act, except that any
shares purchased by our affiliates, as that term is defined in Rule 144 under
the Securities Act, may generally only be sold in compliance with the
limitations of Rule 144 described below. The remaining 82,441,851 shares of
common stock are "restricted securities" under Rule 144. Generally, restricted
securities that have been owned for at least two years may be sold immediately
after the completion of this offering and restricted securities that have been
owned for at least one year may be sold 90 days after the completion of this
offering.
SALES OF RESTRICTED SHARES
In general, under Rule 144, stockholders, including our affiliates, who
have beneficially owned shares for at least one year are entitled to sell,
within any three-month period, a number of these shares that does not exceed the
greater of one percent of the then outstanding shares of common stock and the
average weekly trading volume in the common stock in the over-the-counter market
during the four calendar weeks preceding the date on which notice of such sale
is filed, provided requirements concerning availability of public information,
manner of sale and notice of sale are satisfied. In addition, our affiliates
must comply with the restrictions and requirements of Rule 144, other than the
one-year holding period requirement, in order to sell shares of common stock
which are not restricted securities.
Under Rule 144(k), a stockholder who is not an affiliate and has not been
an affiliate for at least three months prior to the sale and who has
beneficially owned shares for at least two years may sell these shares without
compliance with the foregoing requirements. In meeting the holding periods
described above, a stockholder can include the holding periods of a prior owner
who was not an affiliate. The holding periods described above do not begin until
the stockholder pays the full purchase price or other consideration. Rule 701
provides that currently outstanding shares of common stock acquired under our
employee compensation plans may be sold beginning 90 days after the date of this
prospectus by stockholder other than affiliates subject only to the manner of
sale provisions of Rule 144 and by affiliates under Rule 144 without compliance
with its one-year holding period requirement.
STOCK OPTIONS
At September 30, 1999, approximately 12,000 shares of common stock were
issuable pursuant to vested options granted under our 1998 Stock Incentive Plan,
none of which shares are subject to lock-up agreements with the underwriters.
We intend to file a registration statement on Form S-8 under the Securities
Act within 180 days after the date of this prospectus, to register up to
15,114,900 shares of common stock issuable under our 1998 Stock Incentive Plan,
including the 11,236,650 shares of common stock subject to outstanding options
as of September 30, 1999. We expect this registration statement to become
effective upon filing.
LOCK-UP AGREEMENTS
Akamai and our executive officers, directors and other securityholders have
entered into lock-up agreements with the underwriters. Without the prior written
consent of Morgan Stanley & Co. Incorporated, none of us will, during the period
ending 180 days after the date of this prospectus, (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any shares of common
stock or any securities convertible into or exchangeable for common stock, or
(2) enter into any swap or other arrangement that transfers to another, in whole
or in part, any of the economic consequences of ownership of the common stock,
regardless of whether any such transactions described in clause (1) or (2) of
this paragraph is to be settled by delivery of such common stock or such other
securities, in cash or otherwise. In addition, for a period of 180 days from the
date of this prospectus, except as required by law, we have agreed not to
consent to any offer for sale, sale or other disposition, or any transaction
which is designed or
50
<PAGE> 52
could be expected, to result in, the disposition by any person, directly or
indirectly, of any shares of common stock without the prior written consent of
Morgan Stanley & Co. Incorporated except that we may, without consent, grant
options and sell shares pursuant to our stock plans.
The underwriters intend to enter into similar lock-up agreements for up to
180 days with those individuals and entities who purchase approximately 89% of
the shares under our directed share program.
REGISTRATION RIGHTS
After this offering, the holders of approximately 68,463,019 shares of
common stock and the holders of warrants to purchase approximately 2,077,191
shares of common stock will be entitled to rights with respect to the
registration of these shares under the Securities Act. If we propose to register
any of our securities under the Securities Act, either for our own account or
for the account of other security holders exercising registration rights, these
holders are entitled to notice of such registration and are entitled to include
shares of common stock. Additionally, they are entitled to demand registration
rights pursuant to which they may require us on up to five occasions to file a
registration statement under the Securities Act at our expense. We are required
to use our best efforts to effect any such registration. These registration
rights are subject to the right of the underwriters of an offering to limit the
number of shares included in such registration and our right not to effect a
requested registration within 180 days following an offering of our securities
pursuant to a registration statement in connection with an underwritten public
offering, including this offering. Further, holders may require us to file
registration statements on Form S-3 at our expense. These registration rights
are subject to our right not to effect, no more than once during any 12-month
period, a requested registration if the registration would interfere with an
unforeseen securities or business transaction.
51
<PAGE> 53
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement dated the date hereof, the underwriters named below, for whom Morgan
Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation,
Salomon Smith Barney Inc. and Thomas Weisel Partners LLC are acting as
representatives, have severally agreed to purchase, and we have agreed to sell
to them, the respective number of shares of common stock set forth opposite the
names of the underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated........................... 3,690,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 1,845,000
Salomon Smith Barney Inc.................................... 1,845,000
Thomas Weisel Partners LLC.................................. 820,000
Adams, Harkness & Hill, Inc................................. 100,000
Credit Suisse First Boston Corporation...................... 100,000
Dain Rauscher Wessels, a division of Dain Rauscher 100,000
Incorporated..............................................
First Union Securities, Inc................................. 100,000
Hambrecht & Quist LLC....................................... 100,000
Edward D. Jones & Co., L.P.................................. 100,000
Charles Schwab & Co., Inc................................... 100,000
Soundview Technology Group, Inc............................. 100,000
---------
Total............................................. 9,000,000
=========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from us and subject to prior sale. The underwriting agreement provides
that the obligations of the several underwriters to pay for and accept delivery
of the shares of common stock offered in this offering are subject to customary
closing conditions. The underwriters are obligated to take and pay for all of
the shares of common stock offered in this offering.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the initial public offering price set forth on
the cover page of this prospectus and part to dealers at a price that represents
a concession not in excess of $1.18 per share under the initial public offering
price. Any underwriters may allow, and the dealers may reallow, a concession not
in excess of $.10 per share to other underwriters or to other dealers. After the
initial offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives of the
underwriters.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to an aggregate of 2,350,000 shares of common stock
offered in this offering under a directed share program. We currently expect
that 500,000 of these shares will be offered to directors, officers, employees,
business associates and related persons of Akamai, and that 1,450,000 of these
shares will be offered to Internet-related companies, including strategic
network, technology and content providers, with whom we have or may seek to
establish a business relationship. We currently expect the remaining 400,000
shares under the directed share program to be offered to Baker Communications
Fund, L.P., one of our stockholders. The number of shares of common stock
available for sale to the general public will be reduced to the extent such
individuals or entities purchase such reserved shares. Any reserved shares which
are not so purchased will be offered by the underwriters to the general public
on the same basis as the other shares of common stock offered by the Prospectus
for this offering.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "AKAM."
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<PAGE> 54
Akamai, our directors and executive officers and substantially all other
stockholders are expected to agree that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the underwriters, during the
period ending 180 days after the date of this prospectus, he, she or it will
not, directly or indirectly:
- Offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
- Enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock,
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering if the syndicate repurchases previously distributed
shares of common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities and may
end any of these activities at any time.
We and the underwriters have agreed to indemnify each other against
liabilities in connection with this offering, including liabilities under the
Securities Act. The underwriters have agreed to reimburse certain of Akamai's
expenses incurred in this offering.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners has been named as a lead or co-manager on 56 filed
public offerings of equity securities, of which 31 have been completed, and has
acted as a syndicate member in an additional 27 public offerings of equity
securities. Thomas Weisel Partners does not have any material relationship with
us or any of our officers, directors or other controlling persons, except with
respect to its contractual relationship with us pursuant to the underwriting
agreement entered into in connection with this offering.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the shares of
common stock. Consequently, the public offering price for the shares of common
stock was determined by negotiations between Akamai and the representatives of
the underwriters. Among the factors considered in determining the public
offering price were:
- Our record of operations, our current financial position and future
prospects;
- The experience of our management;
- Sales, earnings and other financial and operating information in recent
periods; and
- The price-earnings ratios, price-sales ratios, market prices of
securities and financial and operating information of companies engaged
in activities similar to ours.
53
<PAGE> 55
LEGAL MATTERS
The validity of the shares of common stock we are offering will be passed
upon for us by Hale and Dorr LLP, Boston, Massachusetts. Legal matters in
connection with this offering will be passed upon for the underwriters by Ropes
& Gray, Boston, Massachusetts.
EXPERTS
The financial statements as of December 31, 1998 and for the period from
inception (August 20, 1998) to December 31, 1998 included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
we propose to sell in this offering. This prospectus, which constitutes part of
the registration statement, does not contain all of the information set forth in
the registration statement. For further information about us and the common
stock we propose to sell in this offering, we refer you to the registration
statement and the exhibits and schedules filed as a part of the registration
statement. Statements contained in this prospectus as to the contents of any
contract or other document filed as an exhibit to the registration statement are
not necessarily complete. If a contract or document has been filed as an exhibit
to the registration statement, we refer you to the copy of the contract or
document that we have filed. You may inspect the registration statement,
including exhibits, without charge at the principal office of the Securities and
Exchange Commission in Washington, D.C. You may inspect and copy the same at the
public reference facilities maintained by the Securities and Exchange Commission
at 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549,
and at the Commission's regional offices located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade
Center, Suite 1300, New York, New York 10048. You can also obtain copies of this
material at prescribed rates by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the
Securities and Exchange Commission maintains a website at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission.
54
<PAGE> 56
AKAMAI TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements:
Report of Independent Accountants......................... F-2
Balance Sheets............................................ F-3
Statements of Operations.................................. F-5
Statements of Convertible Preferred Stock and
Stockholders' Deficit.................................. F-6
Statements of Cash Flows.................................. F-7
Notes to Financial Statements............................. F-8
</TABLE>
F-1
<PAGE> 57
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Akamai Technologies, Inc.:
In our opinion, the accompanying balance sheet and the related statements
of operations, cash flows and convertible preferred stock and stockholders'
deficit present fairly in all material respects, the financial position of
Akamai Technologies, Inc. as of December 31, 1998 and the results of its
operations and its cash flows for the period from inception (August 20, 1998) to
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
August 10, 1999, except as to the stock
split described in Note 8 which is as of
September 8, 1999
F-2
<PAGE> 58
AKAMAI TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1999
------------ ------------- -------------
(NOTE 2)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,579,909 $ 91,758,732 $ 91,758,732
Short-term investments.................................... 224,880 224,880 224,880
Accounts receivable....................................... -- 553,804 553,804
Prepaid expenses and other current assets................. 56,589 1,043,858 1,043,858
----------- ------------ ------------
Total current assets............................... 6,861,378 93,581,274 93,581,274
Property and equipment, net (Note 4)........................ 1,522,980 12,793,579 12,793,579
Other assets................................................ -- 3,126,179 3,126,179
Intangible assets, net...................................... 481,282 446,391 446,391
----------- ------------ ------------
Total assets....................................... $ 8,865,640 $109,947,423 $109,947,423
=========== ============ ============
LIABILITIES, CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses..................... $ 665,483 $ 6,158,376 $ 6,158,376
Accrued payroll and benefits.............................. 27,514 2,192,317 2,192,317
Accrued interest.......................................... -- 904,110 904,110
Current portion of obligations under capital lease and
equipment loan.......................................... 12,350 480,309 480,309
----------- ------------ ------------
Total current liabilities.......................... 705,347 9,735,112 9,735,112
Obligations under capital leases and equipment loan, net of
current portion........................................... 24,859 838,041 838,041
Senior subordinated notes (Note 5).......................... -- 11,416,562 11,416,562
----------- ------------ ------------
Total long-term liabilities........................ 24,859 12,254,603 12,254,603
----------- ------------ ------------
Total liabilities.................................. 730,206 21,989,715 21,989,715
----------- ------------ ------------
Convertible preferred stock:
Series A convertible preferred stock; $0.01 par value;
1,100,000 shares authorized, 1,100,000 issued and
outstanding at December 31, 1998 and September 30, 1999,
no shares issued and outstanding pro forma September 30,
1999 (liquidation preference $8,360,000 at September 30,
1999)..................................................... 8,283,758 8,296,667 --
Series B convertible preferred stock; $0.01 par value;
1,327,500 shares authorized, 1,327,500 issued and
outstanding at September 30, 1999; no shares issued and
outstanding pro forma September 30, 1999 (liquidation
preference $20,723,407 at September 30, 1999)............. -- 20,609,708 --
Series C convertible preferred stock; $0.01 par value;
145,195 shares authorized, none issued and outstanding at
September 30, 1999; no shares issued and outstanding pro
forma September 30, 1999.................................. -- -- --
Series D convertible preferred stock; $0.01 par value;
685,194 shares authorized, 685,194 issued and outstanding
at September 30, 1999; no shares issued and outstanding
pro forma September 30, 1999 (liquidation preference
$12,771,233 at September 30, 1999)........................ -- 12,747,589 --
Series E convertible preferred stock; $0.01 par value;
1,867,480 shares authorized, 1,867,480 issued and
outstanding at September 30, 1999; no shares issued and
outstanding pro forma September 30, 1999 (liquidation
preference $49,591,503 at September 30, 1999)............. -- 49,558,067 --
Series F convertible preferred stock; $0.01 par value;
985,545 shares authorized, 985,545 issued and outstanding
at September 30, 1999; no shares issued and outstanding
pro forma September 30, 1999 (liquidation preference
$15,032,872 at September 30, 1999)........................ -- 15,020,545 --
----------- ------------ ------------
Total convertible preferred stock (Note 7)......... 8,283,758 106,232,576 --
----------- ------------ ------------
</TABLE>
F-3
<PAGE> 59
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1999
------------ ------------- -------------
(NOTE 2)
(UNAUDITED)
<S> <C> <C> <C>
Commitments and contingencies (Note 6)
Stockholders' equity (deficit) (Note 8):
Common stock, $0.01 par value; 300,000,000 shares
authorized; 34,565,310 issued and outstanding at
December 31, 1998; 44,832,810 shares issued and
outstanding at September 30, 1999; 82,351,851 shares
issued and outstanding pro forma September 30, 1999..... 345,653 448,328 823,519
Additional paid-in capital................................ 2,034,248 48,106,288 153,963,673
Notes receivable from officers for stock.................. -- (5,723,500) (5,723,500)
Deferred compensation..................................... (1,505,975) (31,759,351) (31,759,351)
Accumulated deficit....................................... (1,022,250) (29,346,633) (29,346,633)
----------- ------------ ------------
Total stockholders' equity (deficit)............... (148,324) (18,274,868) 87,957,708
----------- ------------ ------------
Total liabilities, convertible preferred stock and
stockholders' equity (deficit)................... $ 8,865,640 $109,947,423 $109,947,423
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 60
AKAMAI TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 20, 1998) NINE-MONTH
THROUGH PERIOD ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Revenue.................................................... $ -- $ 1,287,145
----------- ------------
Operating expenses:
Cost of service.......................................... 30,623 4,533,153
Engineering and development.............................. 228,553 5,373,737
Sales, general and administrative........................ 435,283 12,075,257
Equity related compensation.............................. 205,617 7,618,757
----------- ------------
Total operating expenses......................... 900,076 29,600,904
----------- ------------
Operating loss............................................. (900,076) (28,313,759)
Interest income............................................ 19,993 1,336,401
Interest expense........................................... (10,407) (1,347,025)
----------- ------------
Net loss................................................... (890,490) (28,324,383)
Dividends and accretion to preferred stock redemption
value.................................................... -- 1,644,826
----------- ------------
Net loss attributable to common stockholders............... $ (890,490) $(29,969,209)
=========== ============
Basic and diluted net loss per share....................... $ (0.06) $ (1.47)
Weighted average common shares outstanding................. 15,014,868 20,444,669
Pro forma basic and diluted net loss per share
(unaudited).............................................. $ (0.05) $ (0.59)
Pro forma weighted average common shares outstanding
(unaudited).............................................. 19,262,156 48,368,795
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 61
AKAMAI TECHNOLOGIES, INC.
STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (AUGUST 20, 1998) TO DECEMBER 31, 1998
AND THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE SERIES B CONVERTIBLE SERIES D CONVERTIBLE SERIES E CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
---------------------- ----------------------- --------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ---------- --------- ----------- ------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock to founders....
Issuance of common
stock for technology
license..............
Sales of restricted
common stock.........
Sale of Series A
convertible preferred
stock................ 1,100,000 $8,283,758
Amortization of
deferred
compensation.........
Net loss..............
--------- ----------
Balance at December
31, 1998............. 1,100,000 8,283,758
Sale of restricted
common stock.........
Sale of restricted
common stock in
exchange for notes...
Sale of Series B
convertible preferred
stock................ 1,327,500 $19,875,115
Sale of Series D
convertible preferred
stock................ 685,194 $12,475,000
Sale of Series E
convertible preferred
stock................ 1,867,480 48,966,282
Sale of Series F
convertible preferred
stock................
Dividends and
accretion to
preferred stock
redemption value..... 12,909 734,593 272,589 591,785
Issuance of
warrants.............
Deferred compensation
related to grant of
stock options........
Amortization of
deferred
compensation.........
Issuance of common
stock upon exercise
of stock options.....
Net loss..............
--------- ---------- --------- ----------- ------- ----------- --------- -----------
Balance at September
30, 1999............. 1,100,000 $8,296,667 1,327,500 $20,609,708 685,194 $12,747,589 1,867,480 $49,558,067
========= ========== ========= =========== ======= =========== ========= ===========
<CAPTION>
SERIES F CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------- --------------------- PAID-IN DEFERRED NOTES ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION RECEIVABLE DEFICIT
------- ----------- ---------- -------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock to founders.... 29,646,000 $296,460 $ (131,760)
Issuance of common
stock for technology
license.............. 682,110 6,821 $ 281,179
Sales of restricted
common stock......... 4,237,200 42,372 1,753,069 $ (1,711,591)
Sale of Series A
convertible preferred
stock................
Amortization of
deferred
compensation......... 205,616
Net loss.............. (890,490)
---------- -------- ----------- ------------ ------------
Balance at December
31, 1998............. 34,565,310 345,653 2,034,248 (1,505,975) (1,022,250)
Sale of restricted
common stock......... 1,980,000 19,800 895,200 (622,500)
Sale of restricted
common stock in
exchange for notes... 7,840,000 78,400 20,985,090 (15,339,990) $(5,723,500)
Sale of Series B
convertible preferred
stock................
Sale of Series D
convertible preferred
stock................
Sale of Series E
convertible preferred
stock................
Sale of Series F
convertible preferred
stock................ 985,545 14,987,595
Dividends and
accretion to
preferred stock
redemption value..... 32,950 (1,644,826)
Issuance of
warrants............. 3,901,828
Deferred compensation
related to grant of
stock options........ 21,909,643 (21,909,643)
Amortization of
deferred
compensation......... 7,618,757
Issuance of common
stock upon exercise
of stock options..... 447,500 4,475 25,105
Net loss.............. (28,324,383)
------- ----------- ---------- -------- ----------- ------------ ----------- ------------
Balance at September
30, 1999............. 985,545 $15,020,545 44,832,810 $448,328 $48,106,288 $(31,759,351) $(5,723,500) $(29,346,633)
======= =========== ========== ======== =========== ============ =========== ============
<CAPTION>
TOTAL
SHAREHOLDERS'
DEFICIT
-------------
<S> <C>
Issuance of common
stock to founders.... $ 164,700
Issuance of common
stock for technology
license.............. 288,000
Sales of restricted
common stock......... 83,850
Sale of Series A
convertible preferred
stock................
Amortization of
deferred
compensation......... 205,616
Net loss.............. (890,490)
------------
Balance at December
31, 1998............. (148,324)
Sale of restricted
common stock......... 292,500
Sale of restricted
common stock in
exchange for notes... --
Sale of Series B
convertible preferred
stock................
Sale of Series D
convertible preferred
stock................
Sale of Series E
convertible preferred
stock................
Sale of Series F
convertible preferred
stock................
Dividends and
accretion to
preferred stock
redemption value..... (1,644,826)
Issuance of
warrants............. 3,901,828
Deferred compensation
related to grant of
stock options........ --
Amortization of
deferred
compensation......... 7,618,757
Issuance of common
stock upon exercise
of stock options..... 29,580
Net loss.............. (28,324,383)
------------
Balance at September
30, 1999............. $(18,274,868)
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 62
AKAMAI TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION NINE-MONTH PERIOD
(AUGUST 20, 1998) ENDED
THROUGH DECEMBER 31, SEPTEMBER 30,
1998 1999
--------------------- -----------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................... $ (890,490) $(28,324,383)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization....................... 50,069 1,579,111
Amortization of discount on senior subordinated
notes and equipment loan.......................... -- 339,939
Amortization of deferred compensation............... 205,617 7,618,757
Loss on disposal of fixed asset..................... -- 33,006
Changes in operating assets and liabilities:
Accounts receivable............................... -- (553,804)
Prepaid expenses and other assets................. (56,588) (4,119,218)
Accounts payable and accrued expenses............. 692,997 8,561,806
----------- ------------
Net cash provided by (used in) operating activities...... 1,605 (14,864,786)
----------- ------------
Cash flows from investing activities:
Purchases of property and equipment.................... (1,522,981) (12,767,684)
Purchases of short-term investments.................... (224,880) --
----------- ------------
Net cash used in investing activities.................... (1,747,861) (12,767,684)
----------- ------------
Cash flows from financing activities:
Proceeds from equipment financing loan................. -- 1,500,000
Payment on capital leases and equipment financing
loan................................................ (3,943) (284,779)
Proceeds from the issuance of senior subordinated
notes, net.......................................... -- 14,970,000
Proceeds from issuance of Series A convertible
preferred stock, net................................ 8,283,758 --
Proceeds from issuance of Series B convertible
preferred stock, net................................ -- 19,875,115
Proceeds from issuance of Series D convertible
preferred stock, net................................ -- 12,475,000
Proceeds from issuance of Series E convertible
preferred stock, net................................ -- 48,966,282
Proceeds from issuance of Series F convertible
preferred stock, net................................ -- 14,987,595
Proceeds from exercise of stock options................ -- 29,580
Proceeds from issuance of restricted common stock...... 46,350 292,500
----------- ------------
Net cash provided by financing activities................ 8,326,165 112,811,293
----------- ------------
Net increase in cash and equivalents..................... 6,579,909 85,178,823
Cash and cash equivalents, beginning of the period....... -- 6,579,909
----------- ------------
Cash and cash equivalents, end of the period............. $ 6,579,909 $ 91,758,732
=========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE> 63
AKAMAI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS
UNAUDITED)
1. NATURE OF BUSINESS:
Akamai Technologies, Inc. ("Akamai" or the "Company") provides a global
delivery service for Internet content that improves Web site speed and
reliability and protects against Web site crashes due to demand overloads. The
Company's FreeFlow service, which is marketed to large businesses and to other
businesses with an internet focus, delivers customers' web content through a
worldwide server network by locating the content geographically closer to their
users.
The Company has experienced substantial net losses since its inception and,
as of September 30, 1999, had an accumulated deficit of $29.3 million. Such
losses and accumulated deficit resulted from the Company's lack of substantial
revenue and costs incurred in the development of the Company's service and in
the establishment of the Company's network. For the foreseeable future, the
Company expects to continue to experience significant growth in its operating
expenses in order to execute its current business plan, particularly engineering
and development and sales, general and administrative expenses.
The Company has a single operating segment, Internet content delivery
service. The Company has no organizational structure dictated by product lines,
geography or customer type. All revenue earned to date have been generated from
U.S. based customers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
Cash equivalents consist of cash held in bank deposit accounts and
short-term investments with remaining maturities of three months or less at the
date of purchase.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is computed on a straight-line basis over estimated useful lives of
three to five years. Leasehold improvements are depreciated over the shorter of
related lease terms or the estimated useful lives. Property and equipment
acquired under capital lease is depreciated over the shorter of related lease
terms or the useful life of the asset. Upon retirement or sale, the costs of the
assets disposed and the related accumulated depreciation are removed from the
accounts and any resulting gain or loss is included in the determination of
income. Repairs and maintenance costs are expensed as incurred.
INTANGIBLE ASSETS
Intangible assets consist primarily of the cost of acquired license rights
to content delivery technology. Intangible assets are amortized using the
straight-line method over ten years, based on the estimated useful life. The
carrying value of the intangible assets is reviewed on a quarterly basis for the
existence of facts or circumstances both internally and externally that may
suggest impairment. To date, no such impairment has occurred. The Company
determines whether an impairment has occurred based on gross expected future
cash flows and measures the amount of the impairment based on the related future
estimated discounted cash flows. The cash flow estimates used to determine the
impairment, if any, contain management's best estimates, using appropriate and
customary assumptions and projections at that time.
REVENUE RECOGNITION
The Company derives revenue from the sale of its FreeFlow service under
contracts with terms typically ranging from three to 12 months. The Company
recognizes revenue based on fees for the amount of Internet content delivered
through the Company's service. These contracts also provide for minimum monthly
fees. Revenue may also be derived from one-time implementation fees which are
recognized ratably over the period of the related contracts.
F-8
<PAGE> 64
AKAMAI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS
UNAUDITED)
COSTS OF SERVICE
Cost of service consists of depreciation of network equipment used in
providing the Company's FreeFlow service, fees paid to network providers for
bandwidth and monthly fees for housing the Company's servers in third-party
network data centers. The Company enters into contracts for bandwidth with
third-party network providers with terms typically ranging from six months to
three years. These contracts commit the Company to minimum monthly fees plus
additional fees for bandwidth usage above the contracted level. Under the Akamai
accelerated networks program, the Company provides Akamai servers without charge
to smaller Internet service providers which, in turn, provide the Company with
rack space for the Company's servers and bandwidth to deliver content. The
Company does not recognize as revenue any value to the Internet service
providers associated with the use of the Company's servers and does not expense
the value of the rack space and bandwidth received.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic value method as prescribed by Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, no compensation expense is recorded for options
issued to employees in fixed amounts and with fixed exercise prices at least
equal to the fair market value of the Company's common stock at the date of
grant. The Company has adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," through disclosure only (Note 9). All stock-based awards to
nonemployees are accounted for at their fair value in accordance with SFAS No.
123.
ENGINEERING AND DEVELOPMENT COSTS
Engineering and development costs consist primarily of salaries and related
personnel costs for the design, deployment, testing and enhancement of the
Company's service and the Company's network.
Costs incurred in the engineering and development of the Company's service
are expensed as incurred, except for certain software development costs. Costs
associated with the development of computer software are expensed prior to the
establishment of technological feasibility (as defined by SFAS No. 86,
"Accounting for the costs of Computer Software to be Sold, Leased, or Otherwise
Marketed") and capitalized thereafter. The Company also has adopted Statement of
Position ("SOP") 98-1, which requires computer software costs associated with
internal use software to be charged to operations as incurred until certain
capitalization criteria are met. Costs eligible for capitalization under SFAS
No. 86 and SOP 98-1 have been insignificant to date.
USE OF ESTIMATES
The presentation 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 amount of revenue and expenses during the reporting
period. Actual results could differ from those estimates. Significant estimates
in these financial statements include valuation of deferred tax assets and
useful lives of depreciable assets.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. At December 31, 1998 and September 30, 1999, the Company
had cash balances at certain financial institutions in excess of federally
insured limits. However,
F-9
<PAGE> 65
AKAMAI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS
UNAUDITED)
the Company does not believe that it is subject to unusual credit risk beyond
the normal credit risk associated with commercial banking relationships.
As of September 30, 1999, four customers accounted for 33%, 26%, 17% and
13% of accounts receivable. Three of these customers also accounted for 45%, 18%
and 11% of total revenue for the nine-month period ended September 30, 1999.
INCOME TAXES
Deferred taxes are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse. Valuation
allowances are provided if, based upon the weight of available evidence, it is
more likely than not some or all of the deferred tax assets will not be
realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, which include
cash equivalents, accounts receivable, notes receivable, accounts payable,
accrued expenses and notes payable approximate their fair values at December 31,
1998 and September 30, 1999.
OTHER COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income,"
which established standards for reporting and displaying comprehensive income
and its components in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive loss is equal to net
loss, for the period from inception (August 20, 1998) to December 31, 1998 and
the nine-month period ended September 30, 1999.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company, to date, has not engaged in derivative and hedging activities, and
accordingly does not believe that the adoption of SFAS No. 133 will have a
material impact on the financial reporting and related disclosures of the
Company. The Company will adopt SFAS No. 133 as required by SFAS No. 137,
"Deferral of the Effective Date of the FASB Statement No. 133," in fiscal year
2001.
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Data and information as of September 30, 1999 and for the nine months ended
September 30, 1999 is unaudited. In the opinion of Akamai's management, the
September 30, 1999 unaudited interim financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations for that
period. The results of operations for the nine-month period ended September 30,
1999 are not necessarily indicative of the results of operations for the year
ending December 31, 1999.
PRO FORMA BALANCE SHEET (UNAUDITED)
Upon the closing of the Company's initial public offering, all of the
outstanding shares of convertible preferred stock as of September 30, 1999 will
automatically convert into approximately 37,519,041 shares of
F-10
<PAGE> 66
AKAMAI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS
UNAUDITED)
common stock. The unaudited pro forma presentation of the balance sheet has been
prepared assuming the conversion of all shares of convertible preferred stock
into common stock at September 30, 1999. All references to pro forma information
in the notes to the financial statements are unaudited.
3. NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE:
Basic net loss per share is computed using the weighted average number of
common shares outstanding during the period. Dilutive net loss per share is
computed using the weighted average number of common shares outstanding during
the period, plus the dilutive effect of potential common stock. Potential common
stock consists of convertible preferred stock, unvested restricted common stock,
stock options and warrants. During the period from inception (August 20, 1998)
to December 31, 1998 and the nine-month period ended September 30, 1999, options
to purchase 1,287,000 and 11,236,650 shares of common stock, respectively,
unvested restricted common stock of 18,049,104 and 20,268,742, respectively,
preferred stock convertible into 19,800,000 and 37,519,041 shares of common
stock, respectively, and warrants to purchase none and 2,075,100 shares of
common stock, respectively, were excluded from the calculation of earnings per
share since their inclusion would be antidilutive. Pro forma basic and diluted
net loss per share have been calculated assuming the conversion of all
outstanding shares of preferred stock into common stock, as if the shares had
converted immediately upon their issuance. Accordingly, net loss has not been
adjusted for the accrued dividends for preferred stock in the calculation of pro
forma loss per share.
The following is a calculation of pro forma net loss per share (unaudited):
<TABLE>
<CAPTION>
PERIOD
FROM INCEPTION NINE-MONTH PERIOD
(AUGUST 20, 1998) TO ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
-------------------- ------------------
<S> <C> <C>
Basic and diluted:
Net loss............................................ $ (890,490) $(28,324,383)
=========== ============
Weighted average number of common shares............ 15,014,868 20,444,669
Weighted average assumed number of common shares
upon conversion of preferred stock................ 4,247,288 27,924,126
----------- ------------
Total weighted average number of shares used in
computing pro forma net loss per share............ 19,262,156 48,368,795
=========== ============
Basic and diluted pro forma net loss per common
share............................................. $ (0.05) $ (0.59)
=========== ============
</TABLE>
F-11
<PAGE> 67
AKAMAI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS
UNAUDITED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
DECEMBER 31, SEPTEMBER 30, USEFUL
1998 1999 LIVES IN YEARS
------------ ------------- --------------
<S> <C> <C> <C>
Computer and networking equipment............ $1,384,582 $12,415,007 3
Purchased software........................... -- 332,568 3
Furniture and fixtures....................... 104,942 711,027 5
Office equipment............................. 44,608 429,257 3
Leasehold improvements....................... 30,000 478,966 5
---------- -----------
1,564,132 14,366,825
Accumulated depreciation and amortization.... (41,152) (1,573,246)
---------- -----------
Property and equipment, net.................. $1,522,980 $12,793,579
========== ===========
</TABLE>
Depreciation and amortization expense on property and equipment for the
period from inception (August 20, 1998) to December 31, 1998 and the nine-month
period ended September 30, 1999 was $41,152 and $1,538,450, respectively.
Equipment under capital leases at:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, DEPRECIABLE
1998 1999 LIVES IN YEARS
------------ ------------- --------------
<S> <C> <C> <C>
Office equipment............................. $40,056 $114,427 3
Accumulated amortization..................... (1,873) (17,711)
------- --------
Capital leases, net.......................... $38,183 $ 96,716
======= ========
</TABLE>
5. SENIOR SUBORDINATED NOTES:
During April 1999, Akamai entered into note and warrant purchase agreements
with private investors. Under the agreements, Akamai issued 15% subordinated
demand notes payable in the aggregate amount of $15,000,000 due in May 2004. In
connection with the notes, the Company also issued warrants to purchase an
aggregate of 2,002,836 shares of common stock at $2.50 per share in exchange for
cash. These warrants expire in May 2004. The fair value of the warrants at the
time of issuance was estimated to be approximately $3,876,477, which was
recorded as additional paid-in capital and reduced the carrying value of the
notes. The fair value was estimated using the Black-Scholes model with the
following assumptions: dividend yield of 0%, volatility of 100%, risk free
interest rate of 5.1% and an expected life of five years. The discount on the
notes is being amortized over the term of the notes. For the nine months ended
September 30, 1999, interest expense of $323,039 related to the fair value of
the warrants was recognized.
6. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases its facilities and certain equipment under operating
leases. Rent expense for the period from inception (August 20, 1998) to December
31, 1998 was $36,023. The leases expire at various dates through April 30, 2004
and generally require the payment of real estate taxes, insurance, maintenance
and operating costs. The Company also leases certain equipment under capital
leases. The minimum
F-12
<PAGE> 68
AKAMAI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS
UNAUDITED)
aggregate future obligations under noncancelable leases and equipment loans as
of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL
LEASES
(INCLUDING
OPERATING EQUIPMENT
YEAR ENDING LEASES LOAN)
- ----------- ---------- ----------
<S> <C> <C>
1999........................................................ $ 232,098 $ 16,641
2000........................................................ 217,124 16,641
2001........................................................ 217,124 12,323
2002........................................................ 217,124 --
2003........................................................ 72,375 --
---------- ----------
Total....................................................... $ 955,845 45,605
==========
Less interest............................................... (8,396)
----------
Total principal obligation.................................. 37,209
Less current portion........................................ (12,350)
----------
Noncurrent portion of principal obligation.................. $ 24,859
==========
</TABLE>
During the nine months ended September 30, 1999, the Company entered into
additional operating leases that expire at various dates through January 17,
2006. As a result, for the years ending December 31, 2000, 2001 and 2002,
minimum future obligations under noncancelable leases are approximately
$4,437,000, $5,113,000 and $5,261,000, respectively. The Company also obtained
additional equipment under capital leases and an equipment loan during the nine
months ended September 30, 1999. As a result, minimum future obligations under
capital leases and the equipment loan for the years ending December 31, 2000,
2001 and 2002 are $594,000, $590,000 and $173,000, respectively.
EQUIPMENT LOAN
The Company received an equipment loan from its bank for $1.5 million on
January 26, 1999. The equipment loan is repayable in monthly installments of
$46,318 for 36 months, with a lump sum payment of $112,500 due in February 2002.
In connection with the equipment loan, the Company issued warrants for the
purchase of 72,264 shares of common stock at a purchase price of $0.42. The
warrants were exercisable upon issuance and expire on January 26, 2002. The
Company estimated the value of the warrants to be $25,351 at the date of
issuance, which has been recorded as additional paid-in capital and reduced the
carrying value of the equipment loan. The fair value was estimated using the
Black-Scholes model with the following assumptions: dividend yield of 0%,
volatility of 100%, risk free interest rate of 5.1% and an expected life of
three years. The discount on the note is being amortized over the estimated life
of the loan.
BANDWIDTH USAGE AND CO-LOCATION COSTS
The Company has commitments for bandwidth usage and co-location with
various network service providers. For the years ending December 31, 1999, 2000,
2001 and 2002, the minimum commitments are approximately $5,742,000, $5,664,000,
$3,385,000, and $1,149,000, respectively. Some of these agreements may be
amended to either increase or decrease the minimum commitments during the life
of the contract.
F-13
<PAGE> 69
AKAMAI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS
UNAUDITED)
CONTINGENCY (UNAUDITED)
In April 1999, prior to the filing of the registration statement covering
the shares of the Company's common stock being sold in the Company's anticipated
initial public offering, the Company entered into an agreement with Baker
Communications Fund, L.P. ("Baker") granting Baker an option to purchase up to
five percent of the shares of the Company's common stock sold by the Company in
its initial public offering. There is a substantial likelihood that this
agreement constitutes an offer to purchase shares of common stock in a public
offering prior to the filing of a registration statement in violation of the
requirements of the Securities Act of 1933. The Company has requested that the
underwriters reserve for sale to Baker, at the initial public offering price, up
to an aggregate of 400,000 shares of the Company's common stock.
If a court determines that a violation of the Securities Act of 1933
occurred, Baker would have the right, for a period of one year from the date of
its purchase of common stock in the Company's anticipated initial public
offering, to obtain recovery of the consideration paid in connection with its
purchase of common stock offered in violation of the Securities Act of 1933 or,
if Baker had already sold the stock, sue the Company for damages resulting from
its purchase of common stock. As a result, these shares may be reclassified as
redeemable common stock on the balance sheet of future financial statements.
These damages could total up to approximately $10.4 million plus interest, based
on the initial public offering price of $26.00 per share, if Baker seeks
recovery or damages after an entire loss of its investment. If this occurs, the
Company's business, results of operations and financial condition will be
harmed.
7. CONVERTIBLE PREFERRED STOCK:
The authorized capital stock of the Company consists of (i) 300,000,000
shares of voting common stock ("Common Stock") authorized for issuance with a
par value of $0.01 and (ii) 10,000,000 shares of preferred stock with a par
value of $0.01, of which 1,100,000 shares are designated as Series A convertible
preferred stock ("Series A preferred stock"), 1,327,500 shares are designated as
Series B convertible preferred stock ("Series B preferred stock"), 145,195
shares are designated as Series C convertible preferred stock ("Series C
preferred stock"), 685,194 shares are designated as Series D convertible
preferred stock ("Series D preferred stock"), 1,867,480 shares are designated as
Series E convertible preferred stock ("Series E preferred stock") and 985,545
shares are designated as Series F convertible preferred stock ("Series F
preferred stock").
SERIES A CONVERTIBLE PREFERRED STOCK
In November and December 1998, the Company issued 1,100,000 shares of
Series A preferred stock at $7.60 per share to investors for total consideration
of $8,283,758 (net of offering costs of $76,242).
The holders of the Series A preferred stock have voting rights equivalent
to the number of shares of common stock into which their shares of Series A
preferred stock convert. Dividends must be paid when dividends are declared on
common stock. The Series A preferred stock is convertible at any time by the
holders, at the then applicable conversion rate (1-to-1 on the date of issuance;
18.838-to-1 at September 30, 1999) adjusted for certain events including stock
splits and dividends. The Series A preferred stock is redeemable, subject to the
approval of the holders of 66% of the then outstanding shares of Series A
preferred stock beginning November 23, 2003 if the Company has not made a
qualified initial public offering of its common stock. Upon liquidation, holders
of Series A preferred stock are entitled to receive, out of funds then generally
available, $7.60 per share, plus any declared and unpaid dividends, thereon.
Following payment to holders of all other classes of preferred stock to which
the Series A preferred stock is subordinate, holders of Series A preferred stock
are then entitled to share in remaining available funds on an "as-if converted"
basis with holders of common stock.
F-14
<PAGE> 70
AKAMAI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS
UNAUDITED)
SERIES B CONVERTIBLE PREFERRED STOCK
In April 1999, the Company issued 1,327,500 shares of Series B preferred
stock at $15.066 per share to private investors for total consideration of
$19,875,115 (net of offering costs of $125,000). In addition, the Company issued
a warrant to purchase 145,195 shares of Series C preferred stock at an exercise
price of $34.436 per share which expires at the earlier of (i) December 31, 1999
and (ii) the date immediately prior to the consummation of a qualified initial
public offering.
The holders of Series B preferred stock have voting rights equivalent to
the number of shares of common stock into which their shares of Series B
preferred stock convert. Dividends accrue annually and are cumulative at a rate
of 8% of the original purchase price of $15.066 per share, on a per share basis.
Dividends will only be paid in the event of a liquidation or redemption, as
defined. The Series B preferred stock is convertible at any time by the holders,
at the then applicable conversion rate (1-to-1 on the date of issuance; 6-to-1
at September 30, 1999) adjusted for certain events including stock splits. The
Series B preferred stock is redeemable, as defined, subject to the approval of
the holders of 66% of the then outstanding shares of Series B preferred stock
beginning April 16, 2004 if the Company has not made a qualified initial public
offering of its common stock. Upon liquidation, holders of Series B preferred
stock are entitled to receive, out of funds then generally available, $15.066
per share, plus any accrued and unpaid dividends, thereon. Following payment to
holders of all other classes of preferred stock to which the Series B preferred
stock is subordinate, holders of Series B preferred stock are then entitled to
share in remaining available funds on an "as if converted" basis with holders of
common stock.
SERIES C CONVERTIBLE PREFERRED STOCK
In connection with the Series B preferred stock issuance, one holder of the
Series B preferred stock received the option to purchase 145,195 shares of
Series C preferred stock at the purchase price of $34.436 per share. The option
to purchase the Series C preferred stock expires upon the earlier of an initial
public offering or December 31, 1999. As of September 30, 1999, this option had
not been exercised by the holder.
The holders of the Series C preferred stock have voting rights equivalent
to the number of shares of common stock into which their shares of Series C
preferred stock convert. Dividends accrue annually and are cumulative at a rate
of 8% of the original purchase price of $34.436 per share, on a per share basis.
Dividends will only be paid in the event of a liquidation or redemption. The
Series C preferred stock is convertible at any time by the holders, at the then
applicable conversion rate (1-to-1 on the date of issuance; 6.256-to-1 at
September 30, 1999) adjusted for certain events including stock splits and
dividends subject to the approval of the holders of 66% of the then outstanding
shares of Series C preferred stock beginning April 5, 2003 if the Company has
not made a qualified initial public offering of its common stock. Upon
liquidation, holders of Series C preferred stock are entitled to receive, out of
funds generally available, $34.436 per share, plus any accrued and unpaid
dividends, thereon. Following payment to holders of all other classes of
preferred stock to which Series C is subordinate, holders of Series C preferred
stock are then entitled to share in remaining available funds on an "as if
converted" basis with holders of common stock.
SERIES D CONVERTIBLE PREFERRED STOCK
In June 1999, the Company issued 685,194 shares of Series D preferred stock
at $18.243 per share to private investors for total consideration of $12,475,000
(net of offering costs of $25,000).
The holders of Series D preferred stock have voting rights equivalent to
the number of shares of common stock into which their shares of Series D
preferred stock convert. Dividends accrue annually and are cumulative at a rate
of 8% of the original purchase price of $18.243 per share, on a per share basis.
Dividends will be paid only in the event of a liquidation or redemption, as
defined. The Series D preferred stock is
F-15
<PAGE> 71
AKAMAI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS
UNAUDITED)
convertible at any time by the holders, at the then applicable conversion rate
(1-to-1 on the date of issuance; 6-to-1 at September 30, 1999) adjusted for
certain events including stock splits and dividends. The Series D preferred
stock is redeemable, as defined, subject to the approval of the holder of 66% of
the then outstanding shares of Series D preferred stock.
The holder of the Series D preferred stock is also a customer of the
Company. In June 1999, the holder of the Series D preferred stock entered into a
services agreement with the Company at customary rates. The aggregate minimum
value of the services agreement is $12,360,000 through July 2000. Accounts
receivable included $303,795 from this customer at September 30, 1999. Revenue
recognized from this customer for the nine-month period ended September 30, 1999
was $303,795.
SERIES E CONVERTIBLE PREFERRED STOCK
In August 1999, the Company issued 1,867,480 shares of Series E preferred
stock at $26.239 per share to a private investor for total consideration of
$48,966,282 (net of offering costs of $34,526).
The holders of Series E preferred stock have voting rights equivalent to
the number of shares of common stock into which the shares of Series E preferred
stock convert. Dividends accrue annually and are cumulative at a rate of 8% of
the original purchase price of $26.239 per share, on a per share basis.
Dividends will be paid only in the event of a liquidation or redemption. The
Series E preferred stock is convertible at any time by the holders, at the then
applicable conversion rate (currently 2-to-1) adjusted for certain events such
as stock splits and dividends. The Series E preferred stock is redeemable,
subject to the approval of the holders of 66% of the then outstanding shares of
Series E preferred stock.
SERIES F CONVERTIBLE PREFERRED STOCK (UNAUDITED)
In September 20, 1999, the Company issued 985,545 shares of Series F
preferred stock at $15.22 per share to a private investor for total
consideration of $14,987,595 (net of offering costs of $12,400).
The holders of Series F preferred stock have voting rights equivalent to
the number of shares of common stock into which the shares of Series F preferred
stock convert. Dividends accrue annually and are cumulative at a rate of 8% of
the original purchase price of $15.22 per share, on a per share basis. Dividends
will be paid only in the event of a liquidation or redemption. The Series F
preferred stock is convertible at any time by the holders, at the then
applicable conversion rate (currently 1-to-1) adjusted for certain events such
as stock splits and dividends. The Series F preferred stock is redeemable,
subject to the approval of the holders of 66% of the then outstanding shares of
Series F preferred stock.
As of September 30, 1999, all outstanding shares of preferred stock will
automatically convert into shares of common stock upon the closing of the
anticipated public offering as follows:
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
------------
<S> <C>
Series A preferred stock.................................... 20,722,372
Series B preferred stock.................................... 7,965,000
Series C preferred stock.................................... --
Series D preferred stock.................................... 4,111,164
Series E preferred stock.................................... 3,734,960
Series F preferred stock.................................... 985,545
----------
37,519,041
==========
</TABLE>
F-16
<PAGE> 72
AKAMAI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS
UNAUDITED)
8. STOCKHOLDERS' DEFICIT:
STOCK SPLIT
On January 28, 1999, the Company effected a 3-for-1 stock split through a
stock dividend of common stock. On May 25, 1999, the Company effected a 3-for-1
stock split through a stock dividend of common stock. On September 8, 1999 the
Company effected a 2-for-1 stock split through a stock dividend of common stock.
All references to preferred and common stock share and per share amounts
including options and warrants to purchase common stock have been retroactively
restated to reflect the stock splits.
COMMON STOCK
The common stockholders are entitled to one vote per share. At September
30, 1999, the Company had reserved 51,739,130 shares of common stock, for future
issuance upon conversion of Series A preferred stock, Series B preferred stock,
Series C preferred stock, Series D preferred stock, Series E preferred stock,
Series F preferred stock and the exercise of warrants and stock options.
NOTES RECEIVABLE FROM OFFICERS FOR STOCK
In the connection with the issuance of restricted common stock, the Company
received full recourse notes receivable from the Chief Executive Officer,
President, Chief Financial Officer and the General Counsel of the Company in the
amounts of $1,980,000, $500,000, $2,619,750 and $623,750, respectively. These
notes bear interest at 5.3%, and are payable in full by March 26, 2009, May 18,
2009, July 23, 2009 and July 23, 2009, respectively.
9. STOCK PLANS:
1998 OPTION PLAN
In 1998, the Board of Directors adopted the 1998 Stock Incentive Plan (the
"1998 Option Plan") for the issuance of incentive and nonqualified stock options
and restricted stock awards. The number of shares of common stock reserved for
issuance under the 1998 Option Plan is 28,755,600 shares. Options to purchase
common stock and restricted stock awards are granted at the discretion of the
Board of Directors.
Under the terms of the 1998 Option Plan, the exercise price of incentive
stock options granted must not be less than 100% (110% in certain cases) of the
fair market value of the common stock on the date of grant, as determined by the
Board of Directors. The exercise price of nonqualified stock options may be less
than the fair market value of the common stock on the date of grant, as
determined by the Board of Directors but in no case may the exercise price be
less than the statutory minimum. Vesting of options granted is at the discretion
of the Board of Directors, which typically is four years.
A restricted stock award provides for the issuance of common stock to
directors, officers, consultants and other key personnel at prices determined by
a Committee selected by the Board of Directors. Participants' unvested shares
are subject to repurchase by the Company at the original purchase price for up
to four years. Generally, 25% of the shares vest on the first anniversary of the
date of purchase and, thereafter, the remaining shares vest on a quarterly basis
through the fourth anniversary of the date of purchase. As of December 31, 1998
and September 30, 1999, the Company had the right to repurchase up to 3,283,200
and 10,039,000 unvested shares, respectively. Such shares may be repurchased at
the original purchase prices ranging from $0.01 to $13.12 per share.
F-17
<PAGE> 73
AKAMAI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS
UNAUDITED)
A summary of activity under the Company's 1998 Option Plan for the period
from inception (August 20, 1998) to December 31, 1998 and the nine-month period
ended September 30, 1999 is presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- ---------
<S> <C> <C>
RESTRICTED STOCK AWARDS
Outstanding at inception.................................... -- --
Issued.................................................... 3,283,200 $0.02
Repurchased............................................... -- --
---------- -----
Outstanding at December 31, 1998............................ 3,283,200 0.02
Issued.................................................... 9,820,000 0.62
Repurchased............................................... -- --
---------- -----
Outstanding at September 30, 1999........................... 13,103,200 $0.21
========== =====
Vested restricted common stock at September 30, 1999........ 3,064,200 $0.12
========== =====
</TABLE>
There were 954,000 shares of restricted common stock issued outside of the
plan in the period ended December 31, 1998.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- ---------
<S> <C> <C>
STOCK OPTION AWARDS
Outstanding at inception.................................... -- --
Granted................................................... 1,287,000 $0.02
Exercised................................................. -- --
Forfeited................................................. -- --
---------- -----
Outstanding at December 31, 1998............................ 1,287,000 0.02
Granted................................................... 11,851,550 3.40
Exercised................................................. (447,500) 0.07
Forfeited................................................. (1,454,400) 0.15
---------- -----
Outstanding at September 30, 1999........................... 11,236,650 $3.57
========== =====
</TABLE>
The following table summarizes information about stock options outstanding
at September 30, 1999:
<TABLE>
<CAPTION>
VESTED AND EXERCISABLE
WEIGHTED -----------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE AVERAGE
EXERCISE OF OPTIONS CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE OF OPTIONS PRICE
-------- ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.01 - $ 0.04 5,442,900 9.3 $ 0.04 12,000 $0.04
$ 0.34 - $ 0.50 702,000 9.5 $ 0.42 -- --
$ 0.84 - $ 1.00 1,368,600 9.7 $ 0.90 140,000 $0.84
$ 2.50 1,028,000 9.8 $ 2.50 20,000 $2.50
$13.12 - $15.22 2,695,150 9.9 $13.28 -- --
---------- -------
$ 0.01 - $15.22 11,236,650 9.5 $ 3.57 172,000 $0.98
========== =======
</TABLE>
F-18
<PAGE> 74
AKAMAI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS
UNAUDITED)
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages but
does not require companies to record compensation cost for stock-based employee
compensation at fair value. The Company has chosen to account for stock-based
compensation granted to employees using the intrinsic value method prescribed in
APB No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, deferred compensation cost for restricted stock
awards and stock options granted to employees is measured as the excess, if any,
of the fair value of the Company's stock at the date of the grant over the
amount that must be paid to acquire the stock. From inception (August 20, 1998)
through December 31, 1998, the Company recorded $1,711,591 in deferred
compensation for restricted stock awards and options to purchase common stock
granted at exercise prices subsequently determined to be below the fair value of
the common stock. Compensation expense of $205,617 was recognized during the
period from inception (August 20, 1998) through December 31, 1998.
For the nine months ended September 30, 1999, the Company recorded
$37,872,133 in deferred compensation for restricted stock awards and options to
purchase common stock granted at exercise prices subsequently determined to be
below the fair value of common stock. Compensation expense of $7,618,757 was
recognized during the nine months ending September 30, 1999.
Had the value of options granted been measured using the fair value method
prescribed by SFAS No. 123, the fair value of the options granted from inception
(August 20, 1998) through December 31, 1998 is estimated to be $0.01 per share.
The fair value of the option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: risk free
rate of 5.5%; no expected dividends; an expected life of 10 years; and no
volatility. Had the Company accounted for stock options to employees under the
fair value method prescribed under SFAS No. 123, net losses as reported for the
period from inception (August 20, 1998) to December 31, 1998 would have been
$890,890 under SFAS No. 123. Basic and diluted net loss per share would have
been $(0.06) on a pro forma basis for the period from inception (August 20,
1998) to December 31, 1998. The effects of applying SFAS No. 123 in this pro
forma disclosure are not indicative of future amounts.
EMPLOYEE STOCK PURCHASE PLAN
In August 1999, the Board of Directors adopted the 1999 Employee Stock
Purchase Plan. The 1999 Employee Stock Purchase Plan provides for the issurance
of up to 600,000 shares of common stock to participating employees.
10. INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 20, 1998)
TO DECEMBER 31,
1998
-----------------
<S> <C>
Current tax expense......................................... $ --
Deferred tax expense/(benefit).............................. (288,000)
Valuation allowance......................................... 288,000
---------
$ --
=========
</TABLE>
F-19
<PAGE> 75
AKAMAI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS
UNAUDITED)
The Company's effective tax rate varies from the statutory rate as follows:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 20, 1998)
TO DECEMBER 31,
1998
-----------------
<S> <C>
U.S. Federal income tax rate................................ (34.0)%
State taxes................................................. (6.3)
Deferred compensation amortization.......................... 3.2
Other....................................................... (0.9)
Valuation allowance......................................... 38.0
-----
--%
=====
</TABLE>
Based on the Company's current financial status, realization of the
Company's deferred tax assets does not meet the "more likely than not" criteria
under SFAS No. 109 and, accordingly, a valuation allowance for the entire
deferred tax asset amount has been recorded. The components of the net deferred
tax asset (liability) and the related valuation allowance are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
<S> <C>
Net operating loss carryforwards............................ $ 16,000
Capitalized start-up costs.................................. 207,000
Capitalized research and development expenses............... 70,000
Depreciation................................................ (13,000)
Other....................................................... 8,000
---------
288,000
Valuation allowance......................................... (288,000)
---------
Net deferred tax assets..................................... $ --
=========
</TABLE>
Ownership changes resulting from the Company's issuance of capital stock
may limit the amount of net operating loss and tax credit carryforwards that can
be utilized annually to offset future taxable income. The amount of the annual
limitation is determined based upon the Company's value immediately prior to the
ownership change. Subsequent significant changes in ownership could further
affect the limitation in future years.
11. EMPLOYEE BENEFIT PLAN:
In January 1999, the Company established a savings plan for its employees
which is designed to be qualified under Section 401(k) of the Internal Revenue
Code. Eligible employees are permitted to contribute to the 401(k) plan through
payroll deductions within statutory and plan limits. The Company has not
contributed to the savings plan to date.
F-20
<PAGE> 76
AKAMAI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS
UNAUDITED)
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
The following is the supplemental cash flow information for all periods
presented:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION NINE-MONTH
(AUGUST 20, 1998) PERIOD ENDED
TO DECEMBER 31, SEPTEMBER 30,
1998 1999
----------------- -------------
<S> <C> <C>
Cash paid during the period for interest............... $ 10,407 $ 102,977
Cash paid during the period for income taxes........... -- 5,990
Noncash financing and investing activities:
Purchase of technology license for stock............. 490,200 --
Issuance of restricted common stock in exchange for
note receivable................................... -- 5,723,500
Dividends accrued, not paid on convertible preferred
stock............................................. -- 1,618,097
Acquisition of equipment through capital lease....... 40,056 74,371
</TABLE>
F-21
<PAGE> 77
[Narrative description of graphic material omitted in
electronically filed document.]
The following graphic and text appears on the inside back cover of the
prospectus.
The graphic is a map of the world. There are numerous small circles on the
map. There is an arrow facing down on the right hand side of the map and an
arrow facing up on the left hand side of the map.
The following text appears above the graphic:
"More Content"
The following text appears below the graphic:
"More Networks"
The following text appears below the graphic:
"24 Countries
55 Communications Networks
1,475 Servers
[Akamai Logo]
As of October 5, 1999"
<PAGE> 78
[outside back cover of prospectus]
[Narrative description of graphic material omitted in electronically filed
document.]
The following text appears in the center of the outside back cover of the
prospectus:
[AKAMAI LOGO]
\AH.kuh.my\(Hawaiian) adj: 1 : Intelligent, clever.
2: "Cool." n: 1 Internet content delivery service.
