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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 13, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
AKAMAI TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<TABLE>
<S> <C> <C>
DELAWARE 7389 04-3432319
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
500 TECHNOLOGY SQUARE
CAMBRIDGE, MASSACHUSETTS 02139
(617) 250-3000
(ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
KATHRYN L. JORDEN
VICE PRESIDENT AND GENERAL COUNSEL
AKAMAI TECHNOLOGIES, INC.
500 TECHNOLOGY SQUARE
CAMBRIDGE, MASSACHUSETTS 02139
(617) 250-3000
(NAME, ADDRESS INCLUDING ZIP CODE AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
JOHN H. CHORY, ESQ.
SUSAN W. MURLEY, ESQ.
HALE AND DORR LLP
60 STATE STREET
BOSTON, MASSACHUSETTS 02109
TELEPHONE: (617) 526-6000
TELECOPY: (617) 526-5000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) PRICE REGISTRATION FEE(1)
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<S> <C> <C> <C> <C>
5 1/2% Convertible Subordinated Notes... $300,000,000 100% $300,000,000 $79,200
Common Stock, $.01 par value per
share................................. 2,598,077(2) n/a n/a n/a
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</TABLE>
(1) The shares of common stock registered hereunder are issuable upon conversion
of the 5 1/2% Convertible Subordinated Notes due 2007 registered hereunder.
Pursuant to Rule 457(i) under the Securities Act, there is no filing fee
with respect to the shares of common stock issuable upon the exercise of the
conversion privilege.
(2) Plus such additional indeterminate number of shares as may become issuable
upon conversion of the 5 1/2% Convertible Subordinated Notes due 2007
registered hereunder by means of adjustment to the conversion price
applicable thereto.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
SHALL DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND WE ARE NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
PROSPECTUS (Subject To Completion)
Issued September 13, 2000
[AKAMAI LOGO]
$300,000,000 Principal Amount of 5 1/2% Convertible Subordinated Notes due 2007
------------------------
2,598,077 Shares of Common Stock
$0.01 Par Value per Share
------------------------
The selling securityholders identified in this prospectus are offering all
of the convertible notes and shares to be sold in the offering. Akamai will not
receive any of the proceeds from the sale of the convertible notes or the shares
of common stock.
The principal terms of the convertible notes include the following:
Interest...................... accrues at the rate of 5 1/2% per annum and
will be payable in cash semiannually on January
1 and July 1 of each year, commencing on
January 1, 2001.
Maturity Date................. July 1, 2007
Conversion Rate............... unless previously redeemed, the notes will be
convertible at the option of the holder at any
time following the date of original issuance
and prior to maturity into shares of common
stock at a conversion price of $115.47 per
share (equivalent to an initial conversion
ratio of 8.6603 shares of common stock per
$1,000 principal amount of convertible notes),
subject to adjustment in certain events.
Subordination................. ranks junior to all of our existing and future
senior debt. The convertible notes also will
effectively rank junior to all of our secured
debts and to all of the existing and future
debts and other liabilities of our
subsidiaries.
As of June 30, 2000, assuming we had completed
this offering, the convertible notes would have
effectively ranked junior to $1.9 million of
indebtedness. The indenture governing the
convertible notes will not limit the amount of
indebtedness that we or our subsidiaries may
incur in the future.
Redemption.................... on or after July 3, 2003, redeemable at any
time at the redemption prices, and subject to
certain limitations, described in the section
"Description of Convertible Notes."
The convertible notes are currently designated for trading on the Private
Offerings, Resales and Trading through Automated Linkages, or PORTAL, Market.
The convertible notes are issued in $1,000 principal amounts and integral
multiples of $1,000. On September 11, 2000, the closing bid price of the
convertible notes on the PORTAL Market was $81 1/2 per $1,000 principal amount
of convertible note. Akamai's common stock is traded on the Nasdaq National
Market under the symbol "AKAM." On September 11, 2000, the last reported sale
price for the common stock on the Nasdaq National Market was $62 11/16 per
share. The securities offered by this prospectus may be offered in negotiated
transactions or otherwise, at negotiated prices or at the market prices
prevailing at the time of sale.
INVESTING IN THE CONVERTIBLE NOTES OR OUR COMMON STOCK INVOLVES RISKS. SEE
"RISK FACTORS" BEGINNING ON PAGE 6.
------------------------
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.
The date of this prospectus is , 2000.
<PAGE> 3
TABLE OF CONTENTS
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PAGE
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<S> <C>
PROSPECTUS SUMMARY..................... 3
RISK FACTORS........................... 6
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS........................... 17
USE OF PROCEEDS........................ 18
PRICE RANGE OF COMMON STOCK............ 18
DIVIDEND POLICY........................ 18
SELECTED CONSOLIDATED FINANCIAL DATA... 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................... 20
BUSINESS............................... 26
MANAGEMENT............................. 33
RELATED PARTY TRANSACTIONS............. 39
PRINCIPAL STOCKHOLDERS................. 42
DESCRIPTION OF CONVERTIBLE NOTES....... 45
DESCRIPTION OF CAPITAL STOCK........... 61
SELLING SECURITYHOLDERS................ 63
SUMMARY OF CERTAIN UNITED STATES
FEDERAL INCOME TAX CONSIDERATIONS.... 65
PLAN OF DISTRIBUTION................... 74
LEGAL MATTERS.......................... 75
EXPERTS................................ 75
ADDITIONAL INFORMATION................. 76
WHERE YOU CAN FIND MORE INFORMATION.... 76
INDEX.................................. F-1
</TABLE>
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
WHICH IS CONTAINED IN THIS PROSPECTUS. THE SELLING SECURITYHOLDERS ARE OFFERING
TO SELL CONVERTIBLE NOTES OR SHARES OF COMMON STOCK AND SEEKING OFFERS TO BUY
CONVERTIBLE NOTES OR SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS
AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THE PROSPECTUS IS ACCURATE
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF
THIS PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK.
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information about us, our convertible notes, our common stock and our financial
statements and accompanying notes appearing elsewhere in this prospectus.
AKAMAI TECHNOLOGIES, INC.
We provide global delivery services for Internet content, streaming media
and applications and global Internet traffic management services. Our services
improve the speed, quality, availability, reliability and scalability of Web
sites. Our services deliver our customers' Internet content, streaming media and
applications through a distributed worldwide server network which locates the
content and applications geographically closer to users. Using technology and
software that is based on our proprietary mathematical formulas, or algorithms,
we monitor Internet traffic patterns and deliver our customers' content and
applications by the most efficient route available. Our services are easy to
implement and do not require our customers or their Web site visitors to modify
their hardware or software. 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 streaming services offer customers enhanced video and audio quality,
scalability and reliability.
The ability of a Web site to attract users is in part based on the richness
of its content and the usefulness and customization of its applications.
Increasingly, Web site owners want to enhance their sites by adding graphics,
such as photographs, images and logos, as well as by deploying newer
technologies, such as video and audio streaming, animation and software
downloads. Web sites are increasingly using application services and features
such as profiling, log analysis, transaction processing, customized insertion of
advertisements and content transformation to attract users to Web sites. While
richer content, application services and features attract more visitors, they
also place increasing demands on the Web site to deliver content and
applications quickly and reliably. As a result, Web site owners frequently elect
to constrain the amount of rich content and applications on their Web sites,
thus sacrificing the user experience to maintain acceptable performance levels.
To use our content delivery services, customers identify and tag portions
of their Web site content and applications that require significant amounts of
bandwidth, such as advertising banners, icons, graphics, video and audio
streaming, interactive presentations and software downloads. These tagged items
are delivered over our distributed server network. When users request these
types of content and applications, our technology routes the request to the
server that is best able to deliver the content most quickly based on the
geographic proximity of all available servers on our network and performance and
congestion on the Internet.
We currently sell our services 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. Currently our sales force is actively
targeting both domestic and international companies, focusing on Web sites that
have the greatest number of visitors, Fortune 100 companies and other companies
with large operations worldwide. In addition, we have recently begun to directly
market and sell our services through our telesales force to smaller Web sites
and businesses. As of July 31, 2000, we had 359 employees in our sales,
marketing and distribution organization, of whom 99 are in direct sales.
Our technology originated from research that our founders began developing
at the Massachusetts Institute of Technology, or MIT, in 1995. In April 1999, we
introduced commercially our service for delivery of Internet content. As of July
31, 2000, we have deployed more than 4,250 servers in over 50 countries across
more than 225 different telecommunications networks. We currently have over
2,000 customers. Our customers comprise some of the Web's most popular
properties.
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SUMMARY CONSOLIDATED FINANCIAL DATA
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<CAPTION>
PERIOD FROM PRO FORMA PRO FORMA
INCEPTION COMBINED SIX MONTHS ENDED COMBINED
(AUGUST 20, 1998) YEAR ENDED YEAR ENDED JUNE 30, SIX MONTHS
TO DECEMBER 31, DECEMBER 31, DECEMBER 31, -------------------- ENDED JUNE 30,
1998 1999 1999 1999 2000 2000
----------------- ------------ ------------ -------- --------- --------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue............................ $ -- $ 3,986 $ 16,555 $ 404 $ 25,366 $ 32,052
Total operating expenses........... 900 60,424 1,074,166 10,043 311,315 607,795
Operating loss..................... (900) (56,438) (1,057,611) (9,639) (285,949) (575,743)
Net loss........................... (890) (57,559) (1,051,312) (9,783) (278,633) (566,399)
Net loss attributable to common
stockholders..................... (890) (59,800) (1,051,312) (10,078) (278,633) (566,399)
Basic and diluted net loss per
share............................ $ (0.06) $ (1.98) $ (25.75) $ (0.53) $ (3.43) $ (6.47)
Weighted average common shares
outstanding...................... 15,015 30,177 40,822 18,891 81,251 87,505
</TABLE>
The unaudited pro forma combined column in the statement of operations data
gives effect to our acquisition of Network24 in February 2000 and INTERVU in
April 2000 as if each acquisition had been completed on January 1, 1999 and
includes in total operating expenses $953 million and $471 million of
amortization of intangible assets for the periods ended December 31, 1999 and
June 30, 2000, respectively. The unaudited pro forma net loss per share reflects
loss from continuing operations and excludes extraordinary loss and dividends on
preferred stock.
<TABLE>
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DECEMBER 31, 1999 JUNE 30, 2000
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(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $269,554 $ 515,673
Working capital............................................. 255,026 488,119
Total assets................................................ 300,815 3,335,813
Obligations under capital leases and equipment loan, net of
current portion........................................... 733 901
Convertible subordinated notes.............................. -- 300,000
Total stockholders' equity.................................. $281,445 $2,984,713
</TABLE>
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DEFICIENCY OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
We have not recorded earnings for the period from inception (August 20,
1998) to December 31, 1998, for the year ended December 31, 1999 or for the six
months ended June 30, 2000 and therefore are unable to cover fixed charges.
Earnings (loss) consists of net (loss) from operations before minority interest
and equity in investee losses plus fixed charges. Fixed charges consist of
interest expense, amortization of deferred financing costs and a portion of
rental expense that we believe to be representative of interest. The following
table discloses our dollar coverage deficiency. The ratio of earnings to fixed
charges is not disclosed since it is a negative number in each year and period.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS ENDED
1998 1999 JUNE 30, 2000
---- ------- ----------------
<S> <C> <C> <C>
Ratio of earnings to fixed charges.......................... -- -- --
Coverage deficiency to attain a ratio of 1:1................ $890 $54,169 $278,521
</TABLE>
RECENT DEVELOPMENTS
In June 2000, we issued $300.0 million of 5 1/2% Convertible Subordinated
Notes due July 1, 2007, also referred to as the convertible notes, for aggregate
net proceeds of approximately $290.5 million (net of offering expenses of $9.5
million). The convertible notes are due July 1, 2007, and are convertible at any
time following the date of original issuance into our common stock at a
conversion price of $115.47 per share (equivalent to 8.6603 shares of common
stock per $1,000 principal amount of convertible notes), subject to adjustment
in certain events. We can redeem the convertible notes on or after July 3, 2003
at our option. Interest on the convertible notes accrues as of the issue date
and is payable semiannually on January 1 and July 1 of each year, commencing on
January 1, 2001. The convertible notes are unsecured obligations and are
subordinated to all existing and future senior indebtedness and effectively rank
junior to all secured debts and to all of the existing and future debts and
other liabilities of our subsidiaries.
In July 2000, we acquired all of the outstanding common stock and preferred
stock of CallTheShots Inc., also referred to as CTS, in exchange for a
combination of our common stock and cash. The purchase price is estimated to be
approximately $6 million based on the fair value of the consideration paid plus
direct acquisition expenses. The acquisition will be accounted for using the
purchase method. CTS develops services that enable Web site visitors to
personalize their interaction with such site.
Our principal executive offices are located at 500 Technology Square,
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.
The Akamai logo, EdgeAdvantage(TM), EdgeScape(SM), FirstPoint(SM),
FreeFlow(SM), FreeFlow Streaming(SM), the INTERVU logo, Netpodium(SM),
SteadyStream(TM) and Traffic Analyzer(SM) are trademarks or service marks of us
or our subsidiaries. All other trademarks or trade names in this prospectus are
the property of their respective owners.
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RISK FACTORS
You should carefully consider the following risks before making an
investment decision. You should also refer to the other information set forth in
this prospectus. This prospectus contains forward-looking statements that
involve risks and uncertainties. Our actual results could vary significantly
from the results discussed in the forward-looking statements. Some risks that
could cause our results to vary are disclosed below.
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 services commercially
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. Risks and difficulties are frequently
encountered by companies like us in a new and rapidly evolving market. Our
ability to sell our services and the level of success we achieve depend, among
other things, on the level of demand for delivery services for graphics,
streaming media, applications and other Internet content, which is a new and
rapidly evolving market. Our business strategy may be unsuccessful, and it may
not successfully address the risks we face.
WE ARE ENTIRELY DEPENDENT ON OUR INTERNET CONTENT AND STREAMING MEDIA DELIVERY
SERVICES AND OUR FUTURE
REVENUE DEPENDS ON THE COMMERCIAL SUCCESS OF OUR SERVICES.
Currently, our future growth depends on the commercial success of our
Internet content and streaming media delivery services and other services and
products we may develop and/or offer. While we have been selling our services
commercially since April 1999, sales may not continue in the future. Our other
services and products under development may not achieve widespread market
acceptance. The future revenue growth of our FreeFlow Streaming service, which
provides for the delivery of streaming audio and video content to Internet
users, will depend in part on customer acceptance of the combined or integrated
service offerings of Akamai and INTERVU, Inc., which we refer to as INTERVU, and
which we acquired in April 2000. Failure of our current and planned services to
operate as expected could hinder 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 we might otherwise have received.
THE INTERNET CONTENT, STREAMING AND APPLICATIONS DELIVERY MARKET IS NEW AND
OUR BUSINESS WILL SUFFER IF THE MARKET DOES NOT DEVELOP AS WE EXPECT.
The market for Internet content, streaming and applications delivery
services is new. We cannot be certain that a broad-based market for our services
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 services. To meet these customer
requirements, we must protect our network infrastructure against damage from:
- sabotage and vandalism;
- human error;
- physical or electronic intrusion and security breaches;
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- fire, earthquake, flood and other natural disasters;
- power loss; and
- similar events.
Despite our efforts, our network infrastructure may come under attack by
sabotage or vandalism. In addition, the occurrence of a natural disaster or
other unanticipated problems at one or more of our server locations could result
in service interruptions or significant damage to equipment. We currently
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 its services on that day. Any
widespread loss or interruption of services would reduce our revenue and could
harm our business, financial results and reputation.
BECAUSE OUR INTERNET CONTENT DELIVERY SERVICES ARE COMPLEX AND ARE DEPLOYED IN
COMPLEX ENVIRONMENTS, THEY MAY HAVE ERRORS OR DEFECTS THAT COULD SERIOUSLY HARM
OUR BUSINESS.
Our Internet content delivery services are highly complex and are designed
to be deployed in and across numerous large and complex networks. As of July 31,
2000, our network consisted of over 4,250 servers across 225 networks. 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 services. If we are unable to efficiently
fix errors or other problems that may be identified, we could experience:
- loss of or delay in revenues and loss of market share;
- loss of customers;
- failure to attract new customers or achieve market acceptance;
- diversion of development and engineering resources;
- loss of credibility or damage to business reputation;
- increased service costs; and
- legal actions by our customers.
ANY FAILURE OF OUR TELECOMMUNICATIONS AND NETWORK PROVIDERS TO PROVIDE
REQUIRED TRANSMISSION CAPACITY TO US COULD RESULT IN INTERRUPTIONS IN OUR
SERVICES.
Our operations are dependent in part upon transmission capacity provided by
third-party telecommunications network providers. Any failure of these network
providers to provide the capacity we require may result in a reduction in, or
interruption of, service to our customers. This failure may be a result of the
telecommunications providers or Internet service providers experiencing
interruptions or other failures, failing to comply with or terminating their
existing agreements with us, or otherwise denying or interrupting service or 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. If we are unable to obtain transmission capacity on terms
commercially acceptable to us, our business and financial results could suffer.
In addition, our telecommunications and network providers typically provide rack
space for our servers. Damage or destruction of, or other denial of access to, a
facility where our servers are housed could result in a reduction in, or
interruption of, service to our customers.
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
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current or potential competitors have the financial resources to withstand
substantial price competition. Moreover, many of our competitors have more
extensive brand recognition, 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 services,
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.
As competition in the Internet content, streaming media and applications
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 us. We also believe that we may face competition from other
providers of competing Internet content, streaming media and applications
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.
AS PART OF OUR BUSINESS STRATEGY, WE HAVE ENTERED INTO AND MAY ENTER INTO OR
SEEK TO ENTER INTO BUSINESS COMBINATIONS AND ACQUISITIONS WHICH MAY BE DIFFICULT
TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR DIVERT
MANAGEMENT ATTENTION.
We acquired Network24 Communications, Inc., which we refer to as Network24,
in February 2000, INTERVU in April 2000 and CallTheShots Inc., which we refer to
as CTS, in July 2000. As a part of our business strategy, we may enter into
additional business combinations and acquisitions. Acquisitions are typically
accompanied by a number of risks, including:
- the difficulty of integrating the operations and personnel of the
acquired companies;
- the maintenance of acceptable standards, controls, procedures and
policies;
- the potential disruption of our ongoing business and distraction of
management;
- the impairment of relationships with employees and customers as a result
of any integration of new management personnel;
- the difficulty of incorporation of acquired technology and rights into
our products and services;
- the failure to achieve the expected benefits of the combination or
acquisition;
- expenses related to the acquisition;
- potential unknown liabilities associated with acquired businesses; and
- unanticipated expenses related to acquired technology and its integration
into existing technology.
If we are not successful in completing acquisitions that we may pursue in
the future, we would be required to reevaluate our growth strategy, and we may
have incurred substantial expenses and devoted significant management time and
resources in seeking to complete proposed acquisitions that will not generate
benefits for us. In addition, with future acquisitions, we could use substantial
portions of our available cash as
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all or a portion of the purchase price. We could also issue additional
securities as consideration for these acquisitions, which could cause our
stockholders to suffer significant dilution. Our acquisitions of Network24,
INTERVU and CTS and any future acquisitions may not generate any additional
revenue and may pose other risks to us.
A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK WILL BE ELIGIBLE FOR PUBLIC SALE
AFTER EXISTING LOCK-UP PERIODS EXPIRE, WHICH COULD CAUSE OUR STOCK PRICE TO
FALL.
A substantial amount of our common stock will be eligible for public sale
after existing lock-up periods expire, which could cause our stock price to
fall. Lock-up restrictions will expire with respect to approximately 58.2
million shares on September 13, 2000 and approximately 6.6 million shares on
October 29, 2000.
Sales of a substantial number of shares of our common stock within a short
period of time 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.
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, Inc. effective as
of April 1, 1999. Sales of our services to Apple Computer represented
approximately 18% of our revenue for the six months ended June 30, 2000. We
expect that sales to Apple Computer as a percentage of total sales will
decrease, but that during the remainder of calendar 2000 sales to Apple Computer
will continue to represent a significant portion of our revenue. Apple Computer
has the right to terminate the agreement on short notice if we materially breach
the agreement. A significant decline in sales to Apple Computer could reduce our
revenue and cause our business and financial results to suffer.
SOME OF OUR CURRENT CUSTOMERS ARE EMERGING INTERNET-BASED BUSINESSES THAT MAY
NOT PAY US FOR OUR SERVICES ON A TIMELY BASIS AND THAT MAY NOT SUCCEED OVER THE
LONG TERM.
Some of our revenue recognized in the six months ended June 30, 2000 was
derived from customers that are emerging Internet-based businesses, and a
portion of our future revenue may be derived from this customer base. The
unproven business models of some of these customers make their continued
financial viability uncertain. Given the short operating history and emerging
nature of many of these businesses, there is a risk that some of these customers
will encounter financial difficulties and fail to pay for our services or delay
payment substantially. The failure of our emerging business customers to pay our
fees on a timely basis or to continue to purchase our services in accordance
with their contractual commitments could adversely affect our revenue collection
periods, our revenue and other financial results.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO SCALE OUR NETWORK AS DEMAND
INCREASES.
Our network may not be scalable to expected customer levels while
maintaining superior performance. We cannot be certain that our network can
connect and manage a substantially larger number of customers at high
transmission speeds. In addition, as customers' usage of bandwidth increases, we
will need to make additional investments in our infrastructure to maintain
adequate data transmission speeds. We cannot ensure that we will be able to make
these investments successfully or at an acceptable or commercially reasonable
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 services,
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 continue 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 services may become
obsolete, which would materially and adversely affect our business, results of
operations and financial condition.
In developing our services, 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 services 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. Although the license is effective for the life of
the patents and patent applications, 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 and proprietary technology covered by existing
United States patents, we cannot be certain that any such patents will not be
challenged, invalidated or circumvented. Moreover, although we have filed
international patent applications, none of our technology is patented abroad. 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
services 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.
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 June 30,
2000, we had an accumulated deficit of $337.2 million. We cannot be certain that
our revenue will continue to 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 revenue to achieve
and maintain profitability. If our revenue grows more slowly than we anticipate
or if our operating expenses increase more than we expect or cannot be reduced
in the event of lower revenue, our business will be materially and adversely
affected.
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THE VARIABLE SALES CYCLES FOR OUR SERVICES MAY CAUSE REVENUE AND OPERATING
RESULTS TO VARY SIGNIFICANTLY FROM QUARTER TO QUARTER WHICH COULD ADVERSELY
AFFECT OUR STOCK PRICE.
At times, a customer's decision to purchase our Internet content delivery
services involves a lengthy evaluation process. Throughout the sales cycle, we
spend considerable time and expense educating and providing information to
prospective customers about the use and benefits of our services. Because of our
limited operating history and the nature of our business, we cannot predict
these sales and deployment cycles. 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 SERVICES 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
that can provide additional bandwidth and volume discounts available to us as
our network usage increases. We expect the prices we charge for our services may
also decline over time as a result of, among other things, existing and new
competition in the markets we address. As a result, our historical revenue rates
may not be indicative of future revenue based on comparable traffic volumes. If
we fail to accurately predict the decline in costs of bandwidth, are unable to
sell our services at acceptable prices relative to our bandwidth costs, or 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, speed, 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 services. 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 offerings do not have. To achieve market acceptance for
our services, 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.
We intend to continue to invest heavily in technology development. The
development of new or enhanced services and applications, such as EdgeAdvantage,
an integrated platform of our core technologies and network infrastructure
service, is a complex and uncertain process that requires the accurate
anticipation of
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<PAGE> 13
technological and market trends. We may experience design, integration,
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 and applications also requires that
we manage the transition from older services in order to 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 gaining broad market acceptance of our
services or in commercializing our future services. Our services require a
sophisticated sales effort targeted at a limited number of key people within a
prospective customer's organization. This sales effort requires the efforts of
trained sales personnel. We need to continue to expand our marketing and sales
organization in order to increase market awareness of our services to a greater
number of organizations and generate increased revenue. 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 services, 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 services. 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 services, 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 increased from 385 at December 31, 1999 to 1,123
at July 31, 2000. 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 services 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 workforce worldwide.
Competition for highly skilled personnel is intense, especially in New England
and central and southern California. 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;
- successfully integrate Network24, INTERVU and CTS 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.
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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 they 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
services. 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.
We have expanded our international operations to Munich, Germany; London,
England; and Paris, France. A key aspect of our business strategy is to continue
to expand our sales and support organizations internationally. 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 services 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:
- market acceptance of our products and services by countries outside the
United States;
- 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; and
- potentially adverse tax consequences, including restrictions on the
repatriation of earnings.
INSIDERS HAVE SUBSTANTIAL CONTROL OVER US WHICH COULD LIMIT OTHERS' ABILITIES
TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS, INCLUDING CHANGES OF CONTROL.
As of July 31, 2000, the executive officers, directors and entities
affiliated with them, in the aggregate, beneficially owned approximately 52.2%
of our outstanding common stock. These stockholders, if acting together, are
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.
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<PAGE> 15
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 and streaming 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 us;
- changes in our pricing policies or the pricing policies of our
competitors;
- our ability to develop, introduce and deliver new products, services and
enhancements that meet customer requirements in a timely manner;
- the length of the sales cycle for our services;
- 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, continue to develop new
distribution channels and continue to expand internationally. We also plan to
expand our general and administrative functions to address the increased
reporting and other administrative demands 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.
WE FACE A NUMBER OF UNKNOWN RISKS ASSOCIATED WITH YEAR 2000 PROBLEMS.
We must continue to monitor year 2000 issues. While we have not experienced
any year 2000 issues to date, there can be no assurance that we have identified
and remediated all material year 2000 related issues. We could experience 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.
Our services are used in conjunction with larger networks involving
sophisticated hardware and software products supplied by other vendors. We may
face claims based on year 2000 problems in other companies' products or based on
issues arising from the integration of multiple third-party products within the
overall network. Although no claims of this kind have been made, we may in the
future be required to defend our services in legal proceedings which could be
expensive regardless of the merits of these claims.
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WE COULD INCUR SUBSTANTIAL COSTS DEFENDING OUR INTELLECTUAL PROPERTY FROM
INFRINGEMENT OR A CLAIM OF INFRINGEMENT.
Other companies or individuals, 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 services. 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 these actions, our business may be
seriously harmed. Although we carry 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 that apply to communications and commerce over the
Internet are becoming more prevalent. A recent session of the United States
Congress resulted in the passage of Internet laws regarding children's privacy,
copyrights, taxation and the transmission of sexually explicit material. The
European Union recently enacted its own privacy regulations and is currently
considering copyright legislation that may extend the right of reproduction held
by copyright holders to include the right to make temporary copies for any
reason. The law of the Internet, however, remains largely unsettled, even in
areas where there has been some legislative action. It may take years to
determine whether and how existing laws such as those governing intellectual
property, privacy, libel and taxation apply to the Internet. In addition, the
growth and development of 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 services 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, employees or property
in these jurisdictions. The application of these multiple sets of laws and
regulations is uncertain, but we could find that 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 CONVERTIBLE NOTES AND THE SECURITIES MARKETS
THE CONVERTIBLE NOTES ARE SUBORDINATED TO SENIOR-RANKING DEBT AND WE WILL
NOT BE ABLE TO PAY OUR OBLIGATIONS WITH RESPECT TO THE CONVERTIBLE NOTES UNTIL
ALL OF OUR DEBT RANKING SENIOR TO THE CONVERTIBLE NOTES HAS BEEN FULLY REPAID.
The convertible notes are not secured by our assets and are subordinate in
right of payment to all of our current and future debt that ranks senior to the
convertible notes, including all of our indebtedness, whenever
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<PAGE> 17
created or incurred, that is not made subordinate to or on parity with the
convertible notes by the debt instrument and the indebtedness and liabilities of
our subsidiaries.
In the event of bankruptcy, liquidation, or reorganization or upon
acceleration of the convertible notes and obligations of our subsidiaries due to
an event of default and in certain other events, we will not be able to pay our
obligations with respect to the convertible notes and obligations of our
subsidiaries until all our debt ranking senior to the convertible notes and
obligations of our subsidiaries has been fully repaid. It is possible that there
may not be sufficient assets remaining to pay amounts due on any or all of the
convertible notes and obligations of our subsidiaries then outstanding. At June
30, 2000, the aggregate amount of our outstanding obligations that rank senior
to the convertible notes was approximately $1.9 million. The convertible notes
and obligations of our subsidiaries do not limit the amount of additional
indebtedness, including debt ranking senior, that we can create, incur, assume
or guarantee. We anticipate that we will incur additional indebtedness,
including debt ranking senior to the convertible notes and obligations of our
subsidiaries, which could adversely affect our ability to pay our obligations on
the convertible notes. See "Description of Convertible Notes."
In addition, in the event of the insolvency, bankruptcy, liquidation,
reorganization, dissolution or winding up of the business of any of our
subsidiaries, creditors of our subsidiaries generally will have the right to be
paid in full before any distribution is made to us or the holders of the
convertible notes. Accordingly, holders of the convertible notes are effectively
subordinated to the claims of our subsidiaries' creditors to the extent of the
assets of the indebted subsidiary. This subordination could adversely affect our
ability to pay our obligations to the convertible notes. See "Description of
Convertible Notes."
THERE IS A LIMITED MARKET FOR THE CONVERTIBLE NOTES AND THE CONVERTIBLE
NOTES WILL BE SUBJECT TO SIGNIFICANT RESTRICTIONS ON RESALE.
There is a limited market for the convertible notes, and we can make no
assurance as to liquidity of any markets that may develop for the convertible
notes, the ability of the holders to sell their convertible notes or the price
at which holders of the convertible notes may be able to sell their convertible
notes. Future trading prices of the convertible notes will depend on many
factors, including, among other things, prevailing interest rates, our operating
results, the price of our common stock and the market for similar securities.
Donaldson, Lufkin & Jenrette Securities Corporation, Morgan Stanley & Co.
Incorporated, Salomon Smith Barney Inc. and Thomas Weisel Partners LLC, the
initial purchasers of the convertible notes, have informed us that they intend
to make a market in the convertible notes offered in this prospectus. However,
the initial purchasers are not obligated to do so, and any such market making
activity may be terminated at any time without notice to the holders of the
convertible notes. The convertible notes are traded through direct sales to
qualified buyers or, with respect to those held by qualified institutional
buyers, in the Private Offerings, Resale and Trading through Automatic Linkages,
or PORTAL, market. We do not intend to apply for listing of the convertible
notes on any securities exchange.
WE MAY BE UNABLE TO REDEEM THE CONVERTIBLE NOTES UPON A FUNDAMENTAL CHANGE.
Upon a Fundamental Change (as defined in the indenture governing the
convertible notes), the holders of the convertible notes may require us to
redeem all or a portion of the convertible notes. If a Fundamental Change were
to occur, we may not have enough funds to pay the redemption price for all
tendered convertible notes. Any future credit agreements or other agreements
relating to our indebtedness may contain provisions that expressly prohibit the
repurchase of the convertible notes upon a Fundamental Change or may provide
that a Fundamental Change constitutes an event of default under that agreement.
If a Fundamental Change occurs at a time when we are prohibited from purchasing
or redeeming convertible notes, we could seek the consent of our lenders to
redeem the convertible notes or could attempt to refinance this debt. If we do
not obtain a consent, we could not purchase or redeem the convertible notes. Our
failure to redeem tendered convertible notes would constitute an event of
default under the indenture, which might constitute a default under the terms of
our other indebtedness. In these circumstances, or if a Fundamental Change would
constitute an event of default under our senior indebtedness, the subordination
provisions of the indenture would restrict our ability to make payments to the
holders of convertible notes. The term "Fundamental
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Change" is limited to certain specified transactions and may not include other
events that might adversely affect our financial condition. Our obligation to
offer to redeem the convertible notes upon a Fundamental Change would not
necessarily afford you protection in the event of a highly leveraged
transaction, reorganization, merger or similar transaction. See "Description of
Convertible Notes."
WE MAY NOT BE ABLE TO REFINANCE THE CONVERTIBLE NOTES IF REQUIRED OR IF WE SO
DESIRE.
We may need or desire to refinance all or a portion of our indebtedness on
or before maturity. There can be no assurance that we will be able to refinance
any of our indebtedness on commercially reasonable terms, if at all.
OUR STOCK PRICE HAS BEEN VOLATILE.
The market price of our common stock has been volatile. For example, during
the second quarter of 2000, the market price for our common stock ranged from
$56.625 to $157.875. Fluctuations in the trading price of our common stock will
affect the trading price of the notes. Trading prices may continue to fluctuate
in response to a number of events and factors, including the following:
- quarterly variations in operating results and announcements of
innovations;
- new products, services and strategic developments by us or our
competitors;
- business combinations and investments by us or our competitors;
- variations in our revenue, expenses or profitability;
- changes in financial estimates and recommendations by securities
analysts;
- failure to meet the expectations of public market analysts;
- performance by other content delivery companies; and
- news reports relating to trends in the content delivery, Internet or
other product or service industries.
Any of these events may cause the price of our shares to fall. In addition,
the stock market in general and the market prices for technology companies in
particular have experienced significant volatility that often has been unrelated
to the operating performance of such companies. These broad market and industry
fluctuations may adversely affect the market price of our shares, regardless of
our operating performance.
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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USE OF PROCEEDS
All of the convertible notes and the shares of our common stock issuable
upon conversion of the convertible notes are being sold by the selling
securityholders or by their pledgees, donees, transferees or other successors in
interest. We will not receive any proceeds from the sale of the convertible
notes or the shares of our common stock issuable upon conversion of the
convertible notes.
PRICE RANGE OF COMMON STOCK
Our common stock is listed on the Nasdaq National Market under the symbol
"AKAM." Public trading of our common stock commenced on October 29, 1999. Prior
to that, there was no public market for our common stock. The following table
sets forth, for the periods indicated, the high and low sale price per share of
our common stock on the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1999:
Fourth Quarter (from October 29, 1999).................... $344 7/8 $110
YEAR ENDING DECEMBER 31, 2000:
First Quarter............................................. $345 1/2 $155
Second Quarter............................................ $157 7/8 $ 56 5/8
Third Quarter (until September 11, 2000).................. 132 15/16 60 11/16
</TABLE>
As of September 11, 2000, there were 498 holders of record of our common
stock. On September 11, 2000, the last reported sale price on the Nasdaq
National Market for our common stock was $62 11/16 per share.
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.
18
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this prospectus and our
consolidated financial statements and related notes and other financial data
included elsewhere in this prospectus. The consolidated statements of operations
for the period from inception (August 20, 1998) to December 31, 1998 and the
year ended December 31, 1999 and the balance sheet data as of December 31, 1998
and 1999 are derived from audited consolidated financial statements included
elsewhere in this prospectus. The consolidated statements of operations data for
the six months ended June 30, 1999 and 2000 and the balance sheet data as of
June 30, 2000 are derived from unaudited financial statements included elsewhere
in this prospectus. Operating results for the six months ended June 30, 2000 are
not necessarily indicative of the results that may be expected for any other
period or the entire year ending December 31, 2000.
The unaudited pro forma combined statement of continuing operations is
based on the individual historical statements of continuing operations for
Akamai, INTERVU and Network24 and combines the results of Akamai, INTERVU and
Network24 for the year ended December 31, 1999 and the six months ended June 30,
2000 as if the acquisitions occurred on January 1, 1999. The unaudited pro forma
combined financial information should be read in conjunction with the historical
financial statements of Akamai, INTERVU and Network24, including the
accompanying notes, the unaudited pro forma combined condensed financial
information and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM PRO FORMA PRO FORMA
INCEPTION COMBINED SIX MONTHS COMBINED
(AUGUST 20, 1998) YEAR ENDED YEAR ENDED ENDED JUNE 30, SIX MONTHS
TO DECEMBER 31, DECEMBER 31, DECEMBER 31, --------------------- ENDED JUNE 30,
1998 1999 1999 1999 2000 2000
----------------- ------------ ------------ --------- --------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue................................ $ -- $ 3,986 $ 16,555 $ 404 $ 25,366 $ 32,052
------- -------- ----------- --------- --------- ---------
Operating expenses:
Cost of services..................... 31 9,002 14,930 1,408 19,283 22,100
Engineering and development(1)....... 229 11,749 22,137 2,054 19,846 25,146
Sales, general and
administrative(2).................. 426 29,621 56,825 5,220 61,124 77,595
Charges associated with the
INTERVU/NBC Strategic Alliance
Agreement.......................... -- -- 17,194 -- -- --
Amortization of intangible assets.... 9 47 953,075 23 198,080 471,344
Acquired in-process research and
development........................ -- -- -- -- 1,372 --
Equity-related compensation.......... 205 10,005 10,005 1,338 11,610 11,610
------- -------- ----------- --------- --------- ---------
Total operating expenses........... 900 60,424 1,074,166 10,043 311,315 607,795
------- -------- ----------- --------- --------- ---------
Operating loss......................... (900) (56,438) (1,057,611) (9,639) (285,949) (575,743)
Interest income (expense), net......... 10 2,269 6,299 (144) 7,428 9,456
------- -------- ----------- --------- --------- ---------
Loss before provision for income taxes
and extraordinary loss from early
extinguishment of debt............... (890) (54,169) (1,051,312) (9,783) (278,521) (566,287)
Provision for income taxes........... -- -- -- -- 112 112
------- -------- ----------- --------- --------- ---------
Loss before extraordinary loss from early
extinguishment of debt............... (890) (54,169) (1,051,312) (9,783) (278,633) (566,399)
Extraordinary loss from early
extinguishment of debt............... -- 3,390 -- -- -- --
------- -------- ----------- --------- --------- ---------
Net loss............................... (890) (57,559) (1,051,312) (9,783) (278,633) (566,399)
Dividends and accretion to preferred
stock redemption value............... -- 2,241 -- 295 -- --
------- -------- ----------- --------- --------- ---------
Net loss attributable to common
stockholders......................... $ (890) $(59,800) $(1,051,312) $ (10,078) $(278,633) $(566,399)
======= ======== =========== ========= ========= =========
Basic and diluted net loss per share... $ (0.06) $ (1.98) $ (25.75) $ (0.53) $ (3.43) $ (6.47)
Weighted average common shares
outstanding.......................... 15,015 30,177 40,822 18,891 81,251 87,505
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999 JUNE 30, 2000
------ -------- --------------
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $6,805 $269,554 $ 515,673
Working capital............................................. 6,157 255,026 488,119
Total assets................................................ 8,866 300,815 3,335,813
Obligations under capital leases and equipment loan, net of
current portion........................................... 25 733 901
Convertible subordinated notes.............................. -- -- 300,000
Convertible preferred stock................................. 8,284 -- --
Total stockholders' equity (deficit)........................ $ (148) $281,445 $2,984,713
</TABLE>
---------------
(1) Excludes $7, $5,061, $5,061, $187, $1,697 and $1,697 of equity-related
compensation disclosed below.
(2) Excludes $198, $4,944, $4,944, $1,151, $9,913 and $9,913 of equity-related
compensation disclosed below.
19
<PAGE> 21
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 global delivery services for Internet content, streaming media
and applications, and global Internet traffic management services. Our services
improve the speed, quality, availability, reliability and scalability of Web
sites. Our services deliver our customers' Internet content, streaming media and
applications through a distributed worldwide server network, which locates the
content and applications geographically closer to users. As of June 30, 2000, we
had approximately 2,100 signed customers, including 895 customers under
recurring contract.
Since our inception, we have incurred significant losses, and as of June
30, 2000, we had an accumulated deficit of $337.2 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.
In the first quarter of 2000, we entered into agreements to acquire all the
outstanding common and preferred stock of Network24 and INTERVU. We acquired
both of these companies to accelerate market leadership in streaming media. The
Network24 acquisition was consummated on February 10, 2000 in exchange for
620,872 shares of our common stock and $12.5 million in cash. We also issued
options and warrants exercisable for 195,862 shares of our common stock in
exchange for all outstanding options and warrants exercisable for Network24
common stock. The INTERVU acquisition was consummated on April 20, 2000 in
exchange for 10.0 million shares of our common stock. We also issued options and
warrants exercisable for 2.2 million shares of our common stock in exchange for
all outstanding options and warrants exercisable for INTERVU common stock. We
have included the results of operations of Network24 subsequent to February 10,
2000 and INTERVU subsequent to April 20, 2000 in our statements of operations
for the six months ended June 30, 2000. Both acquisitions are accounted for
using the purchase method of accounting.
In connection with the Network24 and INTERVU acquisitions, we expect
amortization expense for the next four years as follows (in millions):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
2000...................................................... $674
2001...................................................... 953
2002...................................................... 953
2003...................................................... 274
</TABLE>
We derive our revenue from the sale of our services under contracts with
terms typically ranging from 12 to 24 months. We recognize revenue primarily
based on fees for the amount of Internet content delivered through our services.
These contracts also provide for minimum monthly fees. Customers are typically
billed monthly in advance for minimums and monthly in arrears for usage above
the minimums. We also derive revenue for implementation, installation, usage and
other fees that are recognized over the period of the related contracts or
customer relationships.
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, substantially all of
our revenue has been derived from direct sales; however, we expect that revenue
through indirect distribution channels will increase in future periods. Sales to
Apple Computer represented 22% and
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<PAGE> 22
18% of our revenue for the year ended December 31, 1999 and the six months ended
June 30, 2000, respectively. Sales to Yahoo! represented 13% of our revenue for
the year ended December 31, 1999.
Cost of services consists of fees paid to network providers for bandwidth,
depreciation of network equipment used in providing our services 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 may commit us
to minimum monthly fees plus additional fees for bandwidth usage above our
contracted level or may commit us to share with the third-party network
providers a portion of the revenue we recognize from customers that use these
third-party networks. Under our 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 value provided under this
program has been insignificant. We expect our cost of service to increase as we
continue to deploy our network.
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 services and our network. We have to date
expensed our engineering and development costs as incurred. We believe that
research and development is critical to our strategic product development
objectives and intend to continue 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.
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, 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.
Amortization of intangible assets consists primarily of the amortization of
intangible assets acquired in business combinations, including goodwill.
Acquired in-process research and development consists of a nonrecurring charge
for the value of developmental projects that had not reached technological
feasibility and had no alternative future use.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 2000
Revenue. Revenue was $404,000 for the six months ended June 30, 1999
compared to $25.4 million for the six months ended June 30, 2000. The increase
in revenue in the first six months of 2000 over the comparable period in the
prior year was due to the commercial introduction of our services in April 1999.
Cost of Services. Cost of services expense was $1.4 million for the six
months ended June 30, 1999 and represented 14% of total operating expenses for
such period. Cost of services expense was $19.3 million for the six months ended
June 30, 2000 and represented 6% of total operating expenses for such period.
Cost of services expenses were 17% of operating expenses before the amortization
of intangible assets for the six months ended June 30, 2000. The increase in
cost of services expense in dollars for the six month period in 2000 compared to
the comparable period in the prior year was due to commencement of testing of
our FreeFlow service in early 1999 and the commercial introduction of services
in April 1999. Gross margins, defined as revenue less cost of services, were
negative for the six months ended June 30, 1999 largely due to the fixed cost of
building a network of servers. Gross margins were positive for the six months
ended June 30, 2000 due to an increase in the number of customers and volume of
revenue relative to the growth in network infrastructure. While gross margins
are expected to increase over time, fluctuations are possible as fixed costs
increase due to the rapid expansion of our global network of servers.
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<PAGE> 23
Engineering and Development. Engineering and development expenses were
$2.1 million for the six months ended June 30, 1999 and represented 20% of total
operating expenses for such period. Engineering and development expenses were
$19.8 million for the six months ended June 30, 2000 and represented 6% of total
operating expenses for such period. Engineering and development expenses were
18% of operating expenses before the amortization of intangible assets for the
six months ended June 30, 2000. The increase in engineering and development
expenses in the six-month period in 2000 over the comparable period in the prior
year was attributable to personnel and payroll related expenses resulting from
an increase in headcount. We expect engineering and development expenses to
increase in the future as we continue to invest in new technology.
Sales, General and Administrative. Sales, general and administrative
expenses were $5.2 million for the six months ended June 30, 1999 and
represented 52% of total operating expenses for such period. Sales, general and
administrative expenses for the six months ended June 30, 2000 were $61.1
million and represented 20% of total operating expenses for such period. Sales,
general and administrative expenses were 54% of operating expenses before the
amortization of intangible assets for the six months ended June 30, 2000. The
increase in sales, general and administrative expenses in the six-month period
in 2000 over the comparable period in the prior year was due to an increase in
sales, general and administrative personnel and payroll-related expenses
resulting from an increase in headcount, advertising campaigns initiated during
the period, and increased depreciation expense associated with our property and
equipment. We expect sales, general and administrative expenses to increase in
the future.
Amortization of Intangible Assets. Amortization of intangible assets for
the six months ended June 30, 2000 was $198.1 million and represented 64% of
total operating expenses for such period. Amortization expense primarily relates
to the acquisitions of Network24 and INTERVU and the associated amortization of
intangible assets acquired as part of these acquisitions. These intangible
assets are being amortized on a straight-line basis over two to three years. We
expect amortization of intangible assets to be approximately $238 million per
quarter as a result of these acquisitions.
Equity-Related Compensation. Equity-related compensation expenses consist
of the amortization of deferred compensation resulting from the grant of stock
options or shares of restricted stock at exercise or sale prices deemed to be
less than the fair value of the common stock on the grant date and compensation
expense related to the acceleration of stock option vesting for certain
terminated employees. At June 30, 2000, deferred compensation, which is a
component of stockholders' equity, was $26.6 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 expenses of at least
$16.0 million in 2000, $8.7 million in 2001, $8.7 million in 2002 and $3.6
million in 2003.
Interest Income (Expense), Net. Interest income (expense), net was
$(144,000) for the six months ended June 30, 1999 and $7.4 million for the six
months ended June 30, 2000. Interest income (expense), net consists of interest
earned on cash, cash equivalent and short-term and long-term investment
balances, net of interest expense. Interest income increased in 2000 due to
interest on proceeds from the issuance of senior subordinated notes, the sale of
preferred stock in several private placements and the sale of common stock in
our initial public offering during 1999, partially offset by accrued interest
expense on our 5 1/2% convertible subordinated notes and the amortization of
deferred financing costs.
PERIOD FROM INCEPTION (AUGUST 20, 1998) THROUGH DECEMBER 31, 1998 AND THE YEAR
ENDED DECEMBER 31, 1999
Revenue. We recorded no revenue for the period from inception (August 20,
1998) to December 31, 1998. Revenue for the year ended December 31, 1999 was
$4.0 million. The increase in revenue was due to sales of services, which were
commercially introduced in April 1999.
Cost of Services. Cost of services expenses were $31,000 for the period
from inception (August 20, 1998) to December 31, 1998 and represented 4% of
total operating expenses in fiscal 1998. Cost of services expenses were $9.0
million for the year ended December 31, 1999 and represented 15% of total
operating
22
<PAGE> 24
expenses for the year ended December 31, 1999. The increase in cost of services
expenses was due to the commencement of testing of our FreeFlow service in early
1999 and commercial introduction of services in April 1999. Gross margins were
negative largely due to the fixed cost of building a global network of servers.
For the year ended December 31, 1999, the average selling price of our services
as measured in dollars per mbps exceeds our average cost of bandwidth as
measured in dollars per mbps.
Engineering and Development. Engineering and development expenses were
$229,000 for the period from inception (August 20, 1998) to December 31, 1998
and represented 25% of total operating expenses in fiscal 1998. Engineering and
development expenses for the year ended December 31, 1999 were $11.7 million and
represented 19% of total operating expenses for the year ended December 31,
1999. Approximately $9.7 million of the increase was attributable to personnel
and payroll related expenses resulting from an increase in headcount.
Sales, General and Administrative. Sales, general and administrative
expenses were $435,000 for the period from inception (August 20, 1998) to
December 31, 1998 and represented 48% of total operating expenses in fiscal
1998. Sales, general and administrative expenses for the year ended December 31,
1999 were $29.7 million and represented 49% of total operating expenses for the
period. Approximately $11.2 million of the increase was due to sales, general
and administrative personnel and payroll related expenses resulting from an
increase in headcount. Approximately $7.7 million of the increase was
attributable to advertising campaigns initiated during the year.
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 deemed to
be less than the fair value of the our common stock on the grant date. At
December 31, 1999, deferred stock compensation, which is a component of
stockholders' equity, was $29.7 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.
Interest Income, Net. Interest income, net was $10,000 and $2.3 million
for the period from inception (August 20, 1998) through December 31, 1998 and
the year ended December 31, 1999, respectively. Interest income, net consists of
interest earned on our cash equivalent balances, net of interest expense.
Interest income increased in 1999 due to interest on proceeds from the sale of
our preferred stock and from the sale of our common stock in our initial public
offering. This was partially offset by an increase in interest expense from the
issuance of our subordinated notes during the year ended December 31, 1999.
Extraordinary Loss From Early Extinguishment of Debt. During April 1999,
we issued 15% subordinated demand notes payable in the aggregate amount of $15.0
million due in May 2004. In connection with the notes, we also issued warrants
to purchase an aggregate of 2,002,836 shares of our common stock at $2.50 per
share. These warrants expire in May 2004. In December 1999, we utilized a
portion of the proceeds from the initial public offering to exercise our right
to pay a portion of our subordinated notes and as a result, recognized an
extraordinary loss from the early extinguishment in the amount of $3.4 million.
In the first quarter of fiscal 2000, $2.7 million of the notes that remained
outstanding were paid off.
LIQUIDITY AND CAPITAL RESOURCES
Initially, we financed our operations primarily through private sales of
our capital stock and issuance of senior subordinated notes totaling
approximately $124.6 million in net proceeds through December 31, 1999. In
November 1999, we sold shares of common stock through an initial public
offering. The net proceeds to us from the initial public offering were $217.6
million after deducting an aggregate of $16.4 million in underwriting discounts
and commission to the underwriters. In June 2000, we received net proceeds of
$290.5 million from the sale of our convertible notes. At June 30, 2000, cash,
cash equivalents and short-term investments totaled $515.7 million.
Cash used in operating activities was $4.9 million for the six months ended
June 30, 1999 and $49.5 million for the six months ended June 30, 2000. Net cash
used in operating activities for the six months ended
23
<PAGE> 25
June 30, 2000 reflects increasing net losses partially offset by increases in
accounts payable and accrued expenses.
Cash used in investing activities was $5.8 million for the six months ended
June 30, 1999 and $168.0 million for the six months ended June 30, 2000. Net
cash used for investing activities in the current period reflects net purchases
of short-term investments of $277.6 million, sales and maturities of investments
of $147.7 million and purchases of property and equipment of $55.6 million,
consisting primarily of servers for deployment and expansion of our network,
information systems used to operate the business, and facilities improvements.
Also during the current period we made a cash payment of $11.7 million, net of
cash acquired, for the acquisition of Network24 and acquired $29.2 million of
cash in our acquisition of INTERVU. We expect to continue to expand our
infrastructure by making approximately $80 million in additional capital
expenditures during the remainder of the year.
Cash provided by financing activities was $48.9 million for the six months
ended June 30, 1999 and $302.5 million for the six months ended June 30, 2000.
Cash provided by financing activities for the six months ended June 30, 1999 was
derived primarily from the sale of convertible preferred stock, the issuance of
demand notes and an equipment line of credit. In December 1999, we exercised our
right to pay off outstanding senior subordinated notes, of which $12.2 million
was paid in December 1999 and the remainder was paid during the six months ended
June 30, 2000. Cash provided by financing activities for the six months ended
June 30, 2000 was derived primarily from the proceeds from the sale of
convertible notes and the issuance of common stock under our stock plans.
We believe that our current cash, cash equivalents and short-term
investments 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 our
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. It is our intention to at all times
maintain cash on hand and borrowing capacity to meet funding needs for 18 to 24
months in the future.
RECENT ACCOUNTING PRONOUNCEMENTS
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.
In December 1999, the Securities and Exchange Commission, which we refer to
as the SEC or the Commission, issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements," as amended by SAB No. 101A and
101B, which is effective no later than the quarter ending December 31, 2000. SAB
No. 101 clarifies the SEC's views regarding the recognition of revenue. We will
adopt SAB No. 101 in the fourth quarter of 2000. We do not expect the
application of SAB No. 101 to have a significant impact on our financial
position or results of operations.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation ("FIN") No. 44, "Accounting for Certain Transactions Involving
Stock Compensation--an Interpretation of APB Opinion No. 25." FIN No. 44
primarily clarifies (a) the definition of an employee for purposes of applying
APB Opinion No. 25, (b) the criteria for determining whether a plan qualifies as
a noncompensatory plan, (c) the accounting consequence of various modifications
to the terms of previously fixed stock options or awards, and
24
<PAGE> 26
(d) the accounting for an exchange of stock compensation awards in a business
combination. FIN No. 44 is effective July 1, 2000, but certain conclusions in
FIN No. 44 cover specific events that occurred after either December 15, 1998 or
January 12, 2000. We do not expect the application of FIN No. 44 to have a
significant impact on our financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. We do not use derivative financial
instruments in our investment portfolio. We place our investments with high
quality issuers and, by policy, limit the amount of risk by investing primarily
in money market funds, United States Treasury obligations, high-quality
corporate obligations and certificates of deposit. An increase or decrease in
interest rates would not significantly increase or decrease interest expense due
to the fixed nature of our debt obligations. We do not currently have
significant foreign operations and thus are not currently materially exposed to
foreign currency fluctuations. We do not expect a material loss from our
marketable securities investments and believe that our potential interest rate
exposure is not material.
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<PAGE> 27
BUSINESS
OVERVIEW
We provide global delivery services for Internet content, streaming media
and applications and global Internet traffic management services. Our services
improve the speed, quality, availability, reliability and scalability of Web
sites. Our services deliver our customers' Internet content, streaming media and
applications through a distributed worldwide server network which locates the
content and applications geographically closer to users. Using technology and
software that is based on our proprietary mathematical formulas, or algorithms,
we monitor Internet traffic patterns and deliver our customers' content and
applications by the most efficient route available. Our services are easy to
implement and do not require our customers or their Web site visitors to modify
their hardware or software. 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 streaming services offer customers enhanced video and audio quality,
scalability and reliability.
AKAMAI SERVICES
We have developed EdgeAdvantage, an integrated platform of our core
technologies and network infrastructure service used to offer our FreeFlow,
FreeFlow Streaming, Traffic Analyzer, FirstPoint, Akamai Conference and
EdgeScape services. EdgeAdvantage may also be used as a platform for third-party
service offerings, tools and applications. We and our partners intend to use
this platform to introduce a range of value added services and applications.
FREEFLOW
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, to be 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; and
- 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.
FREEFLOW STREAMING
Our FreeFlow Streaming service provides for the delivery of streaming audio
and video content to Internet users over the Internet. Streaming media is
Internet content in the form of audio and/or video that a user can access and
play while downloading it from a content provider.
Streaming content can be delivered in three forms:
- on-demand--which means that the user can view and/or listen to the file
at any time, similar to a videotape in a VCR;
- events--which means that the user can only view and/or listen to the file
at a set time, similar to television; or
- Webcast--which means that the user views and/or listens to a continuous
live broadcast program, similar to a daily line-up of programs on a
television network or ongoing radio broadcast, as it occurs.
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<PAGE> 28
FreeFlow Streaming supports all three forms of streaming content. FreeFlow
Streaming incorporates our proprietary SteadyStreamSMtechnology which splits an
encoded broadcast signal into multiple streams, transmits the streams across the
Akamai network, and recombines them at the appropriate Akamai network server to
deliver the broadcast in its original high quality format. This service enables
customers to enjoy enhanced video and audio quality, scalability and
reliability. The primary pricing model for our FreeFlow Streaming service is
based on megabytes of content delivered. Customers commit to pay for a minimum
usage level over a fixed contract term, and pay additional fees when usage
exceeds the commitment. The pricing is scaled, so that a customer who commits to
a higher level of monthly usage will pay lower amount of money per megabyte
delivered.
As a result of our acquisitions of Network24 and INTERVU, we also offer a
set of applications for developing and delivering interactive media broadcasts,
including audio and video streaming. This set of applications enables Web site
owners to create customized programs of audio and video content, synchronized
presentations, audience polling, and e-Commerce capabilities in a format
designed to engage users in an interactive way. This set of applications can be
used for product rollout presentations, seminars, corporate earnings calls,
distance learning, interactive entertainment and other applications.
TRAFFIC ANALYZER
Our Traffic Analyzer service is a Java-based tool that provides real-time
online traffic monitoring of both a customer's Web site and our network on a
continual basis. Customers may also use our Traffic Analyzer service to quantify
traffic patterns during significant media events. For example, our customers
that advertised their Web sites during the Super Bowl and the Academy Awards and
during streamed events such as the NCAA's Men's Basketball Tournament were able
to analyze the real-time traffic data on their Web sites during these events.
FIRSTPOINT
In June 2000, we introduced commercially FirstPoint, a global traffic
management service for content providers with geographically distributed Web
servers. FirstPoint uses our global network and real-time tracking of Internet
conditions to ensure that Web site visitors reach the optimal server location.
FirstPoint directs inbound Web traffic so that it reaches the server location
best able to handle each individual user request. This offers a significant
advantage to content providers seeking to maximize the performance and
availability of a mirrored Web site. The FirstPoint service is fully
interoperable with local load balancing solutions.
AKAMAI CONFERENCE
In June 2000, we introduced commercially Akamai Conference, a new family of
conference casting solutions that incorporate live audio and video streaming
services and interactive components into traditional conference call offerings
in a fully automated fashion. Akamai Conference will be made available only
through a number of key conferencing service providers, including AT&T,
WorldCom, Global Crossing Conferencing and ACT Teleconferencing, which are
integrating components of these solutions into their conferencing offerings.
EDGESCAPE
In June 2000, we introduced commercially EdgeScape, a knowledge delivery
service that enables content providers to more intelligently serve content and
control assets on their Web sites. EdgeScape utilizes our mapping and data
collection techniques to identify the geographic location from which users
access our customers' Web sites, the network origin of the user's request and
other information. We are thus able to assist our content providers in their
efforts to customize the delivery of content to users so that their experience
on a Web site has more relevance and efficiency each time they visit.
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TECHNOLOGY
Our services incorporate the following technologies:
URLs. Our 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.
Our customers identify which of their Web objects are to be delivered
over our network. The customer then runs a software utility we provide,
called Launcher, which searches for the URLs of the selected objects and
tags them with a special code. This modification transforms each URL for
content to be delivered over our network 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 our network to retrieve those objects. Our process does not
require any modification to the browser or other personal computer
configuration changes. While we 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 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. We
employ 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 or applications toward the most efficient Akamai
server to deliver the requested content or applications. When an Internet
user requests a page containing content to be delivered over our network,
the user's browser asks a Domain Name Server to find an IP address for our
network. The DNS automatically directs the query to one of our top-level
DNS servers rather than to the central Web site. Our 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 one of our 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 our 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. Our servers first determine the optimal
region for serving content to a user at a given moment. We use proprietary
algorithms to then 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. We perform real-time monitoring of our 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
our system is the use of distributed control. Therefore, if any computer,
data center or portion of the Internet fails, our services will continue
operating.
We constantly monitor 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. We rebuild this map periodically to reflect changing
conditions.
Real-time monitoring also ensures reliability. A region is suspended
if the data center in which our servers are located fails or is performing
poorly. However, even when this disruption occurs, the FreeFlow service
continues to function. To ensure fault tolerance, we deploy back-up
low-level DNS servers in each
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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.
CUSTOMERS
We began the introduction of our services commercially in April 1999. Our
customer base spans a broad spectrum of Internet categories. Sales to Apple
Computer and Yahoo! represented 22% and 13%, respectively, of our total revenue
for the year ended December 31, 1999. Sales to Apple Computer represented 18% of
our total revenue for the six months ended June 30, 2000.
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. In addition, we have recently begun to
directly market and sell our services to smaller Web sites and businesses
through our telesales force. As of July 31, 2000, we had 359 employees in our
sales, marketing and distribution organization, of whom 99 are in direct sales.
Currently our sales force is actively targeting both domestic and international
companies, focusing on Web sites that have the greatest number of visitors,
Fortune 100 companies and other companies with large operations worldwide. In
January 2000, we established our new European headquarters based in Munich,
Germany, with offices in Paris, France and London, England.
In addition to our direct sales efforts, we have implemented a Reseller
program with Web hosting companies, system integration firms, streaming
technology companies and commerce service providers. As of July 31, 2000, our
resellers include: Digex, Global Center, NaviSite, IBM, CacheFlow, Genuity,
LoudEye, Encode This and Virage. Our indirect sales channel allows us to greatly
enhance our reach in the marketplace. In the first six months of 2000, indirect
sales represented 9% of our revenue. We have also established an Alliance
Partner program with Web developers, systems integrators and Web-focused
application providers. We encourage our alliance partners to recommend the
Akamai solution to their customers as part of their design, integration and
consulting work for those customers. As of July 31, 2000, we had over 100
partners enrolled in this program.
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 July 31, 2000, we had 30 employees in
the 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. We have many professionals with advanced academic degrees providing
customer care and technology support directly to our customers. As of July 31,
2000, we had 31 employees in our customer service and support organization, 59
employees in our product management group and 51 employees in our account
management organization. We are seeking to hire additional customer service and
support personnel as our customer base grows and as introduces 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 participate in a variety of Internet, computer and financial
industry conferences. As of July 31, 2000, we had 31 employees in our marketing
communications organization.
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NETWORK ALLIANCES
As of July 31, 2000, we have deployed more than 4,250 servers in 50
countries across more than 225 telecommunication networks. Telecommunications
and satellite networks with which we have formed alliances include: AboveNet
Communications, America Online Inc., At Home Corporation, AUCS Communications
Services, Belgacom Skynet, Cable & Wireless USA, CPRMarconi, EasyNet France,
Exodus Communications, Genuity, GTS Carrier Services, Hellas OnLine, Helsinki
Telephone Corporation, interNode systems, Korea Telecom, Level 3 Communications,
Loral, PSINet, QS Communications AG, Road Runner, Teleglobe, Telenor Nextel,
Telenordia, Unisource Iberia, UUNET Technologies, Verio, VisiNet and WonderNet.
Most of our servers are currently deployed in 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 Network
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 our servers, Internet service providers obtain access to popular content
from the Internet that is served from our 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.
ENGINEERING AND DEVELOPMENT
Our 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
our engineering and development organization. As of July 31, 2000, we had 420
employees devoted to engineering and development efforts.
We are focusing our engineering and development efforts on enhancing our
FreeFlow and FreeFlow Streaming services and building on our technology to
develop new services. From our inception in August 1998 through July 31, 2000,
our engineering and development expenses were approximately $36.9 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.
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COMPETITION
The market for delivery services for Internet content, streaming media and
applications is new, intensely competitive and characterized by rapidly changing
technology, evolving industry standards and frequent new product and service
installations. We expect competition to increase both from existing competitors
and new market entrants for various components of our services. We compete
primarily on the basis of:
- performance of service, including speed of delivery, quality,
reliability, peak crowd protection, and global content delivery
capabilities;
- ease of implementation and use of service;
- types of content and applications delivered;
- customer support;
- brand recognition;
- partnerships to provide complete customer solutions; 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. We also compete with companies that host online
conferences using proprietary conferencing applications.
Our competitors may be able to respond more quickly than we can to new or
emerging technologies and industry standards 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 currently have one issued
United States patent covering our FreeFlow content delivery service, and we are
now seeking to obtain patent protection on our other service offerings. We
currently have no issued patents covering these other service offerings. We also
own two United States patents covering methods and systems for storing and
retrieving data over a distributed computer network. We cannot predict whether
any of these issued patents will afford us any meaningful protection. We cannot
predict whether any patent application we filed will result in any issued patent
or, if a patent is issued, any meaningful protection. We seek to limit
disclosure of our intellectual property by requiring employees and consultants
with access to our proprietary information to 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 and services 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
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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. One of these patent
applications has now issued. We cannot predict whether any of the other
applications will result in issued patents that will provide us with 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 United States 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 and is effective for the life
of the relevant patents and patent applications, 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 July 31, 2000, we had a total of 1,123 full-time and part-time
employees. 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.
FACILITIES
Our headquarters are currently in approximately 130,000 square feet of
leased office space located in two locations in Cambridge, Massachusetts. In
addition, our west coast offices are in approximately 24,360 square feet of
leased office space located in San Mateo, California and approximately 57,500
square feet of leased office space in two locations in San Diego, California. We
lease approximately 21,000 square feet of office space in Germany. In addition,
we lease office space in Cupertino, California; Seattle, Washington; Fairfax,
Virginia; Santa Monica, California; San Francisco, California; and New York, New
York.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages and positions as of
August 31, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
George H. Conrades................... 61 Chairman of the Board of Directors and Chief Executive
Officer
Paul Sagan........................... 41 President and Chief Operating Officer
F. Thomson Leighton.................. 43 Chief Scientist and Director
Daniel M. Lewin...................... 30 Chief Technology Officer and Director
Timothy Weller....................... 35 Chief Financial Officer and Treasurer
Earl P. Galleher III................. 40 Executive Vice President
Robert O. Ball III................... 42 Vice President of Business Development
Peter Danzig......................... 39 Vice President of Technology
Antony P. Falco...................... 31 Vice President of Product Management
Avraham T. Freedman.................. 30 Vice President, Chief Network Architect
Steven P. Heinrich................... 55 Vice President of Human Resources
Kathryn L. Jorden.................... 32 Vice President, General Counsel and Secretary
Jonathan Seelig...................... 28 Vice President of Corporate Strategy and Development
Ross A. Seider....................... 53 Vice President, Engineering and Operations
Karen C. Stumcke..................... 37 Vice President and Chief Accounting Officer
Wendy P. Ziner....................... 40 Vice President of Marketing Communications
Arthur H. Bilger(2).................. 47 Vice Chairman of the Board of Directors
Todd A. Dagres(1).................... 40 Director
Terrance G. McGuire(1)(2)............ 44 Director
Edward W. Scott(2)................... 37 Director
</TABLE>
------------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Set forth below is 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 Viacom Inc. and Infinity Broadcasting, a
media company, and Cardinal Health, Inc., a provider of services supporting the
health care industry. 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 not-for-profit membership organization, whose members
are
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multinational corporations 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. Mr. Sagan
is also a director of Open Market, Inc. and Medialink Worldwide Inc.
F. Thomson Leighton co-founded Akamai and has served as Chief Scientist and
as 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 leave 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.
Earl P. Galleher III has served as Executive Vice President of Akamai since
June 2000 and as Vice President of Worldwide Sales and Support from March 1999
until June 2000. 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.
Robert O. Ball III has served as Vice President of Business Development of
Akamai since June 2000 and as Vice President, General Counsel and Secretary from
July 1999 until June 2000. 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.
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.
Antony P. Falco has served as Vice President of Product Management of
Akamai since June 2000. Mr. Falco served as Vice President, Technical Services
of Akamai from March 2000 to June 2000 and as Director, Technical Consulting of
Akamai from March 1999 to March 2000. From December 1998 to February 2000, Mr.
Falco was the Director, Product Management at MyWorld Connect, Inc. a wireless
Internet corporation. Mr. Falco served as the Director, Unix Strategic Account
Services for Digex, Inc., a national Internet carrier, from June 1998 to
December 1998 and as Site Engineer from December 1997 to June 1998. From June
1996 to December 1997, Mr. Falco was the Manager of Technical Services at Aspen
Systems Corporation, a government contractor. Prior to joining Aspen Systems,
from May 1995 to May 1996 Mr. Falco was an IT Manager at Public Citizens, a
not-for-profit group focusing on consumer advocacy.
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Avraham T. Freedman has served as Vice President of Network Strategy and
Deployment of Akamai since May 2000. Prior to joining Akamai in October 1999,
Mr. Freedman served as Vice President of Engineering at AboveNet Communications,
an Internet connectivity company, from November 1998 until October 1999. Mr.
Freedman is the Managing Member of Netaxs, LLC, the first ISP in Philadelphia,
which he founded in 1992. Mr. Freedman spends approximately ten hours per week
providing advisory services to Netaxs.
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.
Kathryn L. Jorden has served as Vice President, General Counsel and
Secretary of Akamai since June 2000, and served as Associate General Counsel
from September 1999 to June 2000. Prior to joining Akamai, Ms. Jorden was an
associate at Baker & Daniels, a law firm, from January 1999 to July 1999. She
held the position of associate general counsel at HealthCare Financial Partners,
an asset-based lender, from March 1998 to June 1999. Ms. Jorden was an associate
at Hogan & Hartson LLP, a law firm, from May 1996 to March 1998, and served as
an attorney adviser at the SEC from September 1993 to May 1996.
Jonathan Seelig co-founded Akamai in August 1998 and has served as Vice
President of Corporate Strategy and Development since June 2000 and served as
Vice President of Strategy and Corporate Development from August 1998 until June
2000. 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.
Ross A. Seider joined Akamai as Vice President, Engineering and Operations
in October 1999. Prior to joining Akamai, Mr. Seider was a vice president of
product development in Motorola's Information Systems Group, a $750 million
supplier of wireline and cable packet communications equipment and services.
From 1987 to 1999, Mr. Seider held various management positions at Motorola
including his recent position as manager for all engineering development and
support for the Multiservices Network Division's WAN-access, multi-protocol,
router family.
Karen C. Stumcke joined Akamai in December 1998 as Controller and has
served as Vice President and Chief Accounting Officer since August 2000. Prior
to joining Akamai, from November 1997 to November 1998, Ms. Stumcke served as
Controller for XCOM Technologies, a venture-funded, start-up CLEC that was
acquired by Level 3 Communications. She held various positions within the
finance organization at the Bank of Boston, a financial institution, from
November 1990 to October 1997. Ms. Stumcke is a certified public accountant in
The Commonwealth of Massachusetts.
Wendy P. Ziner joined Akamai in May 1999 as Director of Marketing and has
been Vice President of Marketing Communications since May 2000. Prior to joining
Akamai, from 1994 to 1998, Ms. Ziner served as Director of Marketing
Communications for Open Market, Inc., a leading e-commerce software firm.
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.
35
<PAGE> 37
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. Mr. McGuire also
serves as director of Aspect Medical Systems, Inc., an anesthesia monitoring
company.
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 our board 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 our
directors or executive officers.
ELECTION OF DIRECTORS
The board of directors is divided into three classes, each of whose members
serve for a staggered three-year term. Messrs. Leighton and Scott serve in the
class whose term expires in 2001; Messrs. Bilger, Dagres and Lewin serve in the
class whose term expires in 2002; and Messrs. Conrades and McGuire serve in the
class whose term expires in 2003. Upon the expiration of the term of a class of
directors, directors in that class will be elected for three-year terms at the
annual meeting of our stockholders in the year that the 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 any 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. Dagres
and McGuire, 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.
The audit committee, which consists of Messrs. Bilger, McGuire and Scott,
reviews the professional services provided by independent accountants, the
independence of the accountants from our management, our annual financial
statements and our system of internal accounting controls. The audit committee
also reviews other matters with respect to our accounting, auditing and
financial reporting practices and procedures as it finds appropriate or may be
brought to its attention.
36
<PAGE> 38
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to the compensation
earned by (1) each of the persons who served during 1999 as our chief executive
officer and (2) each of our four other most highly compensated executive
officers who received annual compensation in excess of $100,000 in 1999. We
refer to these individuals as the Named Executive Officers. In the table below,
columns required by the regulations of the SEC, have been omitted where no
information was required to be disclosed under those columns.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -----------------------
----------------------- NUMBER OF SECURITIES
NAME AND PRINCIPAL POSITION(1) YEAR SALARY($) BONUS($)(2) UNDERLYING OPTIONS/SARS
------------------------------ ---- --------- ----------- -----------------------
<S> <C> <C> <C> <C>
George H. Conrades............................ 1999 260,077 -- --
Chairman of the Board of Directors and 1998 -- -- --
Chief Executive Officer
Daniel M. Lewin(3)............................ 1999 120,000 -- --
Chief Technology Officer and Director 1998 30,000 -- --
Paul Sagan.................................... 1999 205,417 -- --
President and Chief Operating Officer 1998 22,275 -- --
Robert O. Ball III............................ 1999 105,769 100,000 60,000
Vice President of Business Development 1998 -- -- --
Earl P. Galleher III.......................... 1999 137,981 50,000 --
Executive Vice President 1998 -- -- --
David Goodtree(4)............................. 1999 115,385 100,000 1,260,000
Vice President of Strategy and Products 1998 -- -- --
</TABLE>
---------------
(1) Mr. Conrades commenced employment with Akamai in April 1999; Mr. Lewin
co-founded Akamai in August 1998; Mr. Sagan commenced employment with Akamai
in October 1998; Mr. Ball commenced employment with Akamai in July 1999; Mr.
Galleher commenced employment with Akamai in March 1999; and Mr. Goodtree
commence employment with Akamai in March 1999.
(2) Other compensation in the form of perquisites and other personal benefits
has been omitted because these perquisites and other personal benefits
contributed less than $50,000 or 10% of the total salary and bonus for each
Named Executive Officer for that year.
(3) Daniel M. Lewin resigned as President and became our Chief Technology
Officer on May 18, 1999.
(4) David Goodtree resigned as Vice President of Strategy and Products on June
23, 2000.
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<PAGE> 39
OPTION GRANTS DURING FISCAL YEAR 1999
The following table sets forth each grant of stock options during 1999 to
each of the Named Executive Officers. No stock appreciation rights were granted
during such fiscal year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------
PERCENT OF
TOTAL POTENTIAL REALIZABLE
NUMBER OF OPTIONS/ SARS VALUE AT ASSUMED
SECURITIES GRANTED TO ANNUAL RATES OF STOCK
UNDERLYING EMPLOYEES IN EXERCISE OR PRICE APPRECIATION FOR
OPTIONS/ FISCAL BASE PRICE OPTION TERM (2)
SARS YEAR PER SHARE EXPIRATION -----------------------
GRANTED 1999 (%) ($/SHARE)(1) DATE 5% ($) 10% ($)
---------- ------------- ------------ ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
George H. Conrades............ -- -- -- -- -- --
Daniel M. Lewin............... -- -- -- -- -- --
Paul Sagan.................... -- -- -- -- -- --
Robert O. Ball III............ 60,000 0.4 19.80 10/28/09 747,127 1,893,366
Earl P. Galleher III.......... -- -- -- -- -- --
David Goodtree................ 1,260,000 8.7 .0417 3/22/09 33,043 83,738
</TABLE>
---------------
(1) The exercise price was equal to the fair market value of our common stock as
determined by the board of directors on the date of grant.
(2) The potential realizable value is calculated based on the term of the stock
option at the time of grant. Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange
Commission and does not represent our prediction of stock price performance.
The potential realizable values at 5% and 10% appreciation are calculated by
assuming that the exercise price on the date of grant appreciates at the
indicated rate for the entire term of the stock option and that the stock
option is exercised at the exercise price and sold on the last day of its
term at the appreciated price.
OPTION EXERCISES DURING FISCAL YEAR 1999
The following table sets forth for each of the Named Executive Officers
stock options exercised and the number and value of securities underlying
unexercised options that are held by the Named Executive Officers as of December
31, 1999. None of the Named Executive Officers exercised stock options in 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1999 AT DECEMBER 31, 1999($)(1)
--------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
George H. Conrades.............................. -- -- -- --
Daniel M. Lewin................................. -- -- -- --
Paul Sagan...................................... -- -- -- --
Robert O. Ball III.............................. -- 60,000 -- 18,469,500
Earl P. Galleher III............................ -- -- -- --
David Goodtree.................................. -- 1,260,000 -- 412,754,958
</TABLE>
---------------
(1) Based on the closing sale price of our common stock on December 31, 1999
($327 5/8), as reported by the Nasdaq National Market, less the option
exercise price.
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<PAGE> 40
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 executive officers, directors or 5% or greater
stockholders. For more detail on shares of stock held by these purchasers, see
"Principal Stockholders" on page 42.
<TABLE>
<CAPTION>
WARRANTS TO
PURCHASE THE
FOLLOWING
SERIES A SERIES B 15% SENIOR SHARES OF AGGREGATE
PREFERRED PREFERRED SUBORDINATED COMMON PURCHASE
NAME STOCK(1) STOCK(1) NOTES STOCK PRICE
---- --------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Arthur H. Bilger(2).................. 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.(3)......... 513,165 63,056 -- -- $ 4,850,056
George H. Conrades(4)................ 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.(5).......................... 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) Upon the closing of our initial public offering on November 3, 1999, each
share of preferred stock automatically converted into shares of common
stock.
(2) 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 Akamai
common stock issued upon conversion 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.
(3) 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.
(4) Excludes securities held by entities affiliated with Polaris Venture
Management Co. II, L.L.C., of which Mr. Conrades is a general partner.
(5) 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 130,356 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 3,168
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 the Series A
convertible preferred stock was $7.60.
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.
39
<PAGE> 41
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
the 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 its Series C convertible preferred stock and an option to
purchase 5% of the shares sold in the initial public offering. In October 1999,
Baker exercised both of these options.
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 our 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 had a term of five years and an interest rate of 15% per
year, compounded annually. As of December 31, 1999, $2.8 million in aggregate
principal amount remained outstanding under the 15% senior subordinated notes.
ISSUANCES OF COMMON STOCK
The following table presents selected information regarding the 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 common stock at their purchase
price in the event that the person ceases to provide services to us before the
date specified in their respective agreements. 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>
We agreed to the material terms of each of the preferred stock issuances
described above after arms'-length negotiations. All future transactions,
including loans between us and our officers, directors, principal stockholders
and their affiliates will be approved by a majority of the members of our board,
including a majority of the independent and disinterested directors on our
board, 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 our capital stock. 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 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. Under the terms of Mr. Conrades's restricted stock
40
<PAGE> 42
grant, our right to repurchase shares of unvested restricted stock will cease in
the event of 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. Under the terms of Mr. Sagan's restricted stock grant,
our right to repurchase shares of unvested restricted stock will cease in the
event of a change in control 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 of Business
Development. 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. Under the terms of Mr. Ball's restricted stock
grant, our right to repurchase shares of unvested restricted stock will cease in
the event of a change in control 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 and
Treasurer. 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. Under the terms of Mr. Weller's restricted
stock grant, our right to repurchase shares of unvested restricted stock will
cease in the event of a change in control of Akamai. In addition, if Mr.
Weller's employment is terminated by us other than for cause or by Mr. Weller
for good reason (as defined in Mr. Weller's restricted stock agreement), all of
Mr. Weller's unvested restricted stock will vest.
On March 4, 1999, we entered into a letter agreement with Earl P. Galleher
III, our Executive Vice President. The letter agreement provides that if Akamai
is sold then Mr. Galleher's restricted stock shall become fully vested. The
letter agreement also provides that if we terminate the employment of Mr.
Galleher without cause after March 4, 2000 and prior to March 4, 2001, then Mr.
Galleher will receive a one-time payment equal to his then-current annualized
base salary and he will receive an additional year of vesting of his restricted
stock. The letter agreement further provides that if we terminate the employment
of Mr. Galleher after March 4, 2001 and prior to March 4, 2002, then Mr.
Galleher will receive a one-time payment equal to one-half of his then-current
annualized base salary and he will receive an additional year of vesting of his
restricted stock.
We purchase bandwidth and colocation space from LIG Holdings, L.P., and
Internet service provider. Avraham T. Freedman, our Vice President, Chief
Network Architect, is a principal of LIG Holdings with a 35% equity ownership.
Between January 1, 2000 and August 31, 2000, we paid approximately $1,045,000 to
LIG Holdings, including refundable deposits of approximately $973,000.
41
<PAGE> 43
PRINCIPAL STOCKHOLDERS
The following table sets forth information as to the number of shares of
our common stock beneficially owned as of July 31, 2000 by:
- each person known by us to beneficially own more than 5% of the
outstanding shares of our common stock;
- each of our directors;
- our chief executive officer and other most highly compensated executive
officers for the year ended December 31, 1999; and
- all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the SEC,
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., 500
Technology Square, Cambridge, Massachusetts 02139.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES COMMON
BENEFICIALLY STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OUTSTANDING
------------------------------------ ------------ -------------
<S> <C> <C>
Battery Ventures IV, L.P.(1)................................ 10,269,304 9.7%
20 William Street
Wellesley, MA 02481
F. Thomson Leighton......................................... 8,699,750 8.2
Daniel M. Lewin............................................. 8,816,750 8.3
Baker Communications Fund, L.P.(2).......................... 7,818,471 7.3
c/o Baker Capital Partners, LLC
540 Madison Avenue
New York, NY 10022
George H. Conrades(3)....................................... 5,074,381 4.8
Entities affiliated with Polaris Venture Management Co. II,
L.L.C.(4)................................................. 6,662,623 6.3
1000 Winter Street, Suite 3350
Waltham, MA 02451
Arthur H. Bilger(5)......................................... 1,277,680 1.2
Todd A. Dagres(6)........................................... 10,269,304 9.7
c/o Battery Ventures IV, L.P.
20 William Street
Wellesley, MA 02481
Terrance G. McGuire(7)...................................... 6,662,623 6.3
c/o Polaris Management Co. II, LLC
1000 Winter Street, Suite 3350
Waltham, MA 02451
Edward W. Scott(8).......................................... 7,818,471 7.3
c/o Baker Capital Partners, LLC
540 Madison Avenue
New York, NY 10022
Paul Sagan(9)............................................... 2,037,777 1.9
</TABLE>
42
<PAGE> 44
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES COMMON
BENEFICIALLY STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OUTSTANDING
------------------------------------ ------------ -------------
<S> <C> <C>
Earl P. Galleher III(10).................................... 1,334,295 1.3
Robert O. Ball III(11)...................................... 250,300 *
David Goodtree(12).......................................... 394,050 *
All executive officers and directors as a group (20
persons)(13).............................................. 56,215,902 52.2%
</TABLE>
------------------------------
* Less than 1%.
(1) Includes 157,906 shares held by Battery Investment Partners IV, LLC.
Battery Ventures IV, L.P. is the managing member of Battery Investment
Partners IV, LLC.
(2) Includes 934,668 shares issuable upon the exercise of warrants exercisable
within 60 days after July 31, 2000.
(3) Includes 8,694 shares issuable upon the exercise of warrants exercisable
within 60 days after July 31, 2000. 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 6,377,474 shares by Polaris Venture Partners II L.P., 151,625
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 July 31, 2000 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 July 31, 2000.
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 1,220,872 shares held by ADASE Partners, L.P., 43,458 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 July
31, 2000. 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 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 10,111,398 shares held by Battery Ventures IV, L.P. and 157,906
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 6,377,474 shares held by Polaris Venture Partners II L.P.,
151,625 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 July 31, 2000 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 July
31, 2000. 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 6,883,803 shares held by Baker Communications Fund, L.P. and
934,668 shares issuable upon the exercise of warrants exercisable within 60
days after July 31, 2000 held by Baker Communications Fund, L.P. Baker
Capital Partners, LLC is general partner of Baker Fund, L.P. Edward W.
Scott, a director of Akamai, is a general partner of Baker Communications
Fund, L.P. Mr. Scott disclaims
43
<PAGE> 45
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 1,932 shares issuable upon the exercise of warrants exercisable
within 60 days after July 31, 2000.
(10) Includes 6,450 shares issuable upon the exercise of warrants exercisable
within 60 days after July 31, 2000.
(11) Includes 100 shares held as custodian for each of Mr. Ball's three minor
children.
(12) Mr. Goodtree resigned as Vice President of Strategy and Products on June
23, 2000.
(13) Includes 1,307,786 shares issuable upon the exercise of options and
warrants exercisable within 60 days after July 31, 2000.
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<PAGE> 46
DESCRIPTION OF CONVERTIBLE NOTES
GENERAL
The convertible notes were issued under an indenture, dated as of June 20,
2000, between us and State Street Bank and Trust Company, as trustee. The
following description is a summary of the material provisions of the indenture.
It does not restate this agreement in its entirety. We urge you to read the
indenture and registration rights agreement because they, and not this
description, define your rights as holders of these convertible notes. Copies of
the proposed forms of the indenture and the registration rights agreement are
available to you upon request.
You can find the definitions of certain terms used in this description
under the subheading "Definitions." In this section of this prospectus entitled
"Description of Convertible Notes," when we refer to Akamai or Akamai
Technologies, Inc., or "we," "our," or "us," we are referring only to Akamai
Technologies, Inc. and not any of its subsidiaries.
The convertible notes are unsecured obligations, subordinated in right of
payment to all our existing and future Senior Debt as described under
"--Subordination of Convertible Notes" and convertible into our common stock as
described under "--Conversion." The indenture does not contain any financial
covenants or restrictions on the payment of dividends, the incurrence of Senior
Debt or issuance or repurchase of our securities. The indenture contains no
covenants or other provisions to afford protection to holders of the convertible
notes in the event of a highly leveraged transaction by us except to the extent
described under "--Repurchase at the Option of Holders." The convertible notes
are not guaranteed by any of our subsidiaries.
PRINCIPAL, MATURITY AND INTEREST
We issued convertible notes with a maximum aggregate principal amount of
$300,000,000 (including $50,000,000 from the exercise of the over allotment
option). The convertible notes mature on July 1, 2007. Interest on the
convertible notes accrues at a rate of 5 1/2% per annum from the date of
original issuance, payable semiannually on January 1 and July 1, commencing on
January 1, 2001. We will make each interest payment to the holders of record of
the convertible notes on the immediately preceding December 15 and June 15.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
The convertible notes are payable both as to principal and interest on
presentation of the convertible notes if in certificated form at the offices or
agencies we maintain for such purpose within the City and State of New York or,
at our option, payment of interest may be made by check mailed to the holders of
the convertible notes at their respective addresses set forth in the register of
holders of convertible notes or, if a holder who holds an aggregate principal
amount of at least $5.0 million of convertible notes so requests, by wire
transfer of immediately available funds to an account previously specified in
writing by such holder to us and the trustee. Until otherwise designated by us,
our office or agency in New York will be the offices of the trustee maintained
for such purpose. The convertible notes will be issued in registered form,
without coupons, and in denominations of $1,000 and integral multiples of
$1,000.
CONVERSION
The holder of any convertible note has the right, exercisable at any time
following the date of original issuance of the convertible note and prior to its
maturity, to convert the principal amount of the convertible note (or any
portion of it that is an integral multiple of $1,000) into shares of our common
stock at the conversion price set forth on the cover page of this prospectus,
subject to adjustment as described below, which we refer to as the "conversion
price." The foregoing notwithstanding, if a convertible note is called for
redemption, the conversion right will terminate at the close of business on the
business day immediately preceding the date fixed for redemption.
If any convertible notes are converted during the period after any record
date but before the next interest payment date, interest on such convertible
notes will be paid on the next interest payment date, notwithstanding such
conversion, to the holder of record on the record date of those convertible
notes. Any convertible
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<PAGE> 47
notes that are, however, delivered to us for conversion after any record date
but before the next interest payment date must, except as described in the next
sentence, be accompanied by a payment equal to the interest payable on such
interest payment date on the principal amount of convertible notes being
converted. We will not require the payment to us described in the preceding
sentence if, during that period between a record date and the next interest
payment date, convertible notes are delivered for conversion on or after the
date that we have issued a redemption notice and prior to the date of
redemption. If any convertible notes are converted after an interest payment
date but on or before the next record date, no interest will be paid on those
convertible notes. No fractional shares will be issued upon conversion, but a
cash adjustment will be made for any fractional shares.
The conversion price is subject to adjustment upon the occurrence of
certain events, including:
(1) the issuance of shares of common stock as a dividend or
distribution on the common stock;
(2) the subdivision or combination of the outstanding common stock;
(3) the issuance to substantially all holders of common stock of
rights or warrants to subscribe for or purchase common stock (or securities
convertible into common stock) at a price per share less than the then
current market price per share, as defined;
(4) the distribution of shares of our capital stock (other than common
stock), evidences of indebtedness or other assets (excluding dividends in
cash, except as described in clause (5) below) to all holders of common
stock;
(5) the distribution, by dividend or otherwise, of cash to all holders
of common stock in an aggregate amount that, together with the aggregate of
(i) any other distributions of cash within the 12 months preceding the date
fixed for determining the stockholders entitled to such distribution that
did not trigger a conversion price adjustment to all holders of our common
stock and (ii) all Excess Payments in respect of each tender offer or other
negotiated transaction by us or any of our subsidiaries for common stock
concluded within the preceding 12 months not triggering a conversion price
adjustment, exceeds 15% of the product of (a) the current market price per
share (determined as set forth below) on the date fixed for the
determination of stockholders entitled to receive such distribution times
(b) the number of shares of common stock outstanding on such date;
(6) the payment of an Excess Payment in respect of a tender offer or
other negotiated transaction by us or any of our subsidiaries for common
stock, if the aggregate amount of such Excess Payment, together with the
aggregate amount of cash distributions made within the preceding 12 months
not triggering a conversion price adjustment and all Excess Payments in
respect of each tender offer or other negotiated transaction by us or any
of our subsidiaries for common stock concluded within the preceding 12
months not triggering a conversion price adjustment, exceeds 15% of the
product of the current market price per share on the expiration of the
tender offer or the consummation of the other negotiated transaction, as
the case may be, times the number of shares of common stock outstanding on
that date; and
(7) the distribution to substantially all holders of common stock of
rights or warrants to subscribe for securities (other than those referred
to in clause (3) above). In the event of a distribution to substantially
all holders of common stock or rights to subscribe for additional shares of
our capital stock (other than those referred to in clause (3) above), we
may, instead of making any adjustment in the conversion price, make proper
provision so that each holder of a convertible note who converts the
convertible note after the record date for the distribution and prior to
the expiration or redemption of the rights will be entitled to receive upon
that conversion, in addition to shares of common stock, an appropriate
number of rights.
No adjustment of the conversion price will be made until cumulative adjustments
amount to one percent or more of the conversion price as last adjusted.
If we reclassify or change our outstanding common stock, or consolidate
with or merge into or transfer or lease all or substantially all of our assets
to any person, or we are a party to a merger that reclassifies or
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<PAGE> 48
changes our outstanding common stock, the convertible notes will become
convertible into the kind and amount of securities, cash or other assets which
the holders of the convertible notes would have owned immediately after the
transaction if the holders had converted the convertible notes immediately
before the effective date of the transaction.
The indenture also provides that if rights, warrants or options expire
unexercised, the conversion price shall be readjusted to take into account the
actual number of warrants, rights or options which were exercised.
In the indenture, the "current market price" per share of common stock on
any date is deemed to be the average of the daily market prices for the shorter
of (1) 10 consecutive business days ending on the last full trading day on the
exchange or market referred to in determining the daily market prices prior to
the time of determination (as defined in the indenture) or (2) the period
commencing on the date next succeeding the first public announcement of the
issuance of rights or warrants or distribution through the last full trading day
prior to the time of determination.
We will be permitted to make such reductions in the conversion price as we,
in our discretion, determine to be advisable in order that any stock dividend,
subdivision of shares, distribution or rights to purchase stock or securities or
distribution of securities convertible into or exchangeable for stock made by us
to our stockholders will not be taxable to the recipients.
SUBORDINATION OF CONVERTIBLE NOTES
The convertible notes are subordinate in right of payment to all of our
existing and future Senior Debt. The indenture does not restrict the amount of
Senior Debt or other Indebtedness that we or any of our subsidiaries can incur.
As of June 30, 2000, we had indebtedness of approximately $1.2 million, which
constituted Senior Debt, and our subsidiaries had outstanding liabilities and
other obligations of approximately $763,000, which would have been structurally
senior to the convertible notes.
The payment of the principal of, interest on or any other amounts due on
the convertible notes is subordinated in right of payment to the prior payment
in full of all of our existing and future Senior Debt. No payment on account of
principal of, redemption of, interest on or any other amounts due on the
convertible notes, including any payments made to holders of convertible notes
pursuant to any Fundamental Change, as further described below under the heading
"Repurchase at the Option of Holders," and no redemption, purchase or other
acquisition of the convertible notes may be made unless (1) full payment of
amounts then due on all Senior Debt has been made or duly provided for pursuant
to the terms of the instrument governing that Senior Debt, and (2) at the time
for, or immediately after giving effect to, any such payment, redemption,
purchase or other acquisition, there does not exist under any Senior Debt or any
agreement under which any Senior Debt has been issued, any default that has
resulted in the full amount of the Senior Debt being declared due and payable.
In addition, the indenture provides that if any of the holders of any issue of
Designated Senior Debt notify us and the trustee that a default has occurred
giving the holders of the Designated Senior Debt the right to accelerate its
maturity, no payment on account of principal, redemption, interest, special
interest, if any, or any other amounts due on the convertible notes and no
purchase, redemption or other acquisition of the convertible notes will be made
for the period commencing on the date this notice, which we refer to as the
payment blockage notice, is received and ending on the earlier of: (A) the date
on which the default was cured or waived, or (B) 180 days from the date notice
is received. We refer to this period as the payment blockage period.
Notwithstanding the foregoing, only one payment blockage notice with respect to
the same event of default or any other events of default existing or continuing
at the time of notice on the same issue of Senior Debt may be given during any
period of 360 consecutive days unless the event of default or other events of
default have been cured or waived for a period of not less than 90 consecutive
days. No new payment blockage period may be commenced by the holders of
Designated Senior Debt during any period of 360 consecutive days unless all
events of default which were the subject of the preceding payment blockage
notice have been cured or waived.
Upon any distribution of our assets in connection with any dissolution,
winding-up, liquidation or reorganization of us or acceleration of the principal
amount due on the convertible notes because of any Event
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<PAGE> 49
of Default, which is further described on pages 53 and 54 below, all Senior Debt
must be paid in full before the holders of the convertible notes are entitled to
any payments whatsoever.
As a result of these subordination provisions, in the event of our
insolvency, holders of the convertible notes may recover ratably less than our
general creditors.
If the payment of the convertible notes is accelerated because of an Event
of Default, we or the trustee shall promptly notify the holders of Senior Debt
or the trustee(s) for the Senior Debt of the acceleration. We may not pay the
convertible notes until five days after the holders or trustee(s) of Senior Debt
receive notice of the acceleration, after which we may pay the convertible notes
only if the subordination provisions of the indenture otherwise permit payment
at that time.
If the trustee or any holder of convertible notes receives any payment or
distribution of our assets of any kind in contravention of any of the terms of
the indenture, whether in cash, property or securities, including, without
limitation by way of set-off or otherwise, in respect of the convertible notes
before all Senior Debt is paid in full, then the payment or distribution will be
held by the recipient in trust for the benefit of holders of Senior Debt, and
will be immediately paid over or delivered to the holders of Senior Debt or
their representative or representatives to the extent necessary to make payment
in full of all Senior Debt remaining unpaid, after giving effect to any
concurrent payment or distribution, or provision therefor, to or for the holders
of Senior Debt.
The convertible notes are our exclusive obligations. Our right to receive
assets of any of our subsidiaries upon their liquidation or reorganization (and
the consequent right of the holders of the convertible notes to participate in
those assets) is effectively subordinated to the claims of that subsidiary's
creditors (including trade creditors), except to the extent that we are
recognized as a creditor of that subsidiary, in which case our claims would
still be subordinate to any security interests in the assets of that subsidiary
and any indebtedness of that subsidiary senior to that held by us.
The indenture does not limit the amount of additional indebtedness,
including Senior Debt, which we can create, incur, assume or guarantee, nor does
the indenture limit the amount of indebtedness and other liabilities which any
subsidiary can create, incur, assume or guarantee.
OPTIONAL REDEMPTION
The convertible notes are not entitled to any sinking fund. At any time on
or after July 3, 2003, we may redeem any portion of the convertible notes, in
whole or in part, on at least 30 days' but no more than 60 days' notice at the
following prices (expressed as a percentage of the principal amount), together
with accrued and unpaid interest, to, but excluding, the redemption date:
If redeemed during the period beginning July 3, 2003 and ending on June 30,
2004 at a redemption price of 103.143%, and if redeemed beginning on July 1
on the dates set forth below for the periods indicated,
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
<S> <C>
July 1, 2004 - June 30, 2005...................... 102.357%
July 1, 2005 - June 30, 2006...................... 101.571%
July 1, 2006 - June 30, 2007...................... 100.786%
July 1, 2007...................................... 100.000%
</TABLE>
If we redeem less than all of the outstanding convertible notes, the
trustee will select the convertible notes to be redeemed in multiples of $1,000
by lot, pro rata or any other method the trustee considers fair and appropriate.
If a portion of your convertible notes is selected for partial redemption and
you convert a portion of the convertible notes, the portion selected for
redemption will be converted. We may not give notice of any redemption if we
have defaulted in payment of interest and the default is continuing.
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<PAGE> 50
MANDATORY REDEMPTION AND REPURCHASE
We are not required to make mandatory redemption or sinking fund payments
with respect to the convertible notes. We are required to make an offer with
respect to a repurchase of the convertible notes under the circumstances
described under the caption "Repurchase at the Option of Holders." We refer to
this offer as the Fundamental Change Offer. Further information with respect to
a Fundamental Change Offer is set forth in the indenture.
REPURCHASE AT THE OPTION OF HOLDERS
If a Fundamental Change, which is further described below, occurs, each
holder of convertible notes will have the right to require us to repurchase all
or any part of the holder's convertible notes equal to $1,000 or an integral
multiple of $1,000, pursuant to the Fundamental Change Offer at a purchase price
equal to 100% of the principal amount, plus accrued and unpaid interest, if any,
as of the date of purchase. We refer to this payment as the Fundamental Change
Payment.
A Fundamental Change is any transaction or event in connection with which
all or substantially all of our common stock shall be exchanged for, converted
into, acquired for or constitute solely the right to receive, consideration,
whether by means of an exchange offer, liquidation, tender offer, consolidation,
merger, combination, reclassification, recapitalization or otherwise, which is
not all or substantially all common stock listed on, or that will be listed
immediately after the transaction or event on:
- a United States national securities exchange, or
- approved for quotation on the Nasdaq National Market or any similar
United States system of automated dissemination of quotations of
securities prices.
Within 25 days following any Fundamental Change, we will mail a notice to
each holder, stating:
(1) that the Fundamental Change Offer is being made under the covenant
entitled "Fundamental Change" and that all convertible notes tendered will
be accepted for payment;
(2) that the purchase price and the purchase date, which will be no
earlier than 30 days nor later than 45 days from the date the notice is
mailed. This date is referred to as the Fundamental Change Payment Date;
(3) that interest will continue to accrue on any convertible notes not
tendered, as provided in the convertible notes;
(4) that, unless we default in the payment of the Fundamental Change
Payment, with respect to all convertible notes accepted for payment under
the Fundamental Change Offer, interest will cease to accrue after the
Fundamental Change Payment Date;
(5) that holders electing to have any convertible notes purchased
under a Fundamental Change Offer will be required to surrender the
convertible notes, with the form entitled Option of Holder to Elect
Purchase on the reverse of the convertible notes completed, to the paying
agent at the address specified in the notice prior to the close of business
on the third business day preceding the Fundamental Change Payment Date;
(6) that holders will be entitled to withdraw their election if the
payment agent receives, not later than the close of business on the second
business day preceding the Fundamental Change Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount of convertible notes delivered for purchase,
and a statement that the holder is withdrawing his election to have the
convertible notes purchased; and
(7) that holders whose convertible notes are being purchased only in
part will be issued new convertible notes equal in principal amount to the
unpurchased portion of the convertible notes surrendered, which unpurchased
portion must be equal to $1,000 or an integral multiple thereof in
principal amount.
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We will comply with the requirements of Rules 13e-4 and 14e-1 under the
Securities Exchange Act of 1934, as amended, which we refer to as the Exchange
Act, and any other securities laws and regulations to the extent those laws and
regulations are applicable in connection with the repurchase of the convertible
notes in connection with a Fundamental Change.
On the Fundamental Change Payment Date, we will, to the extent lawful:
(1) accept for payment convertible notes or portions of convertible
notes tendered under the Fundamental Change Offer;
(2) deposit with the paying agent an amount equal to the Fundamental
Change Payment in respect of all convertible notes or portions of
convertible notes tendered; and
(3) deliver or cause to be delivered to the trustee the convertible
notes accepted together with an Officers' Certificate stating the
convertible notes or portions of convertible notes tendered to us.
The paying agent will promptly mail or deliver to each holder of
convertible notes accepted payment in an amount equal to the purchase price for
the convertible notes. The trustee will promptly authenticate and mail to each
holder a new convertible note equal in principal amount to any unpurchased
portion of the convertible notes surrendered, if any; provided that each new
convertible note will be in a principal amount of $1,000 or an integral multiple
of $1,000. We will publicly announce the results of the Fundamental Change Offer
on or as soon as practicable after the Fundamental Change Payment Date.
Except as described above with respect to a Fundamental Change, the
indenture does not contain any other provision that permits the holders of the
convertible notes to require that we repurchase or redeem the convertible notes
in the event of a takeover, recapitalization or similar restructuring. The
Fundamental Change Offer requirement of the convertible notes may, in certain
circumstances, make more difficult or discourage a takeover of us, and, thus,
the removal of incumbent management. Management has not entered into any
agreement or plan involving a Fundamental Change, although it is possible that
we would decide to do so in the future. Subject to the limitations discussed
below, we could, in the future, enter into various transactions including
acquisitions, refinancings or other recapitalizations, that would not constitute
a Fundamental Change under the indenture, but that could increase the amount of
indebtedness outstanding at the time or otherwise affect our capital structure
or credit ratings.
Our ability to pay cash to the holders of convertible notes under a
Fundamental Change Offer may be limited by our then existing financial resources
and by the subordination provisions of the convertible notes. See "Risk
Factors." Any future credit facilities or other agreements relating to our or
our subsidiaries' indebtedness may contain prohibitions or restrictions on our
ability to effect a Fundamental Change Payment. In the event a Fundamental
Change occurs at a time when such prohibitions or restrictions are in effect, we
could seek the consent of our lenders to the purchase of convertible notes and
other Indebtedness containing change of control provisions or could attempt to
refinance the borrowings that contain those prohibitions or restrictions. If we
do not obtain such consents or repay such borrowings, we will be effectively
prohibited from purchasing the convertible notes. In that case, our failure to
purchase tendered convertible notes would constitute an Event of Default with
respect to the notes, whether or not such purchase is permitted by the
subordination provisions. Moreover, the events that constitute a Fundamental
Change under the indenture may constitute events of default under our future
debt instruments or credit agreements of us or our subsidiaries. Those events of
default may permit the lenders under the debt instruments or credit agreements
to accelerate that debt and, if that debt is not paid or repurchased, to enforce
their security interests in what may be all or substantially all of our assets
or the assets of our subsidiaries. Therefore, our ability to raise cash to repay
or repurchase the convertible notes may be limited.
SELECTION AND NOTICE
If less than all of the convertible notes are to be redeemed at any time,
selection of convertible notes for redemption will be made by the trustee in
compliance with the requirements of any securities exchange on which the
convertible notes are listed. In the absence of any requirements of any
securities exchange or if the convertible notes are not listed, selection of the
convertible note to be redeemed will be made on a pro rata
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basis, provided that no convertible notes of $1,000 or less will be redeemed in
part. Notice of redemption will be mailed by first class mail at least 30 but
not more than 60 days before the redemption date to each holder of convertible
notes to be redeemed at its registered address. If any convertible note is to be
redeemed in part only, the notice of redemption that relates to that convertible
note will state the portion of the principal amount to be redeemed. A new
convertible note in principal amount equal to the unredeemed portion will be
issued in the name of the holder upon cancellation of the original convertible
note. On and after the redemption date, interest ceases to accrue on convertible
notes or portions of them called for redemption.
COVENANTS
LIMITATION ON MERGER, SALE OR CONSOLIDATION
The indenture provides that we may not, directly or indirectly, consolidate
with or merge with or into, or sell, lease or otherwise dispose of all or
substantially all of our assets, on a consolidated basis, whether in a single
transaction or a series of related transactions, to another person or group of
affiliated persons, other than to our wholly-owned subsidiaries, unless:
(1) either:
(a) in the case of a merger or consolidation, we are the surviving
entity; or
(b) the resulting, surviving or transferee entity is a corporation
organized under the laws of the United States, any state thereof or the
District of Columbia and expressly assumes by supplemental indenture all
of our obligations in connection with the convertible notes and the
indenture; and
(2) no Default or Event of Default shall exist immediately before or
after giving effect on a pro forma basis to such transaction.
Upon any permitted consolidation or merger or any permitted sale, lease or
other disposition of all or substantially all of our assets in accordance with
the foregoing, the successor corporation formed by such consolidation or into
which we are merged or to which such sale, lease or other disposition is made,
shall succeed to, and be substituted for, and may exercise every right and power
of, us under the indenture with the same effect as if such successor corporation
had been named therein in the same manner as we are named, and, when a successor
corporation duly assumes all of our obligations under the convertible notes and
the indenture, we will be released from our obligations under the indenture and
the convertible notes, except as to any obligations that arise from or as a
result of such transaction.
For purposes of the foregoing, the transfer, by lease, assignment, sale or
otherwise, of all or substantially all of the properties and assets of one or
more subsidiaries, which properties and assets, if held by us instead of such
subsidiary, would constitute all or substantially all of our properties and
assets, shall be deemed to be the transfer of all or substantially all of our
properties and assets. This "Limitation on Merger, Sale or Consolidation"
covenant will not apply to a sale, assignment, transfer, conveyance or other
disposition of assets between or among us and any of our wholly-owned
subsidiaries.
LIMITATION ON STATUS AS INVESTMENT COMPANY
The indenture provides that we will not, and will not permit any subsidiary
to, conduct our or its business in a fashion that would cause us to be required
to register as an "investment company" (as that term is defined in the
Investment Company Act of 1940, as amended).
REPORTS
Whether or not required by the rules and regulations of the SEC, so long as
any convertible notes are outstanding, we will file with the SEC and furnish to
the holders of convertible notes all quarterly and annual financial information
required to be contained in a filing with the SEC on Forms 10-Q and 10-K,
including a "Management's Discussion and Analysis of Results of Operations and
Financial Condition" and, with respect to the annual information only, a report
by our certified independent accountants, in each case, as required by the rules
and regulations of the SEC as in effect on the Issuance Date.
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<PAGE> 53
EVENTS OF DEFAULT
The indenture provides that each of the following constitutes an Event of
Default:
(1) a default for 30 days in the payment when due of interest on the
convertible notes;
(2) a default in the payment of principal of any convertible note when
due at its stated maturity, upon optional redemption, in connection with a
Fundamental Change Offer or otherwise;
(3) the failure by us to comply for 30 days after notice with any of
our obligations under the covenants described under "Repurchase at the
Option of Holders" and "Limitation on Merger, Sale or Consolidation" (in
each case, other than a failure to purchase convertible notes in connection
with a Fundamental Change Offer);
(4) the failure by us for 60 days after notice to comply with any
other covenants and agreements contained in the indenture or the
convertible notes;
(5) the failure by us or any Significant Subsidiary to make any
payment at final stated maturity, including any applicable grace period, in
respect of our Indebtedness (other than non-recourse obligations) in an
amount in excess of $15 million, and continuance of such failure for 30
days after written notice is given to us by the trustee or to us and the
trustee by the holders of at least 25% in aggregate principal amount of
convertible notes outstanding;
(6) a default by us or any Significant Subsidiary with respect to any
of our Indebtedness (other than non-recourse obligations), which default
results in the acceleration of Indebtedness in an amount in excess of $15
million;
(7) failure by us or any subsidiary of us that is a Significant
Subsidiary or any group of two or more subsidiaries that, taken as a whole,
would constitute a Significant Subsidiary to pay final judgments for the
payment of money (other than any judgment as to which a reputable insurance
company has accepted liability subject to customary terms) aggregating in
excess of $5.0 million, which judgments are not paid, wired, discharged or
stayed within 60 days after their entry; and
(8) certain events of bankruptcy or insolvency with respect to us or
any of our subsidiaries that is a Significant Subsidiary or any group of
two or more subsidiaries that, taken as a whole, would constitute a
Significant Subsidiary.
If any Event of Default occurs and is continuing, the trustee or the
holders of at least 25% in principal amount of the then outstanding convertible
notes may declare all the convertible notes to be due and payable immediately,
subject to the provision limiting payment described in "Subordination of
Convertible Notes." Notwithstanding the foregoing, in the case of an Event of
Default arising from certain events of bankruptcy, insolvency or reorganization,
with respect to us or any Significant Subsidiary, all outstanding convertible
notes will become due and payable without further action or notice. Holders of
the convertible notes may not enforce the indenture or the convertible notes
except as provided in the indenture. Subject to certain limitations, holders of
a majority in principal amount of the then outstanding convertible notes may
direct the trustee in its exercise of any trust or power. The trustee may
withhold from holders of the convertible notes notice of any continuing Default
or Event of Default, except a Default or Event of Default relating to the
payment of principal or interest, if it determines that withholding notice is in
their interest.
In the event of a declaration of acceleration of the convertible notes
because an Event of Default has occurred and is continuing as a result of the
acceleration of any Indebtedness described in clause (6) above, the declaration
of acceleration of the convertible notes will be automatically annulled if:
(1) the holders of any Indebtedness described in such clause (5) have
rescinded the declaration of acceleration in respect of that Indebtedness
within 30 days after the date of the declaration;
(2) the annulment of the acceleration of the convertible notes would
not conflict with any judgment or decree of a court of competent
jurisdiction; and
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<PAGE> 54
(3) all existing Events of Default, except for nonpayment of principal
of or interest on the convertible notes, have been cured or waived.
The holders of a majority in aggregate principal amount of the then
outstanding convertible notes by notice to the trustee may on behalf of all of
the holders waive any existing Default or Event of Default and its consequences
under the indenture except a continuing Default or Event of Default in the
payment of interest on or the principal of the convertible notes.
We are required to deliver to the trustee annually a statement regarding
compliance with the indenture, and upon becoming aware of any Default or Event
of Default, to deliver to the trustee a statement specifying such Default or
Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
None of our directors, officers, employees, incorporators or shareholders,
as such, has any liability for any of our obligations under the convertible
notes or the indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each holder of the convertible notes by
accepting a convertible note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the convertible notes.
Such waiver may not be effective to waive liabilities under the federal
securities laws, and it is the view of the SEC that a waiver of such liabilities
is against public policy.
UNCLAIMED MONEY; PRESCRIPTION
If money deposited with the trustee or paying agent for the payment of
principal or interest remains unclaimed for two years, the trustee and the
paying agent shall pay the money back to us at our written request. After that,
holders of convertible notes entitled to the money must look to us for payment
unless an abandoned property law designates another person and all liability of
the trustee and the paying agent will cease. Other than as set forth in this
paragraph, the indenture does not provide for any prescription period for the
payment of interest and principal on the convertible notes.
BOOK-ENTRY, DELIVERY AND FORM
The convertible notes were initially offered and sold to qualified
institutional buyers in reliance on Rule 144A. We refer to these convertible
notes as Rule 144A Notes. Convertible notes were also offered and sold to a
limited number of accredited investors in transactions exempt from registration
under the Securities Act. We refer to these convertible notes as Accredited
Investor Notes. Except as set forth below, we issued the convertible notes in
registered, global form, without coupons, in minimum denominations of $1,000,
subject to a minimum initial purchase amount of $100,000 in the case of
Accredited Investor Notes, and integral multiples of $1,000 in excess thereof.
Rule 144A Notes initially are represented by one or more convertible notes
in registered form without interest coupons. We refer to these convertible notes
as the Global Notes. The Global Notes were deposited upon issuance with the
trustee as custodian for DTC, in New York, New York, and registered in the name
of DTC or its nominee, in each case for credit to an account of a direct or
indirect participant in DTC as described below.
Except as set forth below, the Global Notes may be transferred, in whole or
in part, only to another DTC nominee or to a successor of DTC or its nominee.
Beneficial interests in the Global Notes may not be exchanged for convertible
notes in certificated form except in the limited circumstances described below.
See "Exchange of Global Notes for Certificated Notes." Except in the limited
circumstances described below, owners of beneficial interests in the Global
Notes will not be entitled to receive physical delivery of convertible notes in
certificated form.
Accredited Investor Notes are issued only in registered, certificated
(i.e., non-global) form without interest coupons. Accredited Investor Notes may
not be exchanged for beneficial interests in any Global Note except in limited
circumstances described below. See "Exchange of Accredited Investor Notes for
Global Notes."
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Rule 144A Notes (including beneficial interests in the Global Notes) and
Accredited Investor Notes are subject to certain restrictions on transfer and
bear a restrictive legend. In addition, transfers of beneficial interests in
Global Notes are subject to the applicable rules and procedures of DTC and its
direct and indirect participants, which may change from time to time.
DEPOSITORY PROCEDURES
The following description of the operations and procedures of DTC are
provided solely as a matter of convenience. These operations and procedures are
solely within the control of the respective settlement systems and are subject
to changes by them. We take no responsibility for these operations and
procedures and urge investors to contact the system or their participants
directly to discuss these matters.
DTC has advised us that DTC is a limited-purpose trust company created to
hold securities for its participating organizations (collectively, the
Participants) and to facilitate the clearance and settlement of transactions in
those securities between Participants through electronic book-entry changes in
accounts of its Participants. The Participants include securities brokers and
dealers (including the initial purchasers), banks, trust companies, clearing
corporations and certain other organizations. Access to DTC's system is also
available to other entities such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly (collectively, the Indirect Participants). Persons
who are not Participants may beneficially own securities held by or on behalf of
DTC only through the Participants or the Indirect Participants. The ownership
interests in, and transfers of ownership interests in, each security held by or
on behalf of DTC are recorded on the records of the Participants and Indirect
Participants.
DTC has also advised us that, pursuant to procedures established by it:
(1) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the initial purchaser with portions of the
principal amount of Global Notes; and
(2) ownership of these interests in the Global Notes will be shown on,
and the transfer of ownership thereof will be effected only through,
records maintained by DTC (with respect to other owners of beneficial
interest in the Global Notes).
Investors in the Global Notes who are Participants in DTC's system may hold
their interests therein directly through DTC. Investors in the Global Notes who
are not Participants may hold their interests therein indirectly through
organizations which are Participants in such system. All interests in a Global
Note are subject to the procedures and requirements of DTC. The laws of some
states require that certain persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer beneficial
interests in a Global Note to such persons will be limited to that extent.
Because DTC can act only on behalf of Participants, which in turn act on behalf
of Indirect Participants, the ability of a person having beneficial interests in
a Global Note to pledge such interests to persons that do not participate in the
DTC system, or otherwise take actions in respect of such interests, may be
affected by the lack of a physical certificate evidencing such interests.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE CONVERTIBLE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL
DELIVERY OF CONVERTIBLE NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED
THE REGISTERED OWNERS OR "HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal, premium, and special interest, if
any, and interest on a Global Note registered in the name of DTC or its nominee
will be payable to DTC in its capacity as the registered holder under the
indenture. Under the terms of the indenture, we and the trustee will treat the
persons in whose names the convertible notes, including the Global Notes, are
registered as the owners thereof for the purpose of receiving payments and for
all other purposes. Consequently, neither we, the trustee, nor any agent of ours
or the trustee has or will have any responsibility or liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interest in the Global Notes or for maintaining,
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supervising or reviewing any of DTC's records or any Participant's or
Indirect Participant's records relating to the beneficial ownership
interests in the Global Notes; or
(2) any other matter relating to the actions and practices of DTC or
any of its Participants or Indirect Participants.
DTC has advised us that its current practice, upon receipt of any payment
in respect of securities such as the convertible notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date unless DTC has reason to believe it will not receive
payment on such payment date. Each relevant Participant is credited with an
amount proportionate to its beneficial ownership of an interest in the principal
amount of the relevant security as shown on the records of DTC. Payments by the
Participants and the Indirect Participants to the beneficial owners of
convertible notes will be governed by standing instructions and customary
practices and will be the responsibility of the Participants or the Indirect
Participants and will not be the responsibility of DTC, the trustee or us.
Neither we nor the trustee will be liable for any delay by DTC or any of its
Participants in identifying the beneficial owners of the convertible notes, and
we and the trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.
Subject to the transfer restrictions set forth in the offering memorandum
under "Notice to Investors," transfers between Participants in DTC will be
effected in accordance with DTC's procedures, and will be settled in same-day
funds.
DTC has advised us that it will take any action permitted to be taken by a
holder of convertible notes only at the direction of one or more Participants to
whose account DTC has credited the interests in the Global Notes and only in
respect of such portion of the aggregate principal amount of the convertible
notes as to which such Participant or Participants has or have given such
direction. However, if there is an event of default under the convertible notes,
DTC reserves the right to exchange the Global Notes for legended convertible
notes in certificated form, and to distribute such convertible notes to its
Participants.
EXCHANGE OF GLOBAL NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for definitive convertible notes, which we
refer to as Certificated Notes, in registered certificated form under the
following circumstances:
(1) if DTC (a) notifies us that it is unwilling or unable to continue
as depositary for the Global Notes and we fail to appoint a successor
depositary or (b) has ceased to be a clearing agency registered under the
Exchange Act;
(2) if we, at our option, notify the trustee in writing that we elect
to cause the issuance of the Certificated Notes; or
(3) upon the request of a holder if there shall have occurred and be
continuing an Event of Default with respect to the convertible notes.
In all cases, Certificated Notes delivered in exchange for any Global Note
or beneficial interests in Global Notes will be registered in the names, and
issued in any approved denominations, requested by or on behalf of the
depositary (in accordance with its customary procedures) and will bear the
restrictive legend referred to in the offering memorandum under "Notice to
Investors" unless that legend is not required by applicable law.
EXCHANGE OF ACCREDITED INVESTOR NOTES FOR GLOBAL NOTES
Accredited Investor Notes, which have been issued in certificated form, may
not be exchanged for beneficial interests in a global note unless such exchange
occurs in connection with a transfer of such Accredited Investor Notes and the
transferor first delivers to the trustee a written certificate (in the form
provided in the indenture) to the effect that such transfer will comply with the
appropriate transfer restrictions applicable to such convertible notes.
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SAME DAY SETTLEMENT AND PAYMENT
We will make payments in respect of the convertible notes represented by
the Global Notes (including principal, premium, if any, and interest and special
interest, if any) by wire transfer of immediately available funds to the
accounts specified by the Global Note holder. We will make all payments of
principal, interest, premium and special interest, if any, with respect to
Certificated Notes by wire transfer of immediately available funds to the
accounts specified by the holders thereof or, if no such account is specified or
permitted to be specified, by mailing a check to each such Holder's registered
address. The convertible notes represented by the Global Notes are traded in the
PORTAL market and to trade in DTC's Same-Day Funds Settlement System, and any
permitted secondary market trading activity in such convertible notes will,
therefore, be required by DTC to be settled in immediately available funds. We
expect that secondary trading in any Certificated Notes will also be settled in
immediately available funds.
TRANSFER AND EXCHANGE
A holder may transfer or exchange interests in the convertible notes in
accordance with procedures described in "Book-Entry, Delivery and Form." The
registrar and the trustee may require a holder, among other things, to furnish
appropriate endorsements and transfer documents and we may require a holder to
pay any taxes and fees required by law or permitted by the indenture. We are not
required to transfer or exchange any convertible note selected for redemption.
Also, we are not required to transfer or exchange any convertible note for a
period of 15 days before a selection of convertible notes to be redeemed.
The registered holder of a convertible note will be treated as the owner of
it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next succeeding paragraph, the indenture or the
convertible notes may be amended or supplemented with the consent of the holders
of at least a majority in aggregate principal amount of the outstanding
convertible notes, as applicable, including consents obtained in connection with
a tender offer or exchange offer for the convertible notes, and any existing
default or compliance with any provision of the indenture or the convertible
notes may be waived with the consent of the holders of a majority in aggregate
principal amount of then outstanding convertible notes, including consents
obtained in connection with a tender offer or exchange offer for the convertible
notes.
Without the consent of each holder affected, an amendment or waiver may
not:
(1) reduce the amount of convertible notes whose holders must consent
to an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any
convertible note or alter the provisions with respect to the optional
redemption of the convertible notes in a manner adverse to the holders;
(3) reduce the rate of or change the time for payment or accrual of
interest on any convertible note;
(4) waive a default in the payment of principal of or interest on any
convertible notes, except a rescission of acceleration of the convertible
notes by the holders of at least a majority in aggregate principal amount
of the convertible notes and a waiver of the payment default that resulted
from such acceleration;
(5) make any convertible note payable in money other than that stated
in the convertible notes;
(6) make any change in the provisions of the indenture relating to
waivers of past Events of Default or the rights of holders of convertible
notes to receive payments of principal of or interest on the convertible
notes;
(7) waive a redemption payment with respect to any convertible note;
(8) impair the right to convert the convertible notes into common
stock;
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(9) modify the conversion or subordination provision of the indenture
in a manner adverse to the holders of the convertible notes; or
(10) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of
convertible notes, we and the trustee may amend or supplement the indenture or
the convertible notes to cure any ambiguity, defect or inconsistency, to provide
for uncertificated convertible notes in addition to or in place of certificated
convertible notes, to provide for the assumption of our obligations to holders
of the convertible notes in the case of a merger or consolidation or certain
transfers or leases, to make any change that would provide any additional rights
or benefits to the holders of the convertible notes or that does not adversely
affect the legal rights under the indenture of any such holder, or to comply
with requirements of the SEC in order to maintain the qualification of the
indenture under the Trust Indenture Act of 1939, as amended.
GOVERNING LAW AND JUDGMENTS
The convertible notes and the indenture will be governed exclusively by and
construed in accordance with the laws of the State of New York without giving
effect to applicable principles of conflicts of laws to the extent that the
application of the law of another jurisdiction would be required thereby.
We will submit to the jurisdiction of the United States federal and New
York state courts located in the Borough of Manhattan, City and State of New
York for purposes of all legal actions and proceedings instituted in connection
with the convertible notes and the indenture. We have appointed CT Corporation
System as our authorized agent upon which process may be served in any such
action.
CONCERNING THE TRUSTEE
The indenture contains limitations on the rights of the trustee, should it
become a creditor of us, to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such claim as security or
otherwise. The trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such conflict
within 90 days, apply to the SEC for permission to continue or resign.
The holders of the majority in aggregate principal amount of the then
outstanding convertible notes will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
trustee under the indenture, subject to certain exceptions. The indenture
provides that if an Event of Default occurs, which is not cured or waived, the
trustee will be required, in the exercise of its power, to use the degree of
care of a prudent man in the conduct of his own affairs. Subject to these
provisions, the trustee will be under no obligation to exercise any of its
rights or powers under the indenture at the request of any holder of convertible
notes, unless such holder has offered to the trustee security and indemnity
satisfactory to it against any loss, liability or expense.
DEFINITIONS
Set forth below are selected defined terms used in the indenture. Please
refer to the indenture for a full definition of all terms, as well as certain
other terms used in this description of the convertible notes for which no
definition is provided.
"Capital Stock" means any and all shares, interests, participations, rights
or other equivalents, however designated, of corporate stock, including, without
limitation, partnership interests.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Debt" means Senior Debt in which the instrument creating
or evidencing the same or the assumption or guarantee thereof (or related
agreements or documents to which we are a party) expressly provides that such
Senior Debt shall be "Designated Senior Debt" for the purposes of the indenture
(provided
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that such instrument, agreement or other document may place limitations and
conditions on the right of such Senior Debt to exercise the rights of Designated
Senior Debt).
"Excess Payment" means the excess of (A) the aggregate of the cash and
value of other consideration paid by us or any of our subsidiaries with respect
to our shares acquired in a tender offer or other negotiated transaction over
(B) the market value of such acquired shares (by reference to the per share
value of the shares remaining outstanding) after giving effect to the completion
of a tender offer or other negotiated transaction.
"Exchange Rate Contract" means, with respect to any Person, any currency
swap agreements, forward exchange rate agreements, foreign currency futures or
options, exchange rate collar agreements, exchange rate insurance and other
agreements or arrangements, or combination thereof, the principal purpose of
which is to provide protection against fluctuations in currency exchange rates.
An Exchange Rate Contract may also include an Interest Rate Agreement.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession,
which are in effect on the Issuance Date and are applied on a consistent basis.
"Guarantee" means a guarantee, other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner, including, without limitation, letters of credit and
reimbursement agreements in respect thereof, of all or any part of any
Indebtedness.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit, or
reimbursement agreements in respect thereof, or representing the balance
deferred and unpaid of the purchase price of any property (which purchase price
is due more than six months after the placing into service or delivery of such
property) including pursuant to capital leases and sale-and-leaseback
transactions, or representing any hedging obligations under an Exchange Rate
Contract or an Interest Rate Agreement, except any such balance that constitutes
an accrued expense or trade payable, if and to the extent any of the foregoing
indebtedness, other than obligations under an Exchange Rate Contract or an
Interest Rate Agreement, would appear as a liability upon a balance sheet of
such Person prepared in accordance with GAAP, and also includes, to the extent
not otherwise included, the Guarantee of items which would be included within
this definition if incurred directly by such Person. The amount of any
Indebtedness outstanding as of any date shall be the accreted value thereof, in
the case of any Indebtedness issued with original issue discount. Indebtedness
shall not include liabilities for taxes of any kind.
"Interest Rate Agreement" means, with respect to any Person, any interest
rate swap agreement, interest rate cap agreement, interest rate collar agreement
or other similar agreement the principal purpose of which is to protect the
party indicated therein against fluctuations in interest rates.
"Issuance Date" means the date on which the convertible notes are first
authenticated and issued.
"Person" means person within the meaning of Sections 13(d)(3) and 14(d)(2)
of the Exchange Act or any successor provision to either of the foregoing.
"Senior Debt" means the principal of, interest on and other amounts due on
(1) our Indebtedness, whether outstanding on the date of the indenture
or thereafter created, incurred, assumed or guaranteed by us, for money
borrowed from banks or other financial institutions;
(2) our Indebtedness, whether outstanding on the date of the indenture
or thereafter created, incurred, assumed or guaranteed by us; and
(3) our Indebtedness under interest rate swaps, caps or similar
hedging agreements and foreign exchange contracts, currency swaps or
similar agreements;
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unless, in the instrument creating or evidencing or under which Indebtedness
under (1) or (2) is outstanding, it is expressly provided that such Indebtedness
is not senior in right of payment to the convertible notes.
Senior Debt includes, with respect to the obligations described in clauses
(1) and (2) above, interest accruing, pursuant to the terms of such Senior Debt,
on or after the filing of any petition in bankruptcy or for reorganization
relating to us, whether or not post-filing interest is allowed in such
proceeding, at the rate specified in the instrument governing the relevant
obligation. Notwithstanding anything to the contrary in the foregoing, Senior
Debt shall not include: (a) Indebtedness of or amounts owed by us for
compensation to employees, or for goods or materials purchased in the ordinary
course of business, or for services; and (b) our Indebtedness to any of our
subsidiaries.
"Significant Subsidiary" means any of our subsidiaries that is a
"significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under the
Securities Act and the Exchange Act, as such registration is in effect on the
date of the indenture.
REGISTRATION RIGHTS
The following summary of certain provisions of the registration rights
agreement and the convertible notes is not complete. You should refer to the
registration rights agreement and the convertible notes for a full description
of the registration rights that apply to the convertible notes.
Pursuant to a registration rights agreement, we agreed for the benefit of
the holders of the convertible notes, that (i) we will, at our cost, within 90
days after the closing of the sale of the convertible notes, which we refer to
as the Closing, file a Shelf Registration Statement with the SEC with respect to
resales of the convertible notes and the common stock issuable upon conversion
thereof, (ii) we will use our reasonable best efforts to cause such Shelf
Registration Statement to be declared effective by the SEC within 180 days after
the Closing, and (iii) we will use our reasonable best efforts to keep such
Shelf Registration Statement continuously effective under the Securities Act
until, subject to certain exceptions specified in the registration rights
agreement, the second anniversary of the date of the Closing.
We will be permitted to suspend use of the prospectus that is part of the
Shelf Registration Statement during certain periods of time and in certain
circumstances relating to pending corporate developments and public filings with
the SEC and similar events. If (a) we fail to file the Shelf Registration
Statement required by the registration rights agreement on or before 90 days
after the Closing, (b) such Shelf Registration Statement is not declared
effective by the SEC on or prior to 180 days after the Closing, which we refer
to as the "Effectiveness Target Date," or (c) the Shelf Registration Statement
is effective but thereafter ceases to be effective or usable for more than 60
days in the aggregate during any 12-month period in connection with resales of
Transfer Restricted Securities (as defined below) during the periods specified
in the registration rights agreement, then we will pay special interest to each
holder of Transfer Restricted Securities as further described below. Each of the
events specified in clauses (a) through (c) in the preceding sentence is
referred to as a Registration Default. With respect to the first 90
consecutive-day period immediately following the occurrence of such Registration
Default, we will pay an amount equal to an increase in the annual interest on
the convertible notes of 0.25% and with respect to each subsequent 90
consecutive-day period, we will pay additional amounts equal to an increase in
the annual interest rate on the convertible notes of 0.25% until all
Registration Defaults have been cured up to a maximum increase in the annual
rate of interest on the convertible notes equal to 1.0%. All accrued special
interest will be paid by us on each subsequent interest payment date in cash.
Such payment will be made to the holder of the Global Notes by wire transfer of
immediately available funds or by federal funds check and to holders of
Certified Notes, if any, by wire transfer to the accounts specified by them to
the extent permitted under the indenture or by mailing checks to their
registered addresses if no such accounts have been specified by them. Following
the cure of all Registration Defaults, the accrual of special interest will
cease.
For purposes of the foregoing, "Transfer Restricted Securities" means each
convertible note and the common stock issuable upon conversion thereof until (i)
the date on which such convertible note or the common stock issuable upon
conversion thereof has been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement, (ii) the date
on which such convertible note
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or the common stock issuable upon conversion thereof is distributed to the
public pursuant to Rule 144 under the Securities Act (or any similar provision
then in effect) or is salable pursuant to Rule 144(k) under the Act or (iii) the
date on which such convertible note or the common stock issuable upon conversion
thereof ceases to be outstanding.
Holders of the convertible notes will be required to deliver information to
be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the registration rights agreement in order to have their convertible notes or
the common stock issuable upon conversion thereof included in the Shelf
Registration Statement and benefit from the provisions regarding special
interest set forth above.
We will provide to each holder of convertible notes, or the common stock
issuable upon conversion thereof, who is named in the prospectus, copies of the
prospectus which is a part of such Shelf Registration Statement, notify each
such holder when such Shelf Registration Statement for the convertible notes or
the common stock issuable upon conversion thereof has become effective and take
certain other actions as required to permit unrestricted resales of the
convertible notes or the common stock issuable upon conversion thereof. A holder
of the convertible notes or the common stock issuable upon conversion thereof
that sells such securities pursuant to a Shelf Registration Statement generally
will be required to be named as a selling security holder in the related
prospectus and to deliver a prospectus to purchasers, will be subject to certain
of the civil liability provisions under the Securities Act in connection with
such sales and will be bound by the provisions of the registration rights
agreement which are applicable to such holder, including certain indemnification
and contribution rights and obligations.
Upon the initial sale of convertible notes or common stock issuable upon
conversion thereof, each selling holder will be required to deliver a notice of
such sale to the trustee and us. The notice will, among other things, identify
the sale as a transfer pursuant to the Shelf Registration Statement, certify
that the prospectus delivery requirements, if any, of the Securities Act have
been complied with, and certify that the selling holder and the aggregate
principal amount of securities owned by such holder are identified in the
related prospectus in accordance with the applicable rules and regulations under
the Securities Act.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 700,000,000 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 11, 2000, we had 107,238,239 shares of
common stock outstanding held by 498 stockholders of record.
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 our liquidation, dissolution or winding up, the holders of common
stock are entitled to receive ratably our net assets 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 we 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
We are 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.
Our 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
- 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.
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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, us.
The certificate of incorporation and by-laws also provide that;
- 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 EquiServe.
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SELLING SECURITYHOLDERS
We originally sold the convertible notes on June 20, 2000 to Donaldson,
Lufkin & Jenrette Securities Corporation, Morgan Stanley & Co. Incorporated,
Salomon Smith Barney Inc. and Thomas Weisel Partners LLC. The initial purchasers
of the convertible notes have advised us that the convertible notes were resold
in transactions exempt from the registration requirements of the Securities Act
to (1) "qualified institutional buyers," as defined in Rule 144A of the
Securities Act, and (2) a limited number of accredited investors in transactions
exempt from registration under the Securities Act. These subsequent purchasers,
or their transferees, pledgees, donees or successors, may from time to time
offer and sell any or all of the convertible notes and/or shares of the common
stock issuable upon conversion of the convertible notes pursuant to this
prospectus.
The convertible notes and the shares of common stock issuable upon
conversion of the convertible notes are being registered in accordance with the
registration rights agreement. Pursuant to the registration rights agreement, we
are required to file a registration statement with regard to the convertible
notes and the shares of our common stock issuable upon conversion of the
convertible notes and to keep the registration statement effective until the
earlier of:
(1) the sale of all the securities registered pursuant to the registration
rights agreement and
(2) the expiration of the holding period applicable to these securities
under Rule 144(k) under the Securities Act or any successor provision.
The selling securityholders may choose to sell convertible notes and/or the
shares of common stock issuable upon conversion of the convertible notes from
time to time. See "Plan of Distribution."
The following table sets forth:
(1) the name of each selling securityholder who has provided us with notice
as of the date of this prospectus pursuant to the registration rights
agreement that they may intend to sell or otherwise dispose of
convertible notes and/or shares of common stock issuable upon
conversion of the convertible notes pursuant to the registration
statement,
(2) the principal amount of convertible notes and the number of shares of
our common stock issuable upon conversion of the convertible notes
which they may sell from time to time pursuant to the registration
statement, and
(3) the amount of outstanding convertible notes and our common stock
beneficially owned by the selling securityholder prior to the offering,
assuming no conversion of the convertible notes.
To our knowledge, no selling securityholder nor any of its affiliates has
held any position or office with, been employed by or otherwise has had any
material relationship with us or our affiliates, during the three years prior to
the date of this prospectus.
A selling securityholder may offer all or some portion of the convertible
notes and shares of the common stock issuable upon conversion of the convertible
notes. Accordingly, no estimate can be given as to the amount or percentage of
convertible notes or our common stock that will be held by the selling
securityholders upon termination of sales pursuant to this prospectus. In
addition, the selling securityholders identified below may have sold,
transferred or disposed of all or a portion of their convertible notes since the
date on which they provided the information regarding their holdings in
transactions exempt from the registration requirements of the Securities Act.
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The information contained under the column heading "Shares That May be
Sold" represents shares issuable upon conversion of the principal amount of
convertible notes listed and assumes conversion of the full amount of the
convertible notes at the initial rate of $115.47 in principal amount of the
convertible notes per share of the common stock. The name "Unknown" represents
the remaining selling securityholders. We are unable to provide the names of
these securityholders because certain of these convertible notes are currently
evidenced by a global convertible note which has been deposited with DTC and
registered in the name of Cede & Co. as DTC's nominee.
<TABLE>
<CAPTION>
AMOUNT OF 5 1/2% AMOUNT OF 5 1/2%
CONVERTIBLE CONVERTIBLE NOTES SHARES OF COMMON
NOTES THAT MAY OWNED BEFORE SHARES THAT STOCK OWNED
NAME BE SOLD OFFERING MAY BE SOLD BEFORE OFFERING
---- ----------------- ----------------- ----------- ----------------
<S> <C> <C> <C> <C>
AIG SoundShore Opportunity Holding
Fund Ltd. .......................... $ 5,250,000 $ 5,250,000 45,466 0
AIG SoundShore Strategic Holding Fund
Ltd. ............................... 4,750,000 4,750,000 41,136 0
Bank Austria Cayman Island, Ltd....... 3,000,000 3,000,000 25,981 0
Chrysler Corporation Master Retirement
Trust............................... 4,830,000 4,830,000 41,829 0
Deutsche Bank Securities Inc. ........ 72,549,000 72,549,000 628,293 0
Donaldson, Lufkin & Jenrette
Securities Corp. ................... 1,125,000 1,125,000 9,743 0
Goldman Sachs & Company............... 5,000,000 5,000,000 43,301 3,200
JMG Capital Partners, LP.............. 1,000,000 1,000,000 8,660 0
JMG Triton Offshore Fund, Ltd. ....... 6,000,000 6,000,000 51,962 0
J.M. Hall Associates, L.P. ........... 500,000 500,000 4,330 0
Lehman Brothers International
(Europe)............................ 2,000,000 2,000,000 17,321 0
Motion Picture Industry Health Plan --
Active Member Fund.................. 560,000 560,000 4,850 0
Motion Picture Industry Health Plan --
Retiree Member Fund................. 280,000 280,000 2,425 0
OCM Convertible Limited Partnership... 135,000 135,000 1,169 0
OCM Convertible Limited Trust......... 2,140,000 2,140,000 18,533 0
State Employees' Retirement Fund of
the State of Delaware............... 2,445,000 2,445,000 21,174 0
State of Connecticut Combined
Investment Funds.................... 5,440,000 5,400,000 47,112 0
Unknown............................... 182,996,000 182,996,000 1,584,793 0
</TABLE>
---------------
If, after the date of this prospectus, a securityholder notifies us
pursuant to the registration rights agreement of its intent to dispose of
convertible notes pursuant to the registration statement, we may supplement this
prospectus to include that information.
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SUMMARY OF CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain material United States federal income
tax considerations relating to the purchase, ownership and disposition of the
convertible notes and the common stock into which the convertible notes may be
converted, but does not purport to be a complete analysis of all the potential
tax considerations relating thereto. We have based this summary on the
provisions of the Internal Revenue Code of 1986, as amended, or the Code, the
applicable Treasury Regulations promulgated or proposed thereunder, or the
Treasury Regulations, juridical authority and current administrative rulings and
practice, all of which are subject to change, possibly on a retroactive basis.
This summary applies to you only if you hold the notes and common stock as
capital assets. A capital asset is generally an asset held for investment rather
than as inventory or as property used in a trade or business. This summary also
does not discuss the particular tax consequences that might be relevant to you
if you are subject to special rules under the federal income tax laws. Special
rules apply, for example, if you are:
- a bank, thrift, insurance company, regulated investment company, or other
financial institution or financial service company,
- a broker or dealer in securities or foreign currency,
- a person that has a functional currency other than the U.S. dollar,
- a person who acquires the convertible notes or common stock in connection
with your employment or other performance of services,
- a partnership or other flow through entity
- a subchapter S corporation
- a person subject to alternative minimum tax,
- a person who owns the convertible notes or common stock as part of a
straddle, hedging transaction, conversion transaction or constructive
sale transaction,
- a tax-exempt entity, or
- an expatriate.
In addition, the following summary does not address all possible tax
consequences. In particular, except as specifically provided, it does not
discuss any estate, gift, generation-skipping, transfer, state, local or foreign
tax consequences. For all these reasons, we urge you to consult with your tax
advisor about the federal income tax and other tax consequences of the
acquisition, ownership and disposition of the convertible notes and common
stock. We have not sought any ruling from the Internal Revenue Service, or the
IRS, with respect to the statements made and the conclusions reached in the
following summary, and there can be no assurance that the IRS will agree with
such statements and conclusions.
INVESTORS CONSIDERING THE PURCHASE OF CONVERTIBLE NOTES SHOULD CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED STATES
FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX
CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING
JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
UNITED STATES HOLDERS
As explained below, the federal income tax consequences of acquiring,
owning and disposing of the convertible notes and common stock depend on whether
or not you are a U.S. holder. For purposes of this
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summary, you are a U.S. holder if you are a beneficial owner of the convertible
notes or common stock and for federal income tax purposes are:
- a citizen or resident of the United States, including an alien individual
who is a lawful permanent resident of the United States or who meets the
substantial presence residency test under the federal income tax laws,
- a corporation, partnership or other entity treated as a corporation or
partnership for federal income tax purposes, that is created or organized
in or under the laws of the United States, any of the fifty states or the
District of Columbia, unless otherwise provided by Treasury Regulations,
- an estate the income of which is subject to federal income taxation
regardless of its source, or
- a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of
the trust,
and if your status as a U.S. holder is not overridden under the provisions of an
applicable tax treaty. Conversely, you are a "Non-U.S. holder" if you are a
beneficial owner of the convertible notes or common stock and are not a U.S.
holder.
IN GENERAL
We have treated the notes as indebtedness for federal income tax purposes.
This summary assumes that the IRS will respect this classification.
PAYMENT OF INTEREST
All of the notes bear interest at a stated fixed rate. You must generally
include this stated interest in your gross income as ordinary interest income:
- when you receive it, if you use the cash method of accounting for federal
income tax purposes, or
- when it accrues, if you use the accrual method of accounting for federal
income tax purposes.
Purchase price for a note that is allocable to prior accrued stated interest may
be treated as offsetting a portion of the interest income from the next
scheduled stated interest payment on the note.
Under Treasury Regulations, the possibility of an additional payment under
a convertible note may be disregarded for purposes of determining the amount of
interest or original issue discount income to be recognized by a holder in
respect of such note (or the timing of such recognition) if the likelihood of
the payment, as of the date of the convertible notes are issued, is remote, or
subject to an incidental contingency. We are obligated to pay special interest
to holders of the convertible notes in certain circumstances described under
"Description of Convertible Notes-Registration Rights." We believe that any such
payment should be treated as subject to an "incidental contingency" for purposes
of the original issue discount rules because the amount of such payments, if
required to be made, is expected to be insignificant relative to the total
expected amount of remaining payments on the convertible notes. Accordingly, any
such amounts should be taxable to holders as payments of interest. Accordingly,
we believe that the convertible notes do not have original issue discount. Our
determination that such payment is subject to an incidental contingency is
binding on you, unless you disclose in the manner required by applicable
Treasury Regulations that your determination is different than ours. Our
determination is not, however, binding on the IRS. In the event this contingency
occurs, it would affect the amount and timing of the income that you must
recognize.
AMORTIZABLE BOND PREMIUM ON THE CONVERTIBLE NOTES
If you acquire a convertible note and your adjusted tax basis in the
convertible note upon acquisition is greater than its principal amount, then you
will be treated as having acquired that note with bond premium equal to the
excess. Amortizable bond premium, however, will not include any premium
attributable to the value of the convertible note's conversion feature. You
generally may elect to amortize this bond premium
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over the remaining term of the convertible note on a constant yield method. The
amount amortized in any year will be treated as a reduction of your interest
income from the convertible note for that year. If you do not make the election,
your bond premium on a convertible note will decrease the gain or increase the
loss that you otherwise recognize on the convertible note's disposition. Any
election to amortize bond premium applies to all debt obligations, other than
debt obligations the interest on which is excludable from gross income, that you
hold at the beginning of the first taxable year to which the election applies or
that you thereafter acquire. You may not revoke an election to amortize bond
premium without the consent of the IRS. We urge you to consult with your tax
advisor regarding this election.
MARKET DISCOUNT ON THE CONVERTIBLE NOTES
If you acquire a convertible note and your adjusted tax basis upon
acquisition is less than its principal amount, then you will be treated as
having acquired that note at a market discount equal to the difference. The
foregoing does not apply if the amount of the market discount is less than the
de minimis amount specified under the Code. Under the market discount rules, you
will be required to treat any gain on the sale, exchange, redemption, retirement
or other taxable disposition of a convertible note, or any appreciation in a
convertible note in the case of a nontaxable disposition, such as a gift, as
ordinary income to the extent of the market discount that has not previously
been included in income and that is treated as having accrued on such note at
the time of such payment or disposition. In addition, you may be required to
defer, until the maturity of the convertible note or earlier taxable
disposition, the deduction of all or a portion of interest expense on any
indebtedness incurred or continued to purchase or carry the convertible note.
Any market discount will be considered to accrue evenly during the period
from the day after your acquisition to the maturity date of the convertible
note, unless you elect to accrue the market discount on a constant yield method.
You may also elect to include market discount in income currently as it accrues,
on either an even or constant yield method. In that event, your basis in the
convertible note will increase by the amounts you so include in your income. If
you make this election, the rules described above regarding ordinary income on
dispositions and deferral of interest deductions will not apply. This election
to include market discount in income currently, once made, applies to all market
discount obligations acquired on or after the first taxable year to which the
election applies. You may not revoke a market discount election without the
consent of the IRS. We urge you to consult with your tax advisor regarding these
market discount elections.
You should consult your own tax advisors concerning the existence of, and
tax consequences of, market discount and amortizable bond premium.
SALE, EXCHANGE OR REDEMPTION OF THE CONVERTIBLE NOTES
Generally, upon the sale, exchange or redemption of a convertible note, you
will recognize capital gain or loss equal to the difference between (i) the
amount of cash proceeds and the fair market value of any property received on
the sale, exchange or redemption (except to the extent such amount is
attributable to accrued and unpaid interest income, which is taxable as ordinary
income) and (ii) your adjusted tax basis in the convertible note. Your adjusted
tax basis in a convertible note generally will equal your acquisition cost of
the convertible note after reduction for amounts allocated to prior accrued
stated interest, increased by any market discount included in your income, and
reduced by any bond premium you amortized and principal payments you received.
Subject to the market discount rules described above, such capital gain or loss
will be long-term if your holding period is more than 12 months and will be
short-term if your holding period is equal to or less than 12 months. In
general, for individuals, long-term capital gains are taxed at a maximum rate of
20% and short-term capital gains are taxed at a maximum rate of 39.6%.
CONSTRUCTIVE DIVIDENDS ON CONVERTIBLE NOTES
Under Treasury Regulations, an adjustment in the conversion price, or the
failure to make such an adjustment, may, under particular circumstances, be
treated as a constructive taxable dividend to the extent of our current or
accumulated earnings and profits. Adjustments to the conversion price made
pursuant to a bona fide reasonable adjustment formula which has the effect of
preventing the dilution of your interest as a holder
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of the convertible notes generally will not be considered to result in a
constructive distribution of stock where the adjustment does not compensate you
for taxable distributions to other stockholders. However, if at any time
(i) we make a distribution of cash or property to our stockholders or a
purchase of common stock and such distribution or purchase would be taxable to
such stockholders as a dividend for United States federal income tax purposes
(e.g., distributions of evidences of our indebtedness or assets, but generally
not stock dividends or rights to subscribe for common stock) and, pursuant to
the anti-dilution provisions of the indenture, the conversion price (as defined
in the indenture) of the convertible notes is reduced,
(ii) the conversion price is reduced pursuant to a formula that is not a
bona fide reasonable adjustment formula, or
(iii) the conversion price of the convertible notes is reduced at our
discretion, such reduction in conversion price may be deemed to be the payment
of a taxable dividend to you as a holder of the convertible notes (pursuant to
Section 305 of the Code). You could therefore have taxable income as a result of
an event pursuant to which you received no cash or property. Your tax basis in a
convertible note, however, generally will be increased by the amount of any
constructive dividend included in your income.
CONVERSION OF THE CONVERTIBLE NOTES
Generally, you will not recognize any income, gain or loss upon conversion
of your convertible notes into common stock, except with respect to cash
received in lieu of a fractional share of common stock. Your tax basis in the
common stock received on conversion of your convertible notes will be the same
as your adjusted tax basis in the convertible notes at the time of conversion
(reduced by any basis allocable to a fractional share interest), and your
holding period for the common stock received on conversion will generally
include your holding period of the convertible note converted.
Cash received in lieu of a fractional share of common stock upon conversion
will be treated as a payment in exchange for the fractional share of common
stock. Accordingly, the receipt of cash in lieu of a fractional share of common
stock generally will result in gain or loss (measured by the difference between
the cash you receive for the fractional share and your adjusted tax basis in the
fractional share). Any gain would be ordinary income to the extent of any
accrued market discount on your notes that you have not previously included in
your income, and otherwise would be capital gain. Any accrued market discount
not previously included in income as of the date of the conversion of the notes
will carry over to the common stock received on conversion and will give rise to
ordinary income upon the subsequent disposition of that stock.
DIVIDENDS ON COMMON STOCK
The amount of any distribution by us on the common stock will be equal to
the amount of cash and the fair market value, on the date of distribution, of
any property distributed. Generally, distributions will be treated as follows:
- first as ordinary dividend income to the extent paid out of our current
or accumulated earnings and profits,
- next as a nontaxable return of capital that reduces your basis in the
stock dollar-for-dollar until the basis has been reduced to zero, and
- finally as gain from the sale or exchange of the stock.
In general, if you are a corporate U.S. holder, you will qualify for the
70% dividends received deduction if you own less than 20% of the voting power
and value of our stock (other than any non-voting, non-convertible,
non-participating preferred stock). If you are a corporate U.S. holder that owns
20% or more of the voting power and value of our stock (other than any
non-voting, non-convertible, non-participating preferred stock) generally you
will qualify for an 80% dividends received deduction. The dividends received
deduction is subject, however, to certain holding period, taxable income and
other limitations.
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A failure to fully adjust the conversion price of the convertible notes to
reflect a stock dividend or other event increasing the proportionate interest of
holders of common stock in our earnings and profits or assets could, in some
circumstances, be deemed to result in the payment of a taxable dividend to
holders of common stock.
SALE OF COMMON STOCK
Subject to the market discount rules discussed above, your sale or other
taxable disposition of common stock will generally result in capital gain or
loss equal to the difference between the amount of cash or property you receive
and your adjusted tax basis in the stock. Such capital gain or loss will be
long-term if your holding period is more than 12 months and will be short-term
if your holding period is equal to or less than 12 months. In general, for
individuals, long-term capital gains are taxed at a maximum rate of 20% and
short-term capital gains are taxed at a maximum rate of 39.6%. Your basis and
holding period in common stock received upon conversion of a convertible note
are determined as discussed above under "-- Conversion of the Convertible
Notes."
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
In general, information reporting requirements will apply to payment of
principal, premium, if any, and interest on a convertible note, payments of
dividends on common stock, payments of the proceeds of the sale of a convertible
note and payments of the proceeds of the sale of common stock to certain
noncorporate U.S. holders. You may be subject to back up withholding at a 31%
rate when you receive interest and dividends with respect to the convertible
notes or common stock, or when you receive proceeds upon the sale, exchange,
redemption, retirement or other disposition of the convertible notes or common
stock. In general, you can avoid this backup withholding by properly executing
under penalties of perjury an IRS Form W-9 or substantially similar form that
provides:
- your correct taxpayer identification number, and
- a certification that (a) you are exempt from backup withholding because
you are a corporation or come within another enumerated exempt category,
(b) you have not been notified by the IRS that you are subject to backup
withholding, or (c) you have been notified by the IRS that you are no
longer subject to backup withholding.
If you do not provide your correct taxpayer identification number on the IRS
Form W-9 or substantially similar form, you may be subject to penalties imposed
by the IRS.
Unless you have established on a properly executed IRS Form W-9 or
substantially similar form that you are a corporation or come within another
enumerated exempt category, interest, dividend and other payments on the
convertible notes or common stock paid to you during the calendar year, and the
amount of tax withheld, if any, will be reported to you and to the IRS. Amounts
withheld are generally not an additional tax and may be refunded or credited
against your federal income tax liability, provided you furnish the required
information to the IRS.
OUR DEDUCTIONS FOR INTEREST ON THE CONVERTIBLE NOTES
Under Section 279 of the Code, deductions otherwise allowable to a
corporation for interest may be reduced or eliminated in the case of corporate
acquisition indebtedness. This is defined generally to include subordinated
convertible debt issued to provide consideration for the acquisition of stock or
a substantial portion of the assets of another corporation, if either (i) the
acquiring corporation has a debt to equity ratio that exceeds 2 to 1 or (ii) the
projected earnings of the corporation (the average annual earnings for the
three-year period ending on the test date) do not exceed three times the annual
interest costs of the corporation. Our deductions for interest on the
convertible notes could be reduced or eliminated if the convertible notes meet
the definition of corporate acquisition indebtedness in the year of issue. Also,
the convertible notes could become corporate acquisition indebtedness in a
subsequent year if we initially meet the debt/equity ratio and earnings coverage
tests, but later fail them in a year during which we issue additional
indebtedness for
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corporate acquisitions. Our ability to deduct all of the interest payable on the
convertible notes will depend on the application of the foregoing tests to us.
The availability of an interest deduction with respect to the convertible notes
was not determinative in our issuance of the convertible notes.
Under Section 163(l) of the Code, no deduction is permitted for interest
paid or accrued or any indebtedness of a corporation that is "payable in equity"
of the issuer or a related party. Debt is treated as debt payable in equity of
the issuer if the debt is part of an arrangement designed to result in payment
of the instrument with or by reference to the equity. Such arrangements could
include debt instruments that are convertible at the holder's option if it is
substantially certain that the option will be exercised. The legislative history
indicates that it is not expected the provision will affect debt with a
conversion feature where the conversion price is significantly higher than the
market price of the stock on the date of the debt issuance. Accordingly, we do
not believe that our interest deduction with respect to interest payments on the
convertible notes will be adversely affected by these rules.
NON-UNITED STATES HOLDERS
As used herein, the term "Non-U.S. holder" means any beneficial owner of a
convertible note or common stock that is not a U.S. holder.
PAYMENT OF INTEREST
Generally, if you are a Non U.S. holder, interest income that is not
effectively connected with a United States trade or business will not be subject
to a U.S. withholding tax under the "portfolio interest exemption" provided that
you
(i) do not actually or constructively own (pursuant to the conversion
feature of the convertible notes or otherwise) 10% or more of the combined
voting power of all of our classes of stock entitled to vote,
(ii) are not a controlled foreign corporation related to us actually or
constructively through stock ownership,
(iii) are not a bank which acquired the convertible notes in consideration
for an extension of credit made pursuant to a loan agreement entered into in the
ordinary course of business, and
(iv) either (a) you provide a Form W-8BEN (or a suitable substitution form)
signed under penalties of perjury that includes your name and address and
certifies as to your non-United States status, or (b) a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business, provides a statement
to us or our agent under penalties of perjury in which it certifies that a Form
W-8BEN or W-8IMY (or a suitable substitute) has been received by it from you or
a qualifying intermediary and furnishes us or our agent with a copy of such
form.
Interest on convertible notes not exempted from U.S. withholding tax as
described above generally will be subject to U.S. withholding tax at a 30% rate,
except where an applicable tax treaty provides for the reduction or elimination
of such withholding tax. We may be required to report annually to the IRS and to
each Non-U.S. holder the amount of interest paid to, and the tax withheld, if
any, with respect to each Non-U.S. holder.
Except to the extent that an applicable treaty otherwise provides,
generally you will be taxed in the same manner as a U.S. holder with respect to
interest if the interest income is effectively connected with your conduct of a
United States trade or business. If you are a corporate Non-U.S. holder, you may
also, under certain circumstances, be subject to an additional "branch profits
tax" at a 30% rate (or, if applicable, a lower treaty rate). Even though such
effectively connected interest is subject to income tax, and may be subject to
the branch profits tax, it is not subject to withholding tax if you deliver a
properly executed IRS Form W-8ECI to the payor.
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SALE, EXCHANGE OR REDEMPTION OF THE CONVERTIBLE NOTES
If you are a Non-U.S. holder of a convertible note generally you will not
be subject to United States federal income tax or withholding tax on any gain
realized on the sale, exchange or redemption of the convertible note (including
the receipt of cash in lieu of fractional shares upon conversion of a
convertible note into common stock) unless
(1) the gain is effectively connected with your conduct of a United
States trade or business,
(2) you are an individual and are present in the United States for a
period or periods aggregating 183 days or more during the taxable year of
the disposition and certain other conditions are met, or
(3) you are subject to tax pursuant to the provisions of the Code
applicable to certain United States expatriates.
CONVERSION OF THE CONVERTIBLE NOTES
In general, if you are a Non-U.S. holder no United States federal income
tax or withholding tax will be imposed upon the conversion of a convertible note
into common stock except with respect to your receipt of cash in lieu of
fractional shares upon conversion of a convertible note where any of the
conditions described above under "Non-United States Holders -- Sales, Exchange
or Redemption of the Convertible Notes" is satisfied.
SALE OR EXCHANGE OF COMMON STOCK
As a Non-U.S. holder generally you will not be subject to United States
federal income tax or withholding tax on the sale or exchange of common stock
unless any of the conditions described above under "Non-United States
Holder -- Sale, Exchange or Redemption of the Convertible Notes" is satisfied.
DIVIDENDS
If you are a Non-U.S. holder, you will be subject to United States federal
withholding tax at a 30% rate (or lower rate provided under any applicable
income tax treaty) on distributions by us with respect to the common stock that
are treated as dividends paid (or dividends deemed paid on the convertible notes
or common stock, as described above under "United States Holders -- Constructive
Dividends on Convertible Notes" and "United States Holders -- Dividends on
Common Stock") (excluding dividends that are effectively connected with the
conduct of a trade or business in the United States by you and are taxable as
described below). Except to the extent that an applicable tax treaty otherwise
provides, generally you will be taxed in the same manner as a U.S. holder on
dividends paid (or deemed paid) that are effectively connected with your conduct
of a trade or business in the United States. If you are a foreign corporation,
you may also be subject to a United States branch profits tax on such
effectively connected income at a 30% rate or such lower rate as may be
specified on an applicable income tax treaty. Even though such effectively
connected dividends are subject to income tax, and may be subject to the branch
profits tax, they will not be subject to U.S. withholding tax if you deliver IRS
Form W-8ECI to the payor.
Under currently applicable Treasury Regulations, dividends paid to an
address in a foreign country are presumed to be paid to a resident of that
country (unless the payor has knowledge to the contrary) for purposes of the
withholding discussed above, and for purposes of determining the applicability
of a tax treaty rate. Under Treasury Regulations applicable for payments made
after December 31, 2000, however, if you are a Non-U.S. holder of common stock
and wish to claim the benefit of an applicable treaty rate you will be required
to satisfy certain certification requirements.
DEATH OF A NON-UNITED STATES HOLDER
If you are an individual who is not a citizen or resident of the United
States and you hold a convertible note at the time of your death, it will not be
includable in your gross estate for United States estate tax purposes, provided
that you do not at the time of death actually or constructively own 10% or more
of the
71
<PAGE> 73
combined voting power of all of our classes of stock entitled to vote, and
provided that, at the time of death, payments with respect to such convertible
note would not have been effectively connected with your conduct of a trade or
business within the United States.
Common stock actually or beneficially held by you at the time of your death
(or previously transferred subject to certain retained rights or powers) will be
subject to United States federal estate tax unless otherwise provided by an
applicable estate tax treaty.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
If you are a Non-U.S. holder, United States information reporting
requirements and backup withholding tax will not apply to payments of interest
on a convertible note if you provide the statement described in "Non-United
States Holders -- Payment of Interest," provided that the payor does not have
actual knowledge that you are a United States person.
Information reporting will not apply to any payment of the proceeds of the
sale of a convertible note, or any payment of the proceeds of the sale of common
stock effected outside the United States by a foreign office of a "broker" (as
defined in applicable Treasury Regulations), unless such broker
(i) is a United States person,
(ii) is a foreign person that derives 50% or more of its gross income
for certain periods from the conduct of a trade or business in the United
States, or
(iii) is a controlled foreign corporation for United States federal
income tax purposes.
Payment of the proceeds of any such sale effected outside the United States
by a foreign office of any broker that is described in (i), (ii) or (iii) of the
preceding sentence will be subject to information reporting requirements unless
such broker has documentary evidence in its records that the beneficial owner is
a Non-U.S. holder and certain other conditions are met, or the beneficial owner
otherwise establishes an exemption. Temporary Treasury Regulations indicate that
such payments are not currently subject to backup withholding. Payment of the
proceeds of any such sale to or through the United States office of a broker is
subject to information reporting and backup withholding requirements, unless you
provide the statement described in "Non-United States Holders -- Payment of
Interest" or otherwise establish an exemption.
If paid to an address outside the United States, dividends on common stock
held by you as a Non-U.S. holder will generally not be subject to the
information reporting and backup withholding requirements described in this
section. However, under recently issued Treasury Regulations, dividend payments
made after December 31, 2000 will be subject to information reporting and backup
withholding unless applicable certification requirements are satisfied.
Treasury regulations that apply to payments made after December 31, 2000
will modify current information reporting and backup withholding procedures and
requirements. These regulations provide certain presumptions regarding the
status of holders when payments to the holders cannot be reliably associated
with appropriate documentation provided to the payer. For payments made after
December 31, 2000, holders must provide certification, if applicable, that
conforms to the requirements of the regulations, subject to certain transitional
rules permitting certification in accordance with current Treasury regulations
until December 31, 2000. Holders of a convertible note or common stock should
consult with their tax advisors regarding the application of the backup
withholding rules to their particular situation, the availability of an
exemption, the procedure for obtaining any available exemption and the impact of
these new regulations on payments made with respect to convertible notes or
common stock after December 31, 2000.
UNITED STATES REAL PROPERTY HOLDING CORPORATIONS
The discussion of the United States taxation of Non-U.S. holders of
convertible notes and common stock assumes that we are at no time a United
States real property holding corporation within the meaning of Section 897(c) of
the Code. Under present law, we would not be a United States real property
holding corporation so long as (a) the fair market value of our United States
real property interests is less than
72
<PAGE> 74
(b) 50% of the sum of the fair market value of our United States real property
interests, our interests in real property located outside the United States, and
our other assets which are used or held for use in a trade or business. We
believe that we are not a United States real property holding corporation and do
not expect to become such a corporation. If we become a United States real
property holding corporation, gain recognized by you as a Non-U.S. holder on a
disposition of convertible notes or common stock would be subject to United
States federal income tax unless
(i) our common stock is "regularly traded on an established securities
market" within the meaning of the Code and
(ii) either (A) you do not own, actually or constructively, at any
time during the five-year period preceding the disposition, more than 5% of
the common stock, or (B) in the case of a disposition of convertible notes,
you do not own, actually or constructively, convertible notes which, as of
any date on which you acquired convertible notes, had a fair market value
greater than that of 5% of the common stock.
73
<PAGE> 75
PLAN OF DISTRIBUTION
We are registering the convertible notes and the shares of our common stock
issuable upon conversion of the convertible notes to permit public secondary
trading of these securities by the holders from time to time after the date of
this prospectus. We have agreed, among other things, to bear all expenses, other
than underwriting discounts and selling commissions, in connection with the
registration and sale of the convertible notes and the shares of our common
stock issuable upon conversion of the convertible notes covered by this
prospectus.
We will not receive any of the proceeds from the offering of the
convertible notes or the shares of our common stock issuable upon conversion of
the convertible notes by the selling securityholders. The convertible notes and
shares of common stock issuable upon conversion of the convertible notes may be
sold from time to time directly by any selling securityholder or, alternatively,
through underwriters, broker-dealers or agents. If convertible notes or shares
of common stock issuable upon conversion of the convertible notes are sold
through underwriters or broker-dealers, the selling securityholder will be
responsible for underwriting discounts or commissions or agents' commissions.
The convertible notes or shares of common stock issuable upon conversion of
the convertible notes may be sold:
- in one or more transactions at fixed prices,
- at prevailing market prices at the time of sale,
- at varying prices determined at the time of sale or
- at negotiated prices.
Such sales may be effected in transactions, which may involve block trades
or transactions in which the broker acts as agent for the seller and the buyer:
- on any national securities exchange or quotation service on which the
convertible notes or shares of common stock issuable upon conversion of
the convertible notes may be listed or quoted at the time of sale,
- in the over-the-counter market,
- in transactions otherwise than on a national securities exchange or
quotation service or in the over-the-counter market or
- through the writing of options.
In connection with sales of the convertible notes or shares of common stock
issuable upon conversion of the convertible notes or otherwise, any selling
securityholder may:
- enter into hedging transactions with broker-dealers, which may in turn
engage in short sales of the convertible notes or shares of common stock
issuable upon conversion of the convertible notes in the course of
hedging the positions they assume,
- sell short and deliver convertible notes or shares of common stock
issuable upon conversion of the convertible notes to close out the short
positions or
- loan or pledge convertible notes or shares of common stock issuable upon
conversion of the convertible notes to broker-dealers that in turn may
sell the securities.
The outstanding common stock is publicly traded on the Nasdaq National
Market. The initial purchasers of the convertible notes have advised us that
certain of the initial purchasers are making and currently intend to continue
making a market in the convertible notes; however, they are not obligated to do
so and any market-making of this type may be discontinued at any time without
notice, in the sole discretion of the initial purchasers. We do not intend to
apply for listing of the convertible notes on Nasdaq or any securities exchange.
Accordingly, we cannot assure that any trading market will develop or have any
liquidity.
The selling securityholders and any broker-dealers, agents or underwriters
that participate with the selling securityholders in the distribution of the
convertible notes or the shares of common stock issuable upon
74
<PAGE> 76
conversion of the convertible notes may be deemed to be "underwriters" within
the meaning of the Securities Act, in which event any commissions received by
these broker-dealers, agents or underwriters and any profits realized by the
selling securityholders on the resales of the convertible notes or the shares
may be deemed to be underwriting commissions or discounts under the Securities
Act.
In addition, any securities covered by this prospectus which qualify for
sale pursuant to Rule 144, Rule 144A, Regulation S or any other available
exemption from registration under the Securities Act may be sold under Rule 144,
Rule 144A, Regulation S or any of the other available exemptions rather than
pursuant to this prospectus.
There is no assurance that any selling securityholder will sell any or all
of the convertible notes or shares of common stock issuable upon conversion of
the convertible notes described in this prospectus, and any selling
securityholder may transfer, devise or gift the securities by other means not
described in this prospectus.
We originally sold the convertible notes to the initial purchasers in June
2000 in a private placement. We agreed to indemnify and hold the initial
purchasers of the convertible notes harmless against certain liabilities under
the Securities Act that could arise in connection with the sale of the
convertible notes by the initial purchasers. The registration rights agreement
provides for us and the selling securityholders to indemnify each other against
certain liabilities arising under the Securities Act.
We agreed pursuant to the registration rights agreement to use our best
efforts to cause the registration statement to which this prospectus relates to
become effective as promptly as is practicable and to keep the registration
statement effective until the earlier of:
1. the sale of all the securities registered pursuant to the registration
rights agreement and
2. the expiration of the holding period applicable to the securities under
Rule 144(k) under the Securities Act or any successor provision.
The registration rights agreement provides that we may suspend the use of
this prospectus in connection with sales of convertible notes and shares of
common stock issuable upon conversion of the convertible notes by holders for a
period not to exceed an aggregate of 60 days in any 365 day period, under
certain circumstances relating to pending corporate developments, public filings
with the Commission and similar events. We will bear the expenses of preparing
and filing the registration statement and all post-effective amendments.
LEGAL MATTERS
The validity of the convertible notes and shares of common stock issuable
upon conversion of the convertible notes were passed upon for us by Hale and
Dorr LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of Akamai Technologies, Inc. and
subsidiaries as of December 31, 1999 and 1998 and for the period from inception
(August 20, 1998) through December 31, 1998 and the year ended December 31, 1999
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 on auditing and accounting.
The consolidated financial statements of INTERVU Inc. as of December 31,
1999 and 1998 and for each of the three years in the period ended December 31,
1999 included in this prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in this prospectus in reliance upon such report given
on the authority of such firm as experts in auditing and accounting.
75
<PAGE> 77
The financial statements of Network24 Communications, Inc. as of December
31, 1999 and 1998 and for each of the two years ended December 31, 1999 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 on auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the convertible notes and the common stock
offered by this prospectus. This prospectus, which is a 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 convertible notes and the
common stock offered by this prospectus, 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 has been filed. The registration statement, including exhibits,
may be inspected without charge at the principal office of the SEC in
Washington, D.C. and copies of all or any part of which may be inspected and
copied at the public reference facilities maintained by the SEC at 450 Fifth
Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549, and at the SEC
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. Copies of such material can also be obtained at prescribed
rates by mail from the Public Reference Section of the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549. You may obtain information on the operation of the
public reference room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
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 SEC.
We are subject to the information and reporting requirements of the
Securities Exchange Act of 1934, as amended, and, in accordance therewith, we
are required to file annual and quarterly reports, proxy statements and other
information with the SEC. These reports, proxy statements and other information
are available for inspection and copying at the SEC public reference rooms and
the SEC's website referred to above.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the SEC
public reference rooms in Washington, D.C., New York and Chicago, Illinois.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Our SEC filings are also available to the public from the SEC
Website at "http://www.sec.gov."
You should rely only on the information or representations provided in this
prospectus. We have not authorized anyone to provide you with different
information. We are not making an offer of the convertible notes or the common
stock issuable upon conversion thereof in any state where the offer is not
permitted. You should not assume that the information in this prospectus is
accurate as of any date other than the date on the front of the document.
76
<PAGE> 78
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AKAMAI TECHNOLOGIES, INC.
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Convertible Preferred Stock and
Stockholders' Equity (Deficit)............................ F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Condensed Financial
Information............................................... F-27
Notes to Unaudited Pro Forma Combined Condensed Financial
Information............................................... F-30
INTERVU INC.
Report of Ernst & Young LLP, Independent Auditors........... F-31
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-32
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997.......................... F-33
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997.............. F-34
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997.......................... F-35
Notes to Consolidated Financial Statements.................. F-36
NETWORK24 COMMUNICATIONS, INC.
Report of Independent Accountants........................... F-49
Balance Sheets.............................................. F-50
Statements of Operations.................................... F-51
Statements of Changes in Stockholders' Equity............... F-52
Statements of Cash Flows.................................... F-53
Notes to Financial Statements............................... F-54
</TABLE>
F-1
<PAGE> 79
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Akamai Technologies, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, cash flows and convertible preferred stock and stockholders'
equity (deficit) present fairly in all material respects, the financial position
of Akamai Technologies, Inc. and its subsidiaries as of December 31, 1998 and
1999 and the results of their operations and their cash flows for the period
from inception (August 20, 1998) to December 31, 1998 and the year ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
January 25, 2000
F-2
<PAGE> 80
AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------- -----------
1998 1999 2000
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,805 $269,554 $ 354,540
Short-term investments.................................... -- -- 161,133
Accounts receivable, net of allowance for doubtful
accounts of $0, $70, and $616, respectively............. -- 1,588 11,650
Prepaid expenses and other current assets................. 57 2,521 10,472
------- -------- ----------
Total current assets............................... 6,862 273,663 537,795
Property and equipment, net (Note 5)...................... 1,523 23,875 92,563
Intangible assets, net.................................... 481 434 2,656,074
Long-term investments..................................... -- -- 17,558
Other assets.............................................. -- 2,843 31,823
------- -------- ----------
Total assets....................................... $ 8,866 $300,815 $3,335,813
======= ======== ==========
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 665 $ 8,987 $ 29,212
Accrued expenses.......................................... -- 2,083 6,031
Accrued payroll and benefits.............................. 28 3,614 8,973
Deferred revenue.......................................... -- 698 4,437
Current portion of obligations under capital leases and
equipment loan.......................................... 12 504 1,023
Current portion of long-term debt......................... -- 2,751 --
------- -------- ----------
Total current liabilities.......................... 705 18,637 49,676
Convertible subordinated notes............................ -- -- 300,000
Obligations under capital leases and equipment loan, net
of current portion...................................... 25 733 901
Other liabilities......................................... -- -- 523
------- -------- ----------
Total liabilities.................................. 730 19,370 351,100
------- -------- ----------
Convertible preferred stock (Note 9):
Series A convertible preferred stock, $0.01 par value;
1,100,000 shares authorized, 1,100,000 issued and
outstanding at December 31, 1998; no shares authorized,
issued or outstanding at December 31, 1999 and June 30,
2000...................................................... 8,284 -- --
------- -------- ----------
Commitments (Note 8)
Stockholders' equity (deficit) (Notes 9 and 10):
Preferred stock, $0.01 par value; no shares authorized,
issued or outstanding at December 31, 1998; 5,000,000
shares authorized, no shares issued or outstanding at
December 31, 1999 and June 30, 2000..................... -- -- --
Common stock, $0.01 par value; 300,000,000 shares
authorized, 34,565,310 issued and outstanding at
December 31, 1998; 300,000,000 shares authorized,
92,498,525 shares issued and outstanding at December 31,
1999; 700,000,000 shares authorized, 105,872,650 shares
issued and outstanding at June 30, 2000................. 346 925 1,058
Additional paid-in capital................................ 2,034 374,739 3,353,006
Notes receivable from officers for stock.................. -- (5,907) (6,306)
Deferred compensation..................................... (1,506) (29,731) (26,559)
Accumulated other comprehensive income.................... -- -- 728
Accumulated deficit....................................... (1,022) (58,581) (337,214)
------- -------- ----------
Total stockholders' equity (deficit)............... (148) 281,445 2,984,713
------- -------- ----------
Total liabilities, convertible preferred stock and
stockholders' equity (deficit)................... $ 8,866 $300,815 $3,335,813
======= ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 81
AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION SIX MONTHS
(AUGUST 20, 1998) ENDED JUNE 30,
THROUGH YEAR ENDED ---------------------
DECEMBER 31, 1998 DECEMBER 31, 1999 1999 2000
----------------- ----------------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue................................ $ -- $ 3,986 $ 404 $ 25,366
------ -------- -------- ---------
Operating expenses:
Cost of services..................... 31 9,002 1,408 19,283
Engineering and development (excludes
$7, $5,061, $187 and $1,697,
respectively, of equity-related
compensation disclosed separately
below)............................ 229 11,749 2,054 19,846
Sales, general and administrative
(excludes $198, $4,944, $1,151 and
$9,913, respectively, of
equity-related compensation
disclosed separately below)....... 426 29,621 5,220 61,124
Amortization of intangible assets.... 9 47 23 198,080
Acquired in-process research and
development....................... -- -- -- 1,372
Equity-related compensation.......... 205 10,005 1,338 11,610
------ -------- -------- ---------
Total operating expenses..... 900 60,424 10,043 311,315
------ -------- -------- ---------
Operating loss......................... (900) (56,438) (9,639) (285,949)
Interest income........................ 20 4,414 398 8,181
Interest expense....................... (10) (2,145) (542) (753)
------ -------- -------- ---------
Loss before provision for income taxes
and extraordinary loss............... (890) (54,169) (9,783) (278,521)
Provision for income taxes........... -- -- -- 112
------ -------- -------- ---------
Loss before extraordinary loss from
early extinguishment of debt......... (890) (54,169) (9,783) (278,633)
Extraordinary loss from early
extinguishment of debt............... -- 3,390 -- --
------ -------- -------- ---------
Net loss............................... (890) (57,559) (9,783) (278,633)
Dividends and accretion to preferred
stock redemption value............... -- 2,241 295 --
------ -------- -------- ---------
Net loss attributable to common
stockholders......................... $ (890) $(59,800) $(10,078) $(278,633)
====== ======== ======== =========
Basic and diluted net loss per share... $(0.06) $ (1.98) $ (0.53) $ (3.43)
Weighted average common shares
outstanding.......................... 15,015 30,177 18,891 81,251
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 82
AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
FOR THE PERIOD FROM INCEPTION (AUGUST 20, 1998) TO DECEMBER 31, 1998, FOR THE
YEAR ENDED DECEMBER 31, 1999,
AND FOR THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ ---------------------- PAID-IN DEFERRED NOTES
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION RECEIVABLE
------------ --------- ----------- -------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
founders.......................... 29,646,000 $ 297
Issuance of common stock for
technology license................ 682,110 7 $ 281
Sales of restricted common stock... 4,237,200 42 1,753 $ (1,712)
Sale of Series A convertible
preferred stock................... 1,100,000 $ 8,284
Amortization of deferred
compensation...................... 206
Net loss...........................
------------ --------- ----------- -------- ---------- --------
Balance at December 31, 1998....... 1,100,000 8,284 34,565,310 346 2,034 (1,506)
Sale of restricted common stock.... 1,980,000 20 902 (623)
Sale of restricted common stock in
exchange for notes................ 7,840,000 78 20,986 (15,340) $ (5,724)
Sale of Series B convertible
preferred stock................... 1,327,500 19,875
Sale of Series C convertible
preferred stock................... 145,195 5,000
Sale of Series D convertible
preferred stock................... 685,194 12,475
Sale of Series E convertible
preferred stock................... 1,867,480 48,966
Sale of Series F convertible
preferred stock................... 985,545 14,988
Dividends and accretion to
preferred stock redemption
value............................. 2,241 (2,241)
Issuance of warrants............... 3,902
Deferred compensation related to
grant of stock options............ 22,267 (22,267)
Amortization of deferred
compensation...................... 10,005
Conversion of convertible preferred
stock............................. (6,110,914) (111,829) 38,467,466 385 111,444
Issuance of common stock upon the
Company's initial public offering,
net of offering costs............. 9,000,000 90 215,335
Issuance of common stock upon
exercise of warrants.............. 96,249 1 83
Issuance of common stock upon
exercise of stock options......... 549,500 5 27
Interest on note receivable........ (183)
Net loss...........................
------------ --------- ----------- -------- ---------- -------- ---------
Balance at December 31, 1999....... -- -- 92,498,525 925 374,739 (29,731) (5,907)
Deferred compensation related to
the grant of stock options........ 8,438 (8,438)
Amortization of deferred
compensation...................... 11,610
Issuance of common stock upon the
exercise of warrants.............. 892,944 8 18
Issuance of common stock upon the
exercise of stock options......... 1,759,548 18 13,242
Interest on note receivable........ (171)
Issuance of common stock under
employee stock purchase plan...... 77,014 1 1,702
Issuance of common stock for the
acquisition of Network24.......... 620,872 6 189,300 (228)
Issuance of common stock for the
acquisition of INTERVU............ 10,023,747 100 2,765,567
Other comprehensive income
(loss)............................
Net loss...........................
------------ --------- ----------- -------- ---------- -------- ---------
Balance at June 30, 2000........... -- $ -- 105,872,650 $ 1,058 $3,353,006 $(26,559) $ (6,306)
============ ========= =========== ======== ========== ======== =========
<CAPTION>
ACCUMULATED TOTAL
OTHER SHAREHOLDERS'
COMPREHENSIVE ACCUMULATED EQUITY
INCOME DEFICIT (DEFICIT)
------------- ----------- -------------
<S> <C> <C> <C>
Issuance of common stock to
founders.......................... $ (132) $ 165
Issuance of common stock for
technology license................ 288
Sales of restricted common stock... 83
Sale of Series A convertible
preferred stock...................
Amortization of deferred
compensation...................... 206
Net loss........................... (890) (890)
--------- ----------
Balance at December 31, 1998....... (1,022) (148)
Sale of restricted common stock.... 299
Sale of restricted common stock in
exchange for notes................ --
Sale of Series B convertible
preferred stock...................
Sale of Series C 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............................. (2,241)
Issuance of warrants............... 3,902
Deferred compensation related to
grant of stock options............ --
Amortization of deferred
compensation...................... 10,005
Conversion of convertible preferred
stock............................. 111,829
Issuance of common stock upon the
Company's initial public offering,
net of offering costs............. 215,425
Issuance of common stock upon
exercise of warrants.............. 84
Issuance of common stock upon
exercise of stock options......... 32
Interest on note receivable........ (183)
Net loss........................... (57,559) (57,559)
--------- ----------
Balance at December 31, 1999....... (58,581) 281,445
Deferred compensation related to
the grant of stock options........ --
Amortization of deferred
compensation...................... 11,610
Issuance of common stock upon the
exercise of warrants.............. 26
Issuance of common stock upon the
exercise of stock options......... 13,260
Interest on note receivable........ (171)
Issuance of common stock under
employee stock purchase plan...... 1,703
Issuance of common stock for the
acquisition of Network24.......... 189,078
Issuance of common stock for the
acquisition of INTERVU............ 2,765,667
Other comprehensive income
(loss)............................ $ 728 728
Net loss........................... (278,633) (278,633)
------- --------- ----------
Balance at June 30, 2000........... $ 728 $(337,214) $2,984,713
======= ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 83
AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION SIX MONTHS ENDED
(AUGUST 20, 1998) JUNE 30,
THROUGH YEAR ENDED -------------------
DECEMBER 31, 1998 DECEMBER 31, 1999 1999 2000
----------------- ----------------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $ (890) $(57,559) $(9,783) $(278,633)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization................. 50 3,434 571 208,447
Amortization of discount on senior
subordinated notes and equipment loan....... -- 542 133 --
Amortization of deferred compensation......... 206 10,005 1,339 11,611
Loss on disposal of property and equipment.... -- 33 22 --
Acquired in-process research and
development................................. -- -- -- 1,372
Interest on notes receivable from officers for
stock....................................... -- (183) -- (171)
Extraordinary loss on early extinguishment of
debt........................................ -- 3,390 -- --
Changes in operating assets and liabilities,
net of effects of acquired businesses:
Accounts receivable, net.................... -- (1,588) (395) (3,991)
Prepaid expenses and other current assets... (57) (5,082) (388) (7,638)
Accounts payable and accrued expenses....... 693 13,991 3,594 15,670
Deferred revenue............................ -- 698 -- 3,076
Other noncurrent assets and liabilities..... -- -- -- 765
------- -------- ------- ---------
Net cash provided by (used in) operating
activities...................................... 2 (32,319) (4,907) (49,492)
------- -------- ------- ---------
Cash flows from investing activities:
Purchases of property and equipment............. (1,523) (25,670) (5,308) (55,624)
Purchase of investments......................... -- (475) (475) (277,588)
Cash acquired from the acquisition of
businesses, net of cash paid.................. -- -- -- 17,466
Proceeds from sales and maturities of
investments................................... -- 250 -- 147,777
------- -------- ------- ---------
Net cash used in investing activities............. (1,523) (25,895) (5,783) (167,969)
------- -------- ------- ---------
Cash flows from financing activities:
Proceeds from the issuance of convertible
subordinated notes, net of offering costs..... -- -- -- 290,500
Proceeds from equipment financing loan.......... -- 1,500 1,500 --
Payment on capital leases and equipment
financing loan................................ (4) (402) (174) (273)
Proceeds from the issuance of senior
subordinated notes, net....................... -- 14,970 14,970 --
Payment of the senior subordinated notes........ -- (12,249) -- (2,751)
Proceeds from the issuance of common stock,
net........................................... -- 215,425 -- --
Proceeds from the issuance of convertible
preferred stock, net.......................... 8,284 101,304 32,350 --
Proceeds from the issuance of common stock upon
the exercise of warrants...................... -- 84 -- 10
Proceeds from the issuance of common stock under
stock option and employee stock purchase
plans......................................... -- 32 -- 14,977
Proceeds from the issuance of restricted common
stock......................................... 46 299 293 --
------- -------- ------- ---------
Net cash provided by financing activities......... 8,326 320,963 48,939 302,463
------- -------- ------- ---------
Effects of exchange rate translation on cash and
cash equivalents................................ -- -- -- (16)
------- -------- ------- ---------
Net increase in cash and cash equivalents......... 6,805 262,749 38,249 84,986
Cash and cash equivalents, beginning of the
period.......................................... -- 6,805 6,580 269,554
------- -------- ------- ---------
Cash and cash equivalents, end of the period...... $ 6,805 $269,554 $44,829 $ 354,540
======= ======== ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 84
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED)
1. NATURE OF BUSINESS:
Akamai Technologies, Inc. ("Akamai" or the "Company") provides global
delivery services for Internet content, streaming media and applications, and
global Internet traffic management services. Our services improve the speed,
quality, reliability and scaleability of Web sites. Akamai's services deliver
customers' Internet content, steaming media and applications through a
distributed worldwide server network that locates the content geographically
closer to users.
The Company has a single operating segment: global delivery service for
Internet content, streaming media and applications and global Internet traffic
management services. The Company has no organizational structure dictated by
product lines, geography or customer type. Substantially all revenue earned to
date has been generated from U.S. based customers.
2. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION:
The accompanying unaudited interim consolidated financial statements as of
and for the six months ended June 30, 1999 and 2000, together with the related
notes are unaudited and reflect all adjustments, consisting only of normal
recurring adjustments, which in the opinion of management are necessary for a
fair statement of the results for the interim periods. The interim consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information. Consequently, these
interim financial statements do not include all disclosures normally required by
generally accepted accounting principles for annual financial statements.
Results for the interim periods are not necessarily indicative of results for
the entire fiscal year.
The consolidated financial statements include the accounts of Akamai and
its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash and cash equivalents consist of cash held in bank deposit accounts and
short-term, highly liquid investments with original maturities of three months
or less at the date of purchase. Cash equivalents are carried at cost, which
approximates fair market value. Short-term investments consist of high quality
corporate and governmental securities, which have original maturities of more
than three months at the date of purchase and less than one year from the date
of the balance sheet, and equity investments in public companies. Long-term
investments consist of high quality corporate and government securities with
maturities of more than one year from the balance sheet and equity investments
in private companies. The Company classifies all debt securities and equity
securities with readily determinable market values as "available-for-sale" in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." These
investments are carried at fair market value with any unrealized gain or loss
recorded as a separate element of stockholders' equity. Investments in equity
securities with no readily determinable fair value are carried at cost.
F-7
<PAGE> 85
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED)
The following is a summary of investments at June 30, 2000 (in thousands):
<TABLE>
<CAPTION>
GROSS
AMORTIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ----- ------ ----------
<S> <C> <C> <C> <C>
US treasury securities and obligations of US government
agencies.................................................. $ 25,000 $ -- $ 8 $ 24,992
Certificates of deposit..................................... 509 -- -- 509
Municipal bonds............................................. 7,400 -- -- 7,400
US corporate debt securities................................ 132,689 8 117 132,580
Equity securities........................................... 12,350 860 -- 13,210
-------- ---- ---- --------
$177,948 $868 $125 $178,691
======== ==== ==== ========
</TABLE>
Available-for-sale securities by contractual maturity are as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
2000
--------
<S> <C>
Due in one year or less..................................... $155,273
Due after one year through two years........................ 10,208
--------
$165,481
========
</TABLE>
For all periods presented, realized gains and losses on sales of
available-for-sale securities were immaterial. The Company determines the costs
basis of securities by specific identification.
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 consists primarily of goodwill arising from the
acquisition of businesses. Intangible assets from the acquisition of businesses
are amortized using the straight-line method over two to three years, based on
their estimated useful lives. Intangible assets also includes the cost of
acquired licence rights to content delivery technology. These licence rights are
amortized over ten years. 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 services under contracts
with terms typically ranging from 12 to 24 months. The Company recognizes
revenue based on fees for the amount of Internet content delivered through the
Company's services. These contracts also provide for minimum monthly fees.
Customers are typically billed monthly in advance for minimums and monthly in
arrears for usage above the
F-8
<PAGE> 86
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED)
minimums. We also derive revenue for implementation, installation, usage and
other fees that are recognized over the period of the related contracts or
customer relationships. Deferred revenue consists of billings in excess of
revenue recognized.
COST OF SERVICES
Cost of services consists of depreciation of network equipment used in
providing the Company's services, 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 or may commit the Company to
share with the third-party network providers a portion of the revenue recognized
from customers that use these third-party networks. Under the Akamai accelerated
networks program, the Company provides use of its servers to smaller Internet
service providers which, in turn, provide the Company with rack space for the
Company's servers and access to their bandwidth. 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. The Company believes that, to date, the value provided under
this program has been insignificant.
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 SFAS No. 123, "Accounting for
Stock-Based Compensation," through disclosure only (Note 11). All stock-based
awards to nonemployees are accounted for at their fair value in accordance with
SFAS No. 123. The Company has also adopted certain conclusions of Financial
Accounting Standards Board ("FASB") Interpretation No. 44 ("FIN 44") for the
period ended June 30, 2000.
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.
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 1999, the Company had cash
balances at certain financial institutions in excess of federally insured
limits. However, the Company
F-9
<PAGE> 87
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED)
does not believe that it is subject to unusual credit risk beyond the normal
credit risk associated with commercial banking relationships.
For the year ended December 31, 1999, two customers accounted for 22% and
13%, respectively, of total revenue. For the six months ended June 30, 1999, two
customers accounted for 75% and 14%, respectively, of total revenue. For the six
months ended June 30, 2000, one customer accounted for 18% of total revenue.
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.
ADVERTISING EXPENSE
The Company recognizes advertising expense as incurred. Advertising expense
was approximately $7.7 million for the year ended December 31, 1999, $1.5
million for the six months ended June 30, 1999 and $10.1 million for the six
months ended June 30, 2000. There was no advertising expense for the period from
inception (August 20, 1998) to December 31, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, which include
cash equivalents, short-term and long-term investments, accounts receivable,
notes receivable, accounts payable, accrued expenses, notes payable and
convertible subordinated notes approximate their fair values at December 31,
1998 and 1999 and June 30, 2000.
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, for
the six month period ended June 30, 1999 and for the year ended December 31,
1999. Comprehensive loss is equal to net loss, unrealized gain and loss on
investments, and foreign currency translation adjustments for the six month
period ended June 30, 2000.
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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to confirm to the current
year presentation.
F-10
<PAGE> 88
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED)
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.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," as amended by SAB No. 101A and 101B, which is effective no later
than the quarter ending December 31, 2000. SAB No. 101 clarifies the SEC's views
regarding the recognition of revenue. The Company will adopt SAB No. 101 in the
fourth quarter of 2000. The Company does not expect the application of SAB No.
101 to have a significant impact on its financial position or results of
operations.
In March 2000, the FASB issued FASB Interpretation ("FIN") No. 44,
"Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB Opinion No. 25." FIN No. 44 primarily clarifies (a) the
definition of an employee for purposes of applying APB Opinion No. 25, (b) the
criteria for determining whether a plan qualifies as a noncompensatory plan, (c)
the accounting consequence of various modifications to the terms of previously
fixed stock options or awards, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN No. 44 is effective July 1,
2000, but certain conclusions in FIN No. 44 cover specific events that occurred
after either December 15, 1998 or January 12, 2000. The Company does not expect
the application of FIN No. 44 to have a significant impact on its financial
position or results of operations.
4. 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, convertible subordinated notes and contingently
issuable stock.
The following table sets forth potential common stock excluded from the
calculation of earnings per share since their inclusion would be antidilutive:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 20, 1998) YEAR ENDED AS OF JUNE 30,
TO DECEMBER 31, DECEMBER 31, ------------------------
1998 1999 1999 2000
----------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Stock options................... 1,287,000 14,416,565 9,116,000 19,235,704
Unvested restricted common
stock......................... 18,049,104 19,230,430 19,950,804 14,360,695
Convertible preferred stock..... 19,800,000 -- 32,215,694 --
Warrants........................ -- 1,981,086 2,075,100 2,283,732
Convertible subordinated
notes......................... -- -- -- 2,598,077
Contingently issuable stock
(Note 16)..................... -- -- -- 44,477
</TABLE>
F-11
<PAGE> 89
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED)
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, ESTIMATED
---------------- JUNE 30, USEFUL
1998 1999 2000 LIVES IN YEARS
------ ------- -------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Computer and networking equipment........... $1,384 $23,817 $ 88,566 3
Purchased software.......................... -- 1,256 5,023 3
Furniture and fixtures...................... 105 711 4,648 5
Office equipment............................ 45 541 2,394 3
Leasehold improvements...................... 30 972 5,681 5
Vehicles.................................... -- -- 42 5
------ ------- --------
1,564 27,297 106,354
Accumulated depreciation and amortization... (41) (3,422) (13,791)
------ ------- --------
$1,523 $23,875 $ 92,563
====== ======= ========
</TABLE>
Depreciation and amortization expense on property and equipment for the
period from inception (August 20, 1998) to December 31, 1998, for the year ended
December 31, 1999 and for the six months ended June 30, 1999 and June 30, 2000
was $41,152, $3.4 million, $543,078 and $10.4 million, respectively.
Equipment under capital leases at:
<TABLE>
<CAPTION>
DECEMBER 31, ESTIMATED
------------ JUNE 30, USEFUL LIFE
1998 1999 2000 IN YEARS
---- ---- -------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Office equipment................................. $ 40 $142 $305 3
Accumulated amortization......................... (2) (30) (30)
---- ---- ----
$ 38 $112 $275
==== ==== ====
</TABLE>
6. GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill and other intangible assets consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30, ESTIMATED USEFUL
1998 1999 2000 LIVES IN YEARS
------------ ------------ ---------- ----------------
<S> <C> <C> <C> <C>
Goodwill....................... $ -- $ -- $2,808,455 3
Completed technology........... -- -- 28,130 3
Assembled workforce............ -- -- 12,234 2-3
Trademarks and tradenames...... -- -- 4,901 3
Acquired license rights........ 490 490 490 10
---- ---- ----------
490 490 2,854,210
Less accumulated
amortization................. 9 56 198,136
---- ---- ----------
$481 $434 $2,656,074
==== ==== ==========
</TABLE>
F-12
<PAGE> 90
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED)
Goodwill and other intangible assets will be amortized as follows (in
millions):
<TABLE>
<S> <C>
Six months ending December 31, 2000......................... $ 476
2001........................................................ 953
2002........................................................ 953
2003........................................................ 274
------
Total....................................................... $2,656
======
</TABLE>
7. SENIOR SUBORDINATED NOTES AND CONVERTIBLE 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 $15.0 million 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 $3.9 million, 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 year ended December
31, 1999, interest expense of $1.5 million related to the fair value of the
warrants was recognized. In December 1999, the Company exercised its right to
pay off the notes in full and paid $12.2 million in interest and principal. The
remaining unpaid balance of $2.8 million was paid in the six months ended June
30, 2000. The Company recognized an extraordinary loss from early extinguishment
of debt of $3.4 million (or $0.11 per share) during the year ended December 31,
1999.
In June 2000, Akamai issued $300.0 million of 5 1/2% Convertible
Subordinated Notes due July 1, 2007 (the "Convertible Notes") for aggregate net
proceeds of approximately $290.5 million (net of offering expense of $9.5
million). The Convertible Notes are due July 1, 2007, and are convertible at any
time following the date of original issuance into the Company's common stock at
a conversion price of $115.47 per share (equivalent to 8.6603 shares of common
stock per $1,000 principal amount of Convertible Notes), subject to adjustment
in certain events. The Company can redeem the Convertible Notes on or after July
3, 2003 at the Company's option. In the event of a change of control, Akamai may
be required to repurchase all or a portion of the Convertible Notes at a
repurchase price of 100% of the principal amount plus accrued interest. Interest
on the Convertible Notes accrues as of the issue date and is payable
semiannually on January 1 and July 1 of each year, commencing on January 1,
2001. The Convertible Notes are unsecured obligations and are subordinated to
all existing and future senior indebtedness and effectively rank junior to all
secured debts and to all of the existing and future debts and other liabilities
of the Company's subsidiaries.
8. COMMITMENTS:
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 and for the year ended December 31, 1999 was $36,000 and $599,000,
respectively. Rent expense for the six months ended June 30, 1999 and 2000 was
$185,335 and $2.9 million, respectively. The leases expire at various dates
through March 1, 2006 and
F-13
<PAGE> 91
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED)
generally require the payment of real estate taxes, insurance, maintenance and
operating costs. The Company also leases certain equipment under capital leases.
The minimum aggregate future obligations under noncancelable leases and
equipment loans as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL
LEASES
(INCLUDING
OPERATING EQUIPMENT
YEAR ENDING LEASES LOAN)
----------- --------- ----------
(in thousands)
<S> <C> <C>
2000........................................................ $ 4,869 $ 608
2001........................................................ 5,594 604
2002........................................................ 5,755 181
2003........................................................ 5,489 --
2004........................................................ 5,319 --
------- ------
Total....................................................... $27,026 1,393
=======
Less interest............................................... (156)
------
Total principal obligation.................................. 1,237
Less current portion........................................ (504)
------
Noncurrent portion of principal obligation.................. $ 733
======
</TABLE>
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
$46,317 for 36 months, with a lump sum payment of $112,500 due in February 2002.
Interest expense on the loan for the year ended December 31, 1999 was $131,603.
In connection with the equipment loan, the Company issued warrants for the
purchase of 74,499 shares of common stock at a purchase price of $0.40 per
share. The warrants were exercisable upon issuance and expire on January 26,
2002. The Company estimated the value of the warrants to be $25,000 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. In November 1999, the warrants were fully exercised.
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, 2000, 2001
and 2002, the minimum commitments are approximately $10.9 million, $3.8 million,
and $1.2 million, respectively. Some of these agreements may be amended to
either increase or decrease the minimum commitments during the life of the
contract.
9. CONVERTIBLE PREFERRED STOCK:
The authorized capital stock of the Company consists of (i) 700,000,000
shares of voting common stock ("common stock") authorized for issuance with a
par value of $0.01, and (ii) 5,000,000 shares of
F-14
<PAGE> 92
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED)
undesignated preferred stock with a par value of $0.01. Prior to the closing of
the Company's initial public offering, the Company authorized 10,000,000 shares
of preferred stock with a par value of $0.01, of which 1,100,000 shares were
designated as Series A convertible preferred stock ("Series A preferred stock"),
1,327,500 shares were designated as Series B convertible preferred stock
("Series B preferred stock"), 145,195 shares were designated as Series C
convertible preferred stock ("Series C preferred stock"), 685,194 shares were
designated as Series D convertible preferred stock ("Series D preferred stock"),
1,867,480 shares were designated as Series E convertible preferred stock
("Series E preferred stock") and 985,545 shares were designated as Series F
convertible preferred stock ("Series F preferred stock").
All outstanding shares of preferred stock automatically converted into
shares of common stock upon the closing of the initial public offering as
follows:
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
------------
<S> <C>
Series A preferred stock.................................... 20,762,457
Series B preferred stock.................................... 7,965,000
Series C preferred stock.................................... 908,340
Series D preferred stock.................................... 4,111,164
Series E preferred stock.................................... 3,734,960
Series F preferred stock.................................... 985,545
----------
38,467,466
==========
</TABLE>
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).
Prior to conversion of the Series A preferred stock, the holders of the
Series A preferred stock had voting rights equivalent to the number of shares of
common stock into which their shares of Series A preferred stock were
convertible. Dividends were required to be paid when dividends were declared on
common stock. The Series A preferred stock was convertible at any time by the
holders, at the then applicable conversion rate adjusted for certain events
including stock splits and dividends. The Series A preferred stock was
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 had not made a qualified initial public offering of its common
stock. Upon liquidation, holders of Series A preferred stock were 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 was
subordinated, holders of Series A preferred stock were then entitled to share in
remaining available funds on an "as-if converted" basis with holders of common
stock.
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 expired at the earlier of (i) December 31, 1999
and (ii) the date immediately prior to the consummation of a qualified initial
public offering. The warrant was exercised in October 1999.
F-15
<PAGE> 93
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED)
Prior to conversion of the Series B preferred stock, the holders of Series
B preferred stock had voting rights equivalent to the number of shares of common
stock into which their shares of Series B preferred stock were convertible.
Dividends accrued annually and were cumulative at a rate of 8% of the original
purchase price of $15.066 per share, on a per share basis. Dividends were only
required to be paid in the event of a liquidation or redemption, as defined. The
Series B preferred stock was convertible at any time by the holders, at the then
applicable conversion rate adjusted for certain events including stock splits.
The Series B preferred stock was 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 had not made a qualified initial public
offering of its common stock. Upon liquidation, holders of Series B preferred
stock were 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 was subordinated, holders of Series B preferred stock were 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 expired upon the earlier of an initial
public offering or December 31, 1999. The option was exercised in October 1999.
Prior to conversion of the Series C preferred stock, the holders of the
Series C preferred stock had voting rights equivalent to the number of shares of
common stock into which their shares of Series C preferred stock were
convertible. Dividends accrued annually and were cumulative at a rate of 8% of
the original purchase price of $34.436 per share, on a per share basis.
Dividends were only required to be paid in the event of a liquidation or
redemption. The Series C preferred stock was 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 had not made a qualified initial public offering of its common stock.
Upon liquidation, holders of Series C preferred stock were 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 was subordinated, holders of Series C
preferred stock were 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).
Prior to conversion of the Series D preferred stock, the holders of Series
D preferred stock had voting rights equivalent to the number of shares of common
stock into which their shares of Series D preferred stock were convertible.
Dividends accrued annually and were cumulative at a rate of 8% of the original
purchase price of $18.243 per share, on a per share basis. Dividends were
required to be paid only in the event of a liquidation or redemption, as
defined. The Series D preferred stock was convertible at any time by the
holders, at the then applicable conversion rate adjusted for certain events
including stock splits and dividends. The Series D preferred stock was
redeemable, as defined, subject to the approval of the holder of 66% of the then
outstanding shares of Series D preferred stock.
F-16
<PAGE> 94
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED)
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 $12.54 million through April 2001. Revenue
recognized from this customer for the period ended December 31, 1999 was
$882,981.
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).
Prior to conversion of the Series E preferred stock, the holders of Series
E preferred stock had voting rights equivalent to the number of shares of common
stock into which the shares of Series E preferred stock were convertible.
Dividends accrued annually and were cumulative at a rate of 8% of the original
purchase price of $26.239 per share, on a per share basis. Dividends were
required to be paid only in the event of a liquidation or redemption. The Series
E preferred stock was convertible at any time by the holders, at the then
applicable conversion rate adjusted for certain events such as stock splits and
dividends. The Series E preferred stock was 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
In September 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).
Prior to conversion of the Series F preferred stock, the holders of Series
F preferred stock had voting rights equivalent to the number of shares of common
stock into which the shares of Series F preferred stock were convertible.
Dividends accrued annually and were cumulative at a rate of 8% of the original
purchase price of $15.22 per share, on a per share basis. Dividends were
required to be paid only in the event of a liquidation or redemption. The Series
F preferred stock was convertible at any time by the holders, at the then
applicable conversion rate adjusted for certain events such as stock splits and
dividends. The Series F preferred stock was redeemable, subject to the approval
of the holders of 66% of the then outstanding shares of Series F preferred
stock.
10. STOCKHOLDERS' EQUITY (DEFICIT):
PUBLIC OFFERING
In October 1999, Akamai completed an initial public offering of 9,000,000
shares of its common stock for net proceeds of $215.4 million after underwriting
discounts and commissions and offering expenses. As a result, all outstanding
shares of preferred stock automatically converted into 38,467,466 shares of
common stock.
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.
F-17
<PAGE> 95
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED)
COMMON STOCK
The common stockholders are entitled to one vote per share. At December 31,
1999, the Company had reserved 16,397,611 shares of common stock for future
issuance upon 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, $2,620,000 and $624,000, respectively. These
notes bear interest between 5.3% and 6.1%, and are payable in full by March 26,
2009, May 18, 2009, July 23, 2009 and July 23, 2009, respectively.
11. 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. In May 2000, the stockholders of the Company approved an
increase in the number of shares available for issuance under the 1998 Option
Plan to 37,755,600 (unaudited).
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. The term of options
granted cannot exceed ten years (five years for incentive stock options granted
to holders of more than 10% of the voting stock of the Company.)
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 1999 and June 30, 2000, the Company had the right to repurchase up to
3,283,200, 9,874,750 and 6,561,878 unvested shares, respectively. Such shares
may be repurchased at the original purchase prices ranging from $0.01 to $2.50
per share.
F-18
<PAGE> 96
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 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 year ended
December 31, 1999 is presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PURCHASE
SHARES PRICE
---------- ---------
<S> <C> <C>
RESTRICTED STOCK AWARDS
Outstanding at inception.................................... -- --
Issued.................................................... 3,283,200 $0.02
==========
Outstanding at December 31, 1998............................ 3,283,200 0.02
Issued.................................................... 9,820,000 0.62
----------
Outstanding at December 31, 1999............................ 13,103,200 0.21
==========
Vested restricted common stock at December 31, 1999......... 3,228,450 0.22
==========
Vested restricted common stock at June 30, 2000............. 6,541,322 $0.36
==========
</TABLE>
There were 31,282,100 shares of restricted common stock issued outside of
the plan in the period ended December 31, 1998. As of December 31, 1998 and 1999
and June 30, 2000, the Company had the right to repurchase up to 14,765,904,
9,355,680 and 7,798,817 unvested shares, respectively.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- ---------
<S> <C> <C>
STOCK OPTION AWARDS
Outstanding at inception.................................... -- --
Granted................................................... 1,287,000 $ 0.02
----------
Outstanding at December 31, 1998............................ 1,287,000 0.02
Granted................................................... 15,324,425 7.22
Exercised................................................. (549,500) 0.06
Forfeited................................................. (1,645,400) 2.76
----------
Outstanding at December 31, 1999............................ 14,416,525 7.43
==========
Outstanding at June 30, 2000................................ 19,235,704 $20.84
==========
</TABLE>
F-19
<PAGE> 97
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED)
The following table summarizes information about stock options outstanding
at December 31, 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 5,340,900 9.0 $ 0.03 424,350 $ 0.02
0.34 - 0.50 702,000 9.2 0.42 -- --
0.84 - 1.00 1,368,600 9.4 0.90 120,000 0.84
2.50 1,028,000 9.5 2.50 20,000 2.50
13.12 - 15.22 5,174,400 9.7 14.21 20,000 15.22
19.80 738,500 9.8 19.80 -- --
230.38 64,125 10.0 230.38 -- --
---------- -------
0.01 - 230.38 14,416,525 9.4 7.43 584,350 0.79
========== =======
</TABLE>
FAIR VALUE DISCLOSURE
As discussed in Note 3, the Company has adopted SFAS No. 123 through
disclosure only. Had the Company accounted for stock options to employees under
the fair value method prescribed under SFAS No. 123, Akamai's net losses and
basic and diluted net loss per share on a pro forma basis would be as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1998 1999
------ --------
<S> <C> <C>
Net loss attributable to common stockholders (in thousands):
As reported............................................... $ (890) $(59,800)
Pro Forma................................................. (891) (64,600)
Basic and diluted net loss per share:
As reported............................................... $(0.06) $ (1.98)
Pro Forma................................................. (0.06) (2.14)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1998 1999
------ ------
<S> <C> <C>
Expected option term (years)................................ 7.0 5.6
Risk-free interest rate (%)................................. 4.07 5.61
Expected volatility (%)..................................... -- 24.7
Dividend yield (%).......................................... -- --
Weighted average fair value of options granted.............. $ 0.26 $ 4.74
</TABLE>
From inception (August 20, 1998) through December 31, 1998, the Company
recorded $1.7 million in deferred compensation for restricted stock awards and
options to purchase common stock granted at exercise
F-20
<PAGE> 98
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED)
or purchase 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 year ended
December 31, 1999, the Company recorded $38.2 million in deferred compensation
for restricted stock awards and options to purchase common stock granted at
exercise or purchase prices subsequently determined to be below the fair value
of common stock. Compensation expense related to this deferred compensation of
$10.0 million and $4.3 million was recognized during the year ended December 31,
1999 and the six months ended June 30, 2000, respectively.
During the six months ended June 30, 2000, the Company accelerated the
vesting of options for seven terminated employees and recorded compensation
expense of $6.6 million based on the intrinsic value of the options at the time
of the acceleration.
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 issuance
of up to 600,000 shares of common stock to participating employees. At June 30,
2000, a total of $383,000 had been withheld from employees for future purchases
under this plan.
12. INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 20, 1998) YEAR ENDED
TO DECEMBER 31, DECEMBER 31,
1998 1999
----------------- -------------
(in thousands)
<S> <C> <C>
Deferred tax expense/(benefit).......................... $(288) $(19,573)
Valuation allowance..................................... 288 19,573
----- --------
$ -- $ --
===== ========
</TABLE>
The Company's effective tax rate varies from the statutory rate as follows:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 20, 1998) YEAR ENDED
TO DECEMBER 31, DECEMBER 31,
1998 1999
----------------- -------------
<S> <C> <C>
U.S. Federal income tax rate............................. (34.0)% (34.0)%
State taxes.............................................. (6.3) (5.4)
Deferred compensation amortization....................... 3.2 6.0
Other.................................................... (0.9) (0.6)
Valuation allowance...................................... 38.0 34.0
----- ------
--% --%
===== ======
</TABLE>
F-21
<PAGE> 99
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED)
Based on the Company's history of recurring losses, 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 1999
----------------- -------------
(in thousands)
<S> <C> <C>
Net operating loss carryforwards........................ $ 16 $ 15,617
Capitalized start-up costs.............................. 207 458
Capitalized research and development expenses........... 70 2,624
Depreciation............................................ (13) 624
Equity related compensation............................. -- 510
Other................................................... 8 28
----- --------
288 19,861
Valuation allowance..................................... (288) (19,861)
----- --------
Net deferred tax assets................................. $ -- $ --
===== ========
</TABLE>
As of December 31, 1999, the Company has federal and state net operating
loss carryforwards of approximately $37.5 million which begin to expire in 2019
and 2004, respectively. The Company also has federal and state tax credit
carryforwards of $323,000 and $247,000, respectively.
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.
13. 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 contributed
$142,375 to the savings plan for the six months ended June 30, 2000.
14. COMPREHENSIVE LOSS:
The following table presents the calculation of comprehensive loss and its
components for the period from inception through December 31, 1998, the year
ended December 31, 1999 and the six months ended June 30, 1999 and 2000 (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- ---------------------
1998 1999 1999 2000
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net loss............................... $ (890) $(57,559) $(10,078) $(278,633)
Other comprehensive income (loss):
Foreign currency translation
adjustment........................ -- -- -- (15)
Unrealized gain on securities........ -- -- -- 743
-------- -------- -------- ---------
Comprehensive loss..................... $ (890) $(57,559) $(10,078) $(277,905)
======== ======== ======== =========
</TABLE>
F-22
<PAGE> 100
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED)
15. ACQUISITIONS (UNAUDITED):
NETWORK24 COMMUNICATIONS, INC.
In February 2000, the Company acquired all of the outstanding common and
preferred stock of Network24 Communications, Inc. ("Network24") in exchange for
620,872 shares of Akamai common stock and $12.5 million in cash. Akamai also
issued options and warrants exercisable for 195,862 shares of Akamai common
stock in exchange for all outstanding options and warrants exercisable for
Network24 common stock. Network24 is a provider of Internet broadcasting
application services. The value of the acquisition was $203.6 million based on
the fair value of the consideration paid plus direct acquisition costs. The
acquisition has been accounted for using the purchase method. Accordingly, the
results of operations of Network24 subsequent to February 10, 2000 have been
included in Akamai's statements of operations for the three and six months ended
June 30, 2000. The purchase price allocation is as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Tangible net assets......................................... $ 2.7
Intangible assets acquired:
Completed technology...................................... 6.8
Assembled workforce....................................... 1.5
Trademarks and tradenames................................. 1.4
Goodwill.................................................. 191.2
------
Total purchase price allocation............................. $203.6
======
</TABLE>
Goodwill and other intangibles are being amortized on a straight-line basis
over estimated useful lives of three years (see Note 6).
INTERVU INC.
In April 2000, the Company acquired all of the outstanding common and
preferred stock of INTERVU Inc. ("INTERVU") in exchange for 10.0 million shares
of Akamai common stock. Akamai also issued options and warrants exercisable for
2.2 million shares of Akamai common stock in exchange for all outstanding
options and warrants exercisable for INTERVU common stock. INTERVU is a service
provider for Internet audio and video delivery solutions. The acquisition was
accounted for using the purchase method. Accordingly, the results of operations
of INTERVU subsequent to April 20, 2000 have been included in Akamai's
statements of operations for the three and six months ended June 30, 2000. The
total purchase price of $2.8 billion includes the fair market value of Akamai
stock and options issued of $2.8 billion and estimated direct transaction costs
of $19.0 million. The preliminary purchase price allocation is as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Tangible net assets......................................... $ 130.4
Intangible assets acquired:
Completed technology...................................... 21.4
Assembled workforce....................................... 10.7
Trademarks and tradenames................................. 3.5
In-process research and development....................... 1.4
Goodwill.................................................. 2,617.3
--------
Total purchase price allocation............................. $2,784.7
========
</TABLE>
F-23
<PAGE> 101
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED)
Tangible net assets acquired include cash, short-term and long-term
investments, accounts receivable, fixed assets and prepaid advertising (see Note
16). Liabilities assumed include accounts payable, accrued compensation and
accrued expenses. Goodwill and other intangibles are being amortized on a
straight-line basis over estimated useful lives of two to three years (see Note
6).
A portion of the purchase price was allocated to acquired in-process
research and development ("IPR&D") and completed technology. Completed
technology and IPR&D were identified and valued through interviews and analysis
of data provided by management regarding products under development.
Developmental projects that had reached technological feasibility were
classified as completed technology and will be amortized over three years.
Projects that had not reached technological feasibility and had no future
alternatives uses were classified as IPR&D and charged to expense on the date of
the acquisition. The value of IPR&D was determined considering the project's
stage of completion, the time and resources needed for completion, the
contribution of core technology, and the projected discounted cash flows of
completed products. The discount rate was determined considering Akamai's
weighted average cost of capital and the risks surrounding the successful
completion of the projects under development.
The summary table below, prepared on an unaudited pro forma basis, combines
the Company's consolidated results of operations with Network24's and INTERVU's
results of operations as if each company had been acquired as of January 1, 1999
(in thousands, except per share data).
<TABLE>
<S> <C> <C>
SIX MONTHS ENDED
JUNE 30,
----------------------
1999
---------
2000
---------
Revenue..................................................... $ 4,142 $ 32,052
Net loss.................................................... (496,581) (566,399)
Loss per share.............................................. (16.81) (6.47)
</TABLE>
The pro forma results are not necessarily indicative of what would have
occurred if the acquisitions had been in effect for the periods presented. In
addition, they are not intended to be a projection of future results and do not
reflect any synergies that might be achieved from combined operations.
CALLTHESHOTS INC.
In July 2000, the Company acquired all of the outstanding common and
preferred stock of CallTheShots Inc. ("CTS"), in exchange for a combination of
Akamai common stock and cash. The purchase price is estimated to be
approximately $6 million based on the fair value of the consideration paid plus
direct acquisition costs. The acquisition will be accounted for using the
purchase method. CTS develops services that enable Web site visitors to
personalize their interaction with such site.
16. CNN NEWS GROUP STRATEGIC ALLIANCE (UNAUDITED):
On November 11, 1999, INTERVU, which the Company acquired in April 2000
(see Note 15), entered a strategic alliance with the CNN News Group ("CNN"). In
accordance with the agreement, INTERVU issued common stock valued at $20 million
to CNN. In return, CNN agreed to provide INTERVU with three years of on-air and
online advertising and promotional opportunities across CNN's properties. As
part of its purchase price allocation, Akamai estimated the fair value of these
services to be $19.2 million. This amount has been recorded in Other Assets and
will be amortized over the remaining life of the agreement (approximately 28
months) to advertising expense. In addition, for a fee INTERVU agreed to be
CNN's exclusive provider of Internet video management and delivery services and
deliver audio streaming services.
F-24
<PAGE> 102
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED)
Following the first anniversary of the agreement, if the market value of the
Company's common stock prior to the end of any fiscal quarter falls below $33.60
per share, the Company will be obligated to issue a letter of credit in an
amount not to exceed $10.0 million, with the actual amount calculated on the
basis of the number of shares held by CNN at the time and the remaining number
of days in the term of the agreement. In addition, the Company may become
obligated to pay CNN up to $10 million in cash or common stock, at the Company's
option, if CNN holds the shares for three years and the price per share of
common stock does not increase by 1.5 times the initial price at the effective
date of the agreement. At the time of the acquisition, the Company estimated the
fair value of the guaranteed return to CNN using the Black Scholes option
pricing model, and determined its value to be approximately $7 million, which
was included in the purchase price of INTERVU. Either party may terminate the
contract at any time for material breach by the other party that remains uncured
or the other party's bankruptcy or similar adverse condition. In the event the
agreement is terminated by CNN, CNN is required to pay the Company as of the
date of the termination notice the value of the undelivered services purchased
under the agreement. In the event the agreement is terminated by the Company
because CNN engages another party to provide Internet video management and
delivery services, CNN is required to pay the Company as of the date of the
termination (i) the value of the undelivered services purchased under the
agreement and (ii) a breakup fee of $3,000,000 initially that declines to zero
over the term of the agreement.
17. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
The following is the supplemental cash flow information for all periods
presented (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION SIX MONTHS
(AUGUST 20, 1998) YEAR ENDED ENDED JUNE 30,
TO DECEMBER 31, DECEMBER 31, -------------------------------
1998 1999 1999 2000
----------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Cash paid during the period for
interest......................... $ 10 $1,603 $ 542 $ 80
Cash paid during the period for
income taxes..................... -- 6 -- 112
Noncash financing and investing
activities:
Purchase of technology license
for stock................... 490 -- -- --
Issuance of restricted common
stock in exchange for note
receivable.................. -- 5,724 2,480 --
Dividends accrued, not paid on
convertible preferred
stock....................... -- 2,241 295 --
Common stock issued for
acquisition of businesses... -- -- -- 2,954,973
Issuance of common stock in
exchange for note
receivable.................. -- -- -- 228
Acquisition of equipment
through capital lease....... $ 40 $ 102 $ 14 $ 190
</TABLE>
F-25
<PAGE> 103
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 2000 IS UNAUDITED)
18. QUARTERLY FINANCIAL RESULTS (UNAUDITED):
The following tables set forth certain unaudited quarterly results of
operations of the Company for the year ended 1999 and for the six months ended
June 30, 2000. In the opinion of management, this information has been prepared
on the same basis as the audited consolidated financial statements and all
necessary adjustments, consisting only of normal recurring adjustments, have
been included in the amounts stated below to present fairly the quarterly
information when read in conjunction with the audited consolidated financial
statements and notes thereto included elsewhere in this prospectus. The
quarterly operating results are not necessarily indicative of future results of
operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED (UNAUDITED)
---------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1999 1999 1999 1999 2000 2000
--------- -------- ------------- ------------ --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenue........................ $ -- $ 404 $ 883 $ 2,699 $ 7,222 $ 18,144
Loss before extraordinary loss
on early extinguishment of
debt......................... (2,887) (6,896) (18,542) (25,844) (35,397) (243,236)
Net loss....................... (2,887) (6,896) (18,542) (29,234) (35,397) (243,236)
Net loss attributable to common
stockholders................. $(2,891) $(7,187) $(19,892) $(29,830) $(35,397) $(243,236)
Basic and diluted net loss per
share........................ $ (0.17) $ (0.34) $ (0.80) $ (0.51) $ (0.47) $ (2.78)
Weighted average common shares
outstanding.................. 17,045 21,166 24,849 59,033 75,029 87,374
</TABLE>
F-26
<PAGE> 104
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial information
gives effect to the acquisitions by Akamai of INTERVU and Network24 as if the
transactions had occurred on January 1, 1999. These transactions are being
accounted for using the purchase method of accounting. The unaudited pro forma
combined condensed financial information for the year ended December 31, 1999
combines Akamai's historical statements of continuing operations for the year
ended December 31, 1999 with INTERVU's and Network24's historical statements of
continuing operations for the year ended December 31, 1999. The unaudited pro
forma combined condensed financial information for the six months ended June 30,
2000 combines Akamai's historical statements of continuing operations for the
six months ended June 30, 2000 with INTERVU's historical statements of
continuing operations for the period from January 1, 2000 to April 20, 2000 and
Network24's historical statements of continuing operations for the period from
January 1, 2000 to February 10, 2000. The pro forma combined condensed financial
information is based on continuing operations only and excludes extraordinary
items. A pro forma balance sheet has not been presented as the transactions have
been reflected in Akamai's June 30, 2000 balance sheet.
The pro forma combined condensed financial information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results that would have been achieved if the acquisition had been completed as
of the beginning of the period presented, nor is it necessarily indicative of
the future operating results of Akamai. The pro forma combined condensed
financial information does not give effect to any cost savings or restructuring
and integration costs that may result from the integration of Akamai's,
INTERVU's and Network24's operations.
The unaudited pro forma combined condensed financial information should be
read in conjunction with the audited financial statements and accompanying notes
of Akamai, INTERVU and Network24 included elsewhere in this prospectus.
F-27
<PAGE> 105
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS
OF CONTINUING OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------- ----------------------------
AKAMAI NETWORK24 INTERVU ADJUSTMENTS COMBINED
-------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue............................ $ 3,986 $ 735 $11,834 $ -- $ 16,555
-------- ------- -------- --------- -----------
Operating expenses:
Cost of services................. 9,002 768 5,160 -- 14,930
Engineering and development...... 11,749 463 10,094 (169)(3) 22,137
Sales, general and
administrative................ 29,621 2,270 26,659 (1,725)(3) 56,825
Amortization of intangible
assets........................ 47 -- 86 952,942(2) 953,075
Charges associated with the NBC
Strategic Alliance
Agreement..................... -- -- 17,194 -- 17,194
Equity-related compensation...... 10,005 -- -- -- 10,005
-------- ------- -------- --------- -----------
Total operating expenses...... 60,424 3,501 59,193 951,048 1,074,166
-------- ------- -------- --------- -----------
Operating loss..................... (56,438) (2,766) (47,359) (951,048) (1,057,611)
Interest income, net............... 2,269 62 3,968 -- 6,299
-------- ------- -------- --------- -----------
Loss from continuing operations.... $(54,169) $(2,704) $(43,391) $(951,048) $(1,051,312)
======== ======= ======== ========= ===========
Loss from continuing operations per
common share:
Basis and diluted................ $ (1.80) $ (25.75)
======== ===========
Weighted average number of common
shares:
Basis and diluted................ 30,177 10,645(1) 40,822
======== ========= ===========
</TABLE>
F-28
<PAGE> 106
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS
OF CONTINUING OPERATIONS FOR THE PERIOD ENDED JUNE 30, 2000
(in thousands, except per share data)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------------------- --------------------------
AKAMAI NETWORK24 INTERVU ADJUSTMENTS COMBINED
--------- --------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenue............................. $ 25,366 $ 80 $ 6,606 $ -- $ 32,052
--------- ------- -------- --------- ---------
Operating expenses:
Cost of services............... 19,283 241 2,576 -- 22,100
Engineering and development.... 19,846 149 5,151 -- 25,146
Sales, general and
administrative............... 61,124 764 15,707 -- 77,595
Amortization of intangible
assets....................... 198,080 -- 52 273,212(2) 471,344
Acquired in-process research
and development.............. 1,372 -- -- (1,372)(4) --
Equity-related compensation.... 11,610 -- -- -- 11,610
--------- ------- -------- --------- ---------
Total operating
expenses................ 311,315 1,154 23,486 271,840 607,795
--------- ------- -------- --------- ---------
Operating loss...................... (285,949) (1,074) (16,880) (271,840) (575,743)
Interest income, net................ 7,428 6 2,022 -- 9,456
--------- ------- -------- --------- ---------
Loss before provision for income
taxes............................. (278,521) (1,068) (14,858) (271,840) (566,287)
Provision for income taxes..... 112 -- -- -- 112
--------- ------- -------- --------- ---------
Loss from continuing operations..... $(278,633) $(1,068) $(14,858) $(271,840) $(566,399)
========= ======= ======== ========= =========
Loss from continuing operations per
common share:
Basis and diluted.............. $ (3.43) $ (6.47)
========= =========
Weighted average number of common
shares:
Basis and diluted.............. 81,251 6,254(1) 87,505
========= ========= =========
</TABLE>
F-29
<PAGE> 107
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
On February 10, 2000, Akamai acquired all of the outstanding common and
preferred stock of Network24 in exchange for 620,872 shares of Akamai common
stock and $12.5 million in cash. Akamai also issued options and warrants
exercisable for 195,862 shares of Akamai stock in exchange for all outstanding
options and warrants exercisable for Network24 common stock. The value of the
acquisition was $203.6 million based on the fair value of the consideration paid
plus direct acquisition costs.
On April 20, 2000, Akamai acquired all of the outstanding common and
preferred stock of INTERVU in exchange for 10.0 million shares of Akamai common
stock. Akamai also issued options and warrants exercisable for 2.2 million
shares of Akamai common stock in exchange for all outstanding options and
warrants exercisable for INTERVU common stock. The value of the acquisition was
$2.8 billion based on the fair value of the consideration paid plus direct
acquisition costs.
Both acquisitions were accounted for using the purchase method of
accounting. The purchase price for the respective acquisitions was allocated as
follows:
<TABLE>
<CAPTION>
INTERVU NETWORK24
-------- ---------
(MILLIONS)
<S> <C> <C>
Tangible net assets..................................... $ 130.4 $ 2.7
Intangible assets....................................... 2,652.9 200.9
In-process R&D.......................................... 1.4 --
-------- ------
Total purchase price.................................... $2,784.7 $203.6
======== ======
</TABLE>
The intangible assets are being amortized over their estimated useful lives
of two to three years.
The unaudited pro forma combined condensed financial information gives
effect to the above acquisitions as if the transactions had taken place on
January 1, 1999. INTERVU's and Network24's historical statements of operations
for the six months ended June 30, 2000 reflect the operating activity of INTERVU
for the period January 1 through April 20, 2000 and the operating activity of
Network24 for the period January 1 through February 10, 2000.
The following adjustments have been reflected in the unaudited pro forma
combined condensed financial information:
(1) To reflect the shares issued in consideration for the acquisitions. For
the period ended June 30, 2000, Akamai's historical weighted average
common shares outstanding includes the shares issued in consideration
of the acquisitions for the period from the acquisition date to June
30, 2000.
(2) To eliminate the amortization of historical goodwill and intangible
assets previously recorded by INTERVU and to record amortization
expense for the intangible assets recorded as a result of the
allocation of purchase price of INTERVU and Network24.
(3) To eliminate equity-related compensation recorded by INTERVU and
Network24 which would not have been recorded had the acquisitions taken
place on January 1, 1999.
(4) To eliminate the one-time write-off of in-process research and
development acquired in the INTERVU acquisition.
F-30
<PAGE> 108
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
InterVU Inc.
We have audited the accompanying consolidated balance sheets of InterVU
Inc. as of December 31, 1999 and 1998, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
InterVU Inc. at December 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
San Diego, California
February 10, 2000
F-31
<PAGE> 109
INTERVU INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 48,097 $ 13,086
Short-term investments.................................... 66,950 17,700
Accounts receivable, less allowance of $788,000 and
$122,000, at December 31, 1999 and 1998,
respectively........................................... 5,373 795
Prepaid and other current assets.......................... 925 81
-------- --------
Total current assets........................................ 121,345 31,662
Property and equipment, net................................. 13,858 2,654
Intangible assets, net...................................... 1,156 --
Other assets................................................ 6,360 45
-------- --------
Total assets...................................... $142,719 $ 34,361
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,916 $ 1,387
Accrued liabilities....................................... 774 198
Deferred revenue.......................................... 554 210
Payable to NBC Multimedia................................. -- 750
Accrued payroll and related benefits...................... 1,145 677
Current portion of long-term debt......................... 60 --
Current portion of capital lease obligations.............. 385 7
-------- --------
Total current liabilities......................... 5,834 3,229
Capital lease obligations, less current portion............. 515 --
Long term debt, less current portion........................ 55 --
Other long-term liabilities................................. 101 --
Commitments
Redeemable convertible preferred stock, $0.001 par value:
Series H 30,000 shares and 0 shares issued and outstanding
at December 31, 1999 and December 31, 1998,
respectively.............................................. 30,000 --
Stockholders' equity:
Convertible preferred stock, $0.001 par value:
Authorized -- 5,000,000 shares:
Series G convertible preferred stock,
Designated -- 1,280,000 shares; Issued and
outstanding -- 1,280,000 shares at December 31, 1999
and December 31, 1998, respectively.................... 1 1
Common stock, $0.001 par value: Authorized -- 45,000,000
shares; Issued and outstanding -- 15,525,821 shares and
11,865,097 shares at December 31, 1999 and 1998,
respectively.............................................. 15 12
Additional paid-in capital.................................. 203,823 57,057
CNN prepaid advertising..................................... (20,000) --
Deferred compensation....................................... (8,943) (746)
Accumulated other comprehensive (loss)...................... (99) --
Accumulated deficit......................................... (68,583) (25,192)
-------- --------
Total stockholders' equity........................ 106,214 31,132
-------- --------
Total liabilities and stockholders' equity........ $142,719 $ 34,361
======== ========
</TABLE>
See accompanying notes.
F-32
<PAGE> 110
INTERVU INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Revenues.............................................. $ 11,834 $ 1,761 $ 144
Cost of revenues...................................... 5,160 1,105 997
----------- ---------- ----------
Gross margin.......................................... 6,674 656 (853)
Operating expenses:
Research and development............................ 10,094 4,752 1,705
Sales and marketing................................. 15,638 6,021 1,920
General and administrative.......................... 11,107 4,143 231
Charges associated with the NBC Strategic Alliance
Agreement........................................ 17,194 4,622 750
----------- ---------- ----------
Total operating expenses.............................. 54,033 19,538 4,606
----------- ---------- ----------
Loss from operations.................................. (47,359) (18,882) (5,459)
Interest income....................................... 3,968 1,281 192
----------- ---------- ----------
Net loss.............................................. $ (43,391) $ (17,601) $ (5,267)
=========== ========== ==========
Basic and diluted net loss per share.................. $ (3.23) $ (1.83) $ (0.95)
=========== ========== ==========
Shares used in calculating basic and diluted net loss
per share........................................... 13,452,463 9,604,154 5,570,609
=========== ========== ==========
</TABLE>
See accompanying notes.
F-33
<PAGE> 111
INTERVU INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NOTES DEFERRED
RECEIVABLE COMPENSATION
PREFERRED STOCK COMMON STOCK ADDITIONAL FROM AND
------------------- ------------------- PAID-IN COMMON CNN PREPAID
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS ADVERTISING
---------- ------ ---------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996....... 1,194,138 $ 1 4,006,787 $ 4 $ 5,325 $(6) $ (403)
Issuance of common stock in initial
public offering net of issuance
cost of $2,432.................... -- -- 2,210,526 2 18,566 -- --
Issuance of convertible preferred
stock............................. 832,164 1 -- -- 5,395 -- --
Conversion of preferred stock...... (2,026,302) (2) 3,237,286 3 (1) -- --
Issuance of Series G convertible
preferred stock................... 1,280,000 1 -- -- (25) -- --
Repayments of note receivable from
common stockholders............... -- -- -- -- -- 4 --
Repurchase of restricted stock..... -- -- (108,685) -- (3) 2 --
Issuance of shares for exercise of
stock options..................... -- -- 31,490 -- 1 -- --
Issuance of stock upon formation of
Netpodium......................... -- -- 43,117 -- 30 -- --
Deferred compensation.............. -- -- -- -- 563 -- (563)
Amortization of deferred
compensation...................... -- -- -- -- -- -- 256
Net loss........................... -- -- -- -- -- -- --
---------- --- ---------- --- -------- --- --------
Balance at December 31, 1997....... 1,280,000 1 9,420,521 9 29,851 -- (710)
Recognition of lapse of NBC's
obligation to return 680,000
shares of Series G convertible
preferred stock issued under the
Strategic Alliance Agreement...... -- -- -- -- 3,373 -- --
Issuance of common stock in
connection with the subsequent
public offering net of issuance
costs of $1,973................... -- -- 1,495,000 2 17,834 -- --
Repurchase of restricted stock..... -- -- (28,334) -- (1) -- --
Issuance of shares for exercise of
stock options..................... -- -- 47,789 -- 80 -- --
Issuance of common stock........... -- -- 927,493 1 5,681 -- --
Compensation related to stock
options........................... -- -- 2,628 -- 22 -- --
Deferred compensation.............. -- -- -- -- 217 -- (217)
Amortization of deferred
compensation...................... -- -- -- -- -- -- 181
Net loss........................... -- -- -- -- -- -- --
---------- --- ---------- --- -------- --- --------
Balance at December 31, 1998....... 1,280,000 1 11,865,097 12 57,057 -- (746)
Recognition of lapse of NBC's
obligation to return 600,000
shares of Series G convertible
preferred stock issued under the
Strategic Alliance Agreement...... -- -- -- -- 17,194 -- --
Issuance of common stock in
connection with the subsequent
public offering net of issuance
costs of $6,493................... -- -- 2,875,000 3 97,004 -- --
Issuance of stock to CNN for
prepaid advertising............... -- -- 349,612 -- 20,000 -- (20,000)
Repurchase of restricted stock..... -- -- (47,437) -- (2) -- --
Issuance of shares under ESPP
plan.............................. -- -- 13,396 -- 106 -- --
Issuance of shares for exercise of
warrants.......................... -- -- 165,837 -- -- -- --
Issuance of shares for exercise of
stock options..................... -- -- 225,301 -- 1,162 -- --
Issuance of common stock........... -- -- 40,616 -- 111 -- --
Issuance of common stock related to
the acquisition of Videolinx...... 38,399 1,530
Deferred compensation and expense
related to issuance of common
stock for services................ -- -- -- -- 9,661 -- (9,084)
Amortization of deferred
compensation...................... -- -- -- -- -- -- 887
Comprehensive Income:
Net loss.......................... -- -- -- -- -- -- --
Unrealized loss on short-term
investments..................... -- -- -- -- -- -- --
Total comprehensive income
(loss)............................ -- -- -- -- -- -- --
---------- --- ---------- --- -------- --- --------
Balance at December 31, 1999....... 1,280,000 $ 1 15,525,821 $15 $203,823 $-- $(28,943)
========== === ========== === ======== === ========
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
(LOSS) DEFICIT EQUITY
------------- ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1996....... $ -- $ (2,324) $ 2,597
Issuance of common stock in initial
public offering net of issuance
cost of $2,432.................... -- -- 18,568
Issuance of convertible preferred
stock............................. -- -- 5,396
Conversion of preferred stock...... -- -- --
Issuance of Series G convertible
preferred stock................... -- -- (24)
Repayments of note receivable from
common stockholders............... -- -- 4
Repurchase of restricted stock..... -- -- (1)
Issuance of shares for exercise of
stock options..................... -- -- 1
Issuance of stock upon formation of
Netpodium......................... -- -- 30
Deferred compensation.............. -- -- --
Amortization of deferred
compensation...................... -- -- 256
Net loss........................... -- (5,267) (5,267)
---- -------- --------
Balance at December 31, 1997....... -- (7,591) 21,560
Recognition of lapse of NBC's
obligation to return 680,000
shares of Series G convertible
preferred stock issued under the
Strategic Alliance Agreement...... -- -- 3,373
Issuance of common stock in
connection with the subsequent
public offering net of issuance
costs of $1,973................... -- -- 17,836
Repurchase of restricted stock..... -- -- (1)
Issuance of shares for exercise of
stock options..................... -- -- 80
Issuance of common stock........... -- -- 5,682
Compensation related to stock
options........................... -- -- 22
Deferred compensation.............. -- -- --
Amortization of deferred
compensation...................... -- -- 181
Net loss........................... -- (17,601) (17,601)
---- -------- --------
Balance at December 31, 1998....... -- (25,192) 31,132
Recognition of lapse of NBC's
obligation to return 600,000
shares of Series G convertible
preferred stock issued under the
Strategic Alliance Agreement...... -- -- 17,194
Issuance of common stock in
connection with the subsequent
public offering net of issuance
costs of $6,493................... -- -- 97,007
Issuance of stock to CNN for
prepaid advertising............... -- -- --
Repurchase of restricted stock..... -- -- (2)
Issuance of shares under ESPP
plan.............................. -- -- 106
Issuance of shares for exercise of
warrants.......................... -- -- --
Issuance of shares for exercise of
stock options..................... -- -- 1,162
Issuance of common stock........... -- -- 1,641
Issuance of common stock related to
the acquisition of Videolinx......
Deferred compensation and expense
related to issuance of common
stock for services................ -- -- 577
Amortization of deferred
compensation...................... -- -- 887
Comprehensive Income:
Net loss.......................... -- (43,391) (43,391)
Unrealized loss on short-term
investments..................... (99) -- (99)
--------
Total comprehensive income
(loss)............................ -- -- 43,490
---- -------- --------
Balance at December 31, 1999....... $(99) $(68,583) $106,214
==== ======== ========
</TABLE>
See accompanying notes.
F-34
<PAGE> 112
INTERVU INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
--------- -------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $ (43,391) $(17,601) $(5,267)
Adjustments to reconcile net loss to net cash used in
operating activities:
Recognition of lapse of NBC's obligation to return shares
of Series G convertible preferred stock issued under the
NBC Strategic Alliance Agreement........................ 17,194 3,373 --
Loss on disposal of property and equipment................ -- 11 --
Issuance of common stock for services..................... 577 22 --
Amortization of deferred compensation..................... 887 181 256
Depreciation and amortization............................. 3,372 615 178
Changes in operating assets and liabilities net of effects
from the purchase of Videolinx:
Accounts receivable..................................... (4,239) (707) (89)
Prepaid and other assets................................ (1,034) (49) (60)
Accounts payable........................................ 1,065 949 350
Accrued liabilities..................................... 438 205 --
Deferred revenue........................................ 344 210 --
Payable to NBC Multimedia............................... (750) 750 --
Accrued payroll and related benefits.................... 468 529 76
--------- -------- -------
Net cash used in operating activities....................... (25,069) (11,512) (4,556)
INVESTING ACTIVITIES:
Acquisition of Videolinx net of cash acquired............... 41 -- --
Purchase of short-term investments.......................... (208,338) (42,232) --
Proceeds from sale of short-term investments................ 158,989 24,532 --
Purchases of property and equipment......................... (12,707) (2,675) (484)
Investments in other entities............................... (6,100) -- --
--------- -------- -------
Net cash used in investing activities....................... (68,115) (20,375) (484)
FINANCING ACTIVITIES:
Payments on capital leases.................................. (304) (12) (8)
Proceeds from note payable.................................. 165 -- --
Repayment on note payable................................... (50) -- --
Proceeds from issuance of redeemable convertible preferred
stock and warrants........................................ 30,000 -- --
Issuance of common stock.................................... 98,386 23,578 18,599
Issuance of preferred stock................................. -- -- 3,336
Advances from stockholders.................................. -- -- 2,010
Repurchase of common stock.................................. (2) (1) (1)
Repayment of stockholder notes receivable................... -- -- 4
--------- -------- -------
Net cash provided by financing activities................... 128,195 23,565 23,940
--------- -------- -------
Net increase in cash and cash equivalents................... 35,011 (8,322) 18,900
Cash and cash equivalents at beginning of year.............. 13,086 21,408 2,508
--------- -------- -------
Cash and cash equivalents at end of year.................... $ 48,097 $ 13,086 $21,408
========= ======== =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Capital lease obligations entered into for equipment........ $ 1,155 $ -- $ 27
--------- -------- -------
Conversion of advances from stockholders to convertible
preferred stock........................................... $ -- $ -- $ 2,306
--------- -------- -------
Expense related to issuance of common stock for services.... $ 577 $ 22 $ --
--------- -------- -------
Cancellation of stockholder notes receivable................ $ -- $ -- $ 1
--------- -------- -------
Issuance of Series G convertible preferred stock as
consideration for the formation of NBC Strategic Alliance
Agreement................................................. $ -- $ -- $ 1
--------- -------- -------
Recognition of lapse of NBC's obligation to return shares of
Series G convertible preferred stock issued under the NBC
Strategic Alliance Agreement.............................. $ 17,194 $ 3,373 $ --
--------- -------- -------
</TABLE>
See accompanying notes.
F-35
<PAGE> 113
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
InterVU Inc. (the "Company" or "INTERVU") was incorporated in Delaware on
August 2, 1995 to provide services for the delivery or "streaming" of live and
on-demand video and audio content over the Internet. The Company utilizes a
distributed network to accelerate the speed and improve the quality of video and
audio delivery.
BASIS OF PRESENTATION
The consolidated financial statements include all the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation. On August 25, 1999 the
Company acquired Netpodium in a business combination accounted for as a
pooling-of-interests. Netpodium Inc., a Seattle based innovator of live,
interactive web-based communication software and event hosting services, became
a wholly owned subsidiary of the Company through the exchange of approximately
one million shares of common stock for all outstanding stock, stock options and
warrants of Netpodium. The accompanying financial statements have been prepared
as if the companies had been combined for all periods presented, as more fully
discussed in Note 9.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents consist of cash, money market funds, and other
highly liquid investments with maturities of three months or less when
purchased. Such investments are made in accordance with the Company's investment
policy, which establishes guidelines relating to diversification, maturities and
credit quality designed to maintain safety and liquidity. The Company applies
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS No. 115), to its short-term
investments. Under SFAS No. 115, the Company classifies its short-term
investments as "available-for-sale" and records such assets at estimated fair
value in the balance sheets with unrealized gains and losses, if any, reported
in stockholders' equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, cash equivalents, short-term investments,
accounts receivable, accounts payable, accrued liabilities, payable to NBC
Multimedia, accrued payroll and related benefits and lease commitments
approximates fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and depreciated over the estimated useful lives of the assets, ranging from
three to five years, using the straight-line method. Leasehold improvements are
stated at cost and amortized using the straight-line method over the shorter of
the estimated useful lives of the assets or the lease term. Amortization of
equipment under capital leases is reported with depreciation of property and
equipment.
INTANGIBLE ASSETS
Intangible assets consist of goodwill and patents.
The Company has recorded goodwill of $1.2 million for the excess purchase
price over the estimated fair value of tangible and intangible assets acquired
and liabilities assumed resulting from its acquisition of Videolinx. The
goodwill is amortized on a straight line basis over seven years from July 15,
1999, date of acquisition.
F-36
<PAGE> 114
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The cost of patent applications and costs incurred in filing for patents
are capitalized. Capitalized costs related to patent applications are expensed
when it becomes determinable that such applications will not be pursued.
Capitalized costs related to issued patents are amortized over a period not to
exceed seventeen years or the remaining useful life of the patents, whichever is
shorter, using the straight-line method. As of December 31, 1999, the Company
had $82,000 of capitalized patent costs.
Accumulated amortization of intangible assets at December 31, 1999 and 1998
was $89,000 and $0, respectively.
SOFTWARE DEVELOPMENT COSTS
SFAS No. 86, Accounting for Costs of Computer Software to be Sold, Leased
or Otherwise Marketed, provides for the capitalization of certain software
development costs after technological feasibility of the software is attained.
No such costs have been capitalized to date because costs incurred subsequent to
reaching technological feasibility have not been material.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). This standard requires
companies to capitalize qualifying computer software costs incurred during the
application development stage and amortize them over the software's useful life
(three years.) As of December 31, 1999 the Company has capitalized $1,470,000 of
development costs related to internal use software compared with $1,044,000 as
of December 31, 1998. Accumulated amortization of developed computer software at
December 31,1999 and 1998 was $385,000 and $95,000, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the financial statements. Actual
results could differ from those estimates.
REVENUE RECOGNITION
Revenue is generated primarily from video encoding and distribution
services. Revenue from video encoding services is recognized as the service is
provided and revenue from video distribution services is recognized at the time
of delivery. The Company also performs services on development contracts and
recognizes related revenues on a percentage-of-completion method as services are
performed. Substantially all revenue is generated from domestic customers.
The Company's wholly owned subsidiary Netpodium generates revenue from
licensing the rights to use its software products directly to end-users and also
generates revenue from broadcast hosting services and the sale of customer
support services. Netpodium recognizes revenue in accordance with Statement of
Position (SOP) 97-2, "Software Revenue Recognition." Revenues from software
license agreements are recognized upon delivery of software if persuasive
evidence of an arrangement exists, collection is probable, the fee is fixed or
determinable, and vendor-specific objective evidence exists to allocate the
total fee to elements of the arrangement. The software revenue represents less
than 10% of total revenues in each of the years presented.
CONCENTRATION OF CREDIT RISK
The Company from time to time maintains a substantial portion of its cash
and cash equivalents in money market accounts with one financial institution.
The Company invests its excess cash in debt instruments of governmental
agencies. The Company has established guidelines relative to diversification and
maturities that attempt to maintain safety and liquidity.
F-37
<PAGE> 115
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in connection with research and development are charged to
operations as incurred.
LONG-LIVED ASSETS
The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery of
the asset's carrying value unlikely. An impairment loss would be recognized when
the sum of the expected future undiscounted net cash flows is less than the
carrying amount of the asset. The Company has identified no such impairment
losses. Substantially all of the Company's long-lived assets are located in the
United States.
ADVERTISING COSTS
Advertising costs are expensed as incurred. The Company incurred $1.3
million and $1.0 million in advertising costs for the years ended December 31,
1999 and 1998, respectively.
STOCK OPTIONS
SFAS No. 123, Accounting for Stock-Based Compensation, and EITF 96-18,
Accounting for Equity Instruments, That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods or Services, establishes the use
of the fair value based method of accounting for stock-based compensation
arrangements, under which compensation cost is determined using the fair value
of stock-based compensation determined as of the grant date, and is recognized
over the periods in which the related services are rendered. Deferred
compensation for options granted to non-employees has been determined in
accordance with SFAS No. 123 and EITF 96-18 as the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measured. Deferred charges for options granted to
non-employees are periodically remeasured as the underlying options vest. SFAS
No. 123 also permits companies to elect to continue using the intrinsic value
accounting method specified in Accounting Principles Board (APB) Opinion No. 25
to account for stock-based compensation. The Company has decided to retain the
intrinsic value based method, and has disclosed the pro forma effect of using
the fair value based method to account for its stock-based compensation (Note
5).
LOSS PER SHARE
Historical basic and diluted net loss per share has been computed in
accordance with SFAS No. 128. Earnings Per Share, using the weighted-average
number of shares of common stock outstanding during the period. Common
equivalent shares result from Series G Preferred Stock, Series H Preferred
Stock, stock options, warrants and unvested restricted stock of which 5,311,265,
4,065,391 and 3,365,614 shares were excluded from the computation of diluted
earnings per share for the years ended December 31, 1999, 1998 and 1997,
respectively, as their effect would be anti-dilutive.
RECENT ACCOUNTING STANDARDS
In 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income,
and SFAS No. 131, Segment Information. SFAS No. 130 requires that all components
of comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income is
defined as the change in equity during the period from transactions and other
events and circumstances from non-owner sources. Net income and other
comprehensive income, including foreign currency translation adjustments, and
unrealized gains and losses on investments shall be reported, net of their
related tax effect, to arrive at comprehensive income. SFAS No. 131 amends the
requirements for public enterprises to report financial and descriptive
information about their reportable operating segments.
F-38
<PAGE> 116
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Operating segments, as defined in SFAS No. 131, are components of an enterprise
for which separate financial information is available and is evaluated regularly
by a company in deciding how to allocate resources and in assessing performance.
The financial information is required to be reported on the basis that is used
internally for evaluating the segment performance. The Company believes it
operates in one business and operating segment and adoption of this standard did
not have a material impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." In May 1999, the FASB voted to
delay the effective date of SFAS 133 by one year. The Company will be required
to adopt SFAS 133 for fiscal year 2001. This statement establishes a new model
for accounting for derivatives and hedging activities. Under SFAS 133, all
derivatives must be recognized as assets and liabilities and measured at fair
value. The Company has not completed its determination of the impact of the
adoption of this new accounting standard on its financial position or results of
operations.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to current
year presentation.
2. SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ----------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ------ ------- ----------
<S> <C> <C> <C> <C>
At December 31, 1999:
US Treasury securities and obligations of US
government agencies....................... $ 61 $-- $-- $ 61
Municipal Bonds.............................. 38,300 -- -- 38,300
U.S. corporate debt securities............... 28,688 -- 99 28,589
------- -- --- -------
$67,049 $-- $99 $66,950
======= == === =======
At December 31, 1998:
Municipal Bonds........................... $17,700 $-- $-- $17,700
======= == === =======
</TABLE>
Available-for-sale securities by contractual maturity are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Due in one year or less......................... $51,614
Due after one year through two years............ 15,275
-------
$66,950
=======
</TABLE>
F-39
<PAGE> 117
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- ------
(IN THOUSANDS)
<S> <C> <C>
Equipment......................................... $ 904 $ 81
Computers......................................... 11,267 2,041
Furniture and fixtures............................ 205 125
Equipment under capital lease..................... 1,175 27
Leasehold improvements............................ 320 21
Internally developed software..................... 1,470 1,044
Purchased software................................ 2,839 152
------- ------
18,180 3,491
Less accumulated depreciation..................... (4,322) (837)
------- ------
$13,858 $2,654
======= ======
</TABLE>
4. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
At December 31, 1999 the Company had authorized 5,000,000 shares of
preferred stock, of which 1,280,000 shares were designated as Series G
convertible preferred stock and 30,000 shares were designated as Series H 6.5%
Convertible Redeemable Preferred Stock due 2009. The Board of Directors is
authorized, without further stockholder approval, to issue the remaining
3,690,000 shares of preferred stock in one or more series and to fix the rights,
preferences, privileges, and restrictions granted or imposed upon any unissued
shares of preferred stock and to fix the number of shares constituting any
series and the designation of such series.
In connection with the formation of a strategic alliance in October 1997,
the Company issued 1,280,000 shares of Series G convertible preferred stock to
NBC. The Series G convertible preferred stock ($0.001 par value) has an
aggregate liquidation preference of $10,240,000, a dividend rate of $0.64 per
share and a conversion rate of 0.6298 common shares to one preferred share,
subject to adjustment for dilution. Noncumulative dividends are payable
quarterly, when, as and if declared by the Board of Directors. The shares of
Series G convertible preferred stock are convertible into common stock at the
option of the holder commencing July 10, 1998. The holder of each share of
Series G convertible preferred stock has the right to one vote for each share of
common stock into which it would convert.
On December 23, 1999, the Company and Microsoft Corporation ("Microsoft")
entered into a strategic partnership. Microsoft purchased 30,000 shares of the
Company's Series H 6.5% Convertible Redeemable Preferred Stock due 2009 (the
"Series H Preferred Stock"), a new series of preferred stock. The shares of
Series H Preferred Stock are convertible at the option of the holder into an
aggregate of 333,333 shares of the Company's common stock, subject to customary
anti-dilution adjustments. The terms of the Series H Preferred Stock specify an
annual dividend rate of 6.5%, payable quarterly in Series H Preferred Stock,
common stock or cash at the Company's option. Holders of Series H Preferred
Stock have a liquidation preference of $1,000 per share plus all accumulated
dividends. On December 19, 2000 if the Series H Preferred Stock has not been
converted to common, the Company will be required to redeem all outstanding
shares of Series H Preferred Stock at a price equal to the liquidation
preference, plus accumulated and unpaid dividends to the date of redemption.
F-40
<PAGE> 118
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMMON STOCK
In August 1995, 2,398,278 shares of common stock were issued to the
founders of the Company at a price of $0.0004 per share under founder stock
purchase agreements. In March 1996, an additional 886,758 shares of common stock
were issued to three of the founders at a price of $0.002 per share under the
founder stock purchase agreements. In January 1996, the Company issued 147,373
shares of common stock to employees at $0.004 per share under restricted stock
agreements. Also, in April and December 1996, the Company issued 444,639 and
129,739 shares of common stock, respectively, to employees at $0.024 and $0.04
per share, respectively, under restricted stock agreements. In connection with
the founder stock purchase agreements and the restricted stock agreements, the
Company has the option to repurchase, at the original issue price, unvested
common shares in the event of termination of employment. Shares issued under the
agreements generally vest 20% on the first anniversary of the employee's hire
date and daily thereafter for four years. Shares subject to repurchase by the
Company totaled 472,448 and 1,107,247 at December 31, 1999 and 1998,
respectively. In 1999 and 1998, the Company repurchased a total of 47,437 shares
for $2,000 and 28,334 shares for $1,000, respectively, pursuant to the
agreements.
In August 1997, the Board of Directors authorized management of the Company
to file a registration statement with the SEC permitting the Company to sell
shares of its common stock to the public. Concurrent with the closing of the
offering, all of the preferred stock outstanding, excluding 1,280,000 shares of
Series G preferred stock, automatically converted into 3,328,717 shares of
common stock.
On June 18, 1999, the Company increased the number of authorized shares of
the Company's common stock from 20,000,000 to 45,000,000 shares.
STOCK OPTIONS
The Company has established stock option plans to grant options to purchase
common stock to consultants, employees, officers and directors of the Company.
The Company has authorized for grant under the plans stock options to purchase
up to 5,081,676 shares of its common stock.
Under the terms of the plans, non-qualified and incentive options may be
granted to consultants, employees, officers and directors at prices not less
than 100% of the fair value on the date of grant. Options generally vest 20%
after the first year of employment and daily thereafter for four years. The
options expire ten years from the date of grant.
F-41
<PAGE> 119
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the stock option activity under the plans:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Balance at December 31, 1996................ 157,000 $ 0.04
Granted................................... 711,000 3.15
Exercised................................. (32,000) 0.03
Canceled.................................. (92,000) 0.03
--------- ------
Balance at December 31, 1997................ 744,000 3.00
Granted................................... 1,537,000 11.19
Exercised................................. (50,000) 1.77
Canceled.................................. (363,000) 9.72
--------- ------
Balance at December 31, 1998................ 1,868,000 9.39
Granted................................... 2,406,000 35.24
Exercised................................. (225,000) 5.15
Canceled.................................. (484,000) 23.94
--------- ------
Balance at December 31, 1999................ 3,565,000 $25.12
========= ======
</TABLE>
Options exercisable as of December 31, 1999 and 1998 were 491,000 and
209,000, respectively and approximately 1.2 million shares are available for
future grant under the Company's stock option plans as of December 31, 1999.
Additional information regarding stock options outstanding at December 31, 1999
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------------------------------------
WEIGHTED- OPTIONS EXERCISABLE
AVERAGE ---------------------------
WEIGHTED- REMAINING WEIGHTED-
AVERAGE CONTRACTUAL AVERAGE
RANGE OF EXERCISE PRICES SHARES PRICE LIFE (IN YEARS) SHARES PRICE
------------------------ --------- --------- --------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$0.04 to $8.38.............. 736,000 $ 3.86 6.85 250,000 $ 3.23
$8.63 to $17.00............. 611,000 12.97 8.51 157,000 12.49
$17.50 to $30.63............ 621,000 21.96 8.86 84,000 18.60
$31.00 to $36.75............ 694,000 33.12 9.63 -- --
$37.13 to $44.50............ 596,000 40.89 9.52 -- --
$45.25 to $97.75............ 307,000 58.07 9.71 -- --
--------- ------ ---- ------- ------
$0.04 to $97.75............. 3,565,000 $25.12 8.72 491,000 $ 8.83
========= ====== ==== ======= ======
</TABLE>
Pro forma information regarding net income or loss is required to be
disclosed in accordance with SFAS No. 123, and has been determined as if the
Company had accounted for its employee stock options under the fair value method
prescribed in that Statement. For options granted from January 1, 1996 through
November 18, 1997, the fair value for the options was estimated at the date of
grant using the "minimum value" method for option pricing with the following
weighted-average assumptions: risk-free interest rate of 6%, dividend yield of
0%, and weighted-average expected life of the option of seven years. For options
granted from November 18, 1997 to December 31, 1997, the fair value of the
options was estimated at the date of grant using the "Black-Scholes" method for
option pricing with the following weighted-average assumptions: risk free
interest rate of 6%, dividend yield of 0%, expected volatility of 75% and
weighted-average expected life of the option of seven years. For options granted
in 1998, the fair value of the options was estimated at the date of the grant
using the following assumptions: risk free interest rate of 6%, dividend yield
of 0%, expected volatility of 108% and weighted-average expected life of seven
years. For options granted in 1999, the fair
F-42
<PAGE> 120
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
value of the options was estimated at the date of the grant using the following
assumptions: risk free interest rate of 6%, dividend yield of 0%, expected
volatility of 150% and weighted-average expected life of seven years.
The minimum value pricing model is similar to the Black-Scholes option
valuation model which was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable,
except that it excludes the factor for volatility. In addition, option valuation
models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of related options. The
Company's net loss would have been affected by the pro forma amounts as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<S> <C> <C> <C>
Net loss
As reported........................................ $(43,391) $(17,601) $(5,267)
Pro forma.......................................... $(52,810) $(19,165) $(5,102)
Basic and diluted net loss per share
As reported........................................ $ (3.23) $ (1.83) $ (0.95)
Pro forma.......................................... $ (3.93) $ (2.00) $ (0.92)
Weighted-average fair value of options granted..... $ 35.24 $ 10.33 $ 1.11
</TABLE>
EMPLOYEE QUALIFIED STOCK PURCHASE PLAN
The Employee Qualified Stock Purchase Plan ("Qualified Stock Purchase
Plan") was adopted by the Board of Directors on February 25, 1998, and by the
Company's stockholders on June 22, 1998 and became effective September 1, 1998.
A total of 500,000 shares of common stock have been authorized for issuance
under the Qualified Stock Purchase Plan. The Qualified Stock Purchase Plan
permits eligible employees of the Company to purchase shares of common stock
through periodic payroll deductions. Payroll deductions may not exceed 15% of
the participant's base salary, and the purchase price will not be less than 85%
of the lower of the fair market value of the stock at either the beginning or
the end of the offering period. As of December 31, 1999, 13,396 shares had been
issued under the plan.
DEFERRED COMPENSATION
Through December 31, 1999, the Company recorded deferred compensation for
the difference between the price per share of restricted stock issued or the
exercise price of stock options granted and the deemed fair value for financial
statement presentation purposes of the Company's common stock at the date of
issuance or grant. The deferred compensation is amortized over the vesting
period of the related restricted stock or options, which is generally five
years. Through December 31, 1999, the Company recorded gross deferred
compensation totaling $10.3 million and related amortization expense totaling
$887,000, $181,000, and $256,000 for the fiscal years 1999, 1998 and 1997,
respectively.
F-43
<PAGE> 121
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
WARRANTS
In connection with the Company's initial public offering in November 1997,
the Company issued warrants to purchase 200,000 shares of common stock to its
underwriters. Such warrants are exercisable at $11.40 per share of common stock
through November 2002. In connection with the Company's public offering in June
1998, the Company issued warrants to purchase 130,000 shares of common stock to
its underwriters.
These warrants are exercisable at $15.90 per share commencing June 1999 and
expire in June 2003. In December 1999, the Company issued a warrant to purchase
60,000 shares of common stock to Microsoft in conjunction with its purchase of
Series H Preferred Stock. This warrant is exercisable at $90.00 per share
commencing December 1999 and expires in December 2004. At December 31, 1999
warrants to purchase 134,000 shares remain unexercised with a weighted average
exercise price of $48.66 per share.
Shares Reserved for Future Issuance
The following common stock is reserved for future issuance at December 31:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Conversion of redeemable preferred stock...... 333,000 --
Conversion of preferred stock................. 806,000 806,000
Stock options issued and outstanding.......... 3,565,000 1,868,000
Warrants issued and outstanding............... 134,000 330,000
Authorized for future option grants and share
purchases................................... 1,697,000 1,280,000
--------- ---------
6,535,000 4,284,000
========= =========
</TABLE>
5. COMMITMENTS
The Company leases certain of its operating facilities and equipment under
operating and capital leases with terms ranging up to five years. Future annual
minimum payments under noncancelable capital and operating leases (with initial
lease terms in excess of one year) consisted of the following at December 31,
1999:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
2000.............................................. $1,248 $ 442
2001.............................................. 1,237 435
2002.............................................. 1,267 108
2003.............................................. 720 --
2004.............................................. 316 --
------ -----
Total minimum lease payments...................... $4,788 985
======
Less amounts representing interest................ (85)
-----
Present value of future minimum lease payments.... 900
Less current portion.............................. (385)
-----
Capital lease obligation, net of current
portion......................................... $ 515
=====
</TABLE>
Rental expense under operating leases for the years ended December 31,
1999, 1998, and 1997 was $1,167,000, $327,000, and $129,000, respectively.
In March 1999, the Company financed $1.1 million of equipment under a
three-year non-cancelable lease with an annual interest rate of 7.75%.
F-44
<PAGE> 122
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
Significant components of the Company's deferred tax assets as of December
31, 1999 and 1998 are shown below. A valuation allowance of $26,584,000 has been
recorded at December 31, 1999 to offset the net deferred tax assets because
realization is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.............. $ 24,682 $ 8,999
Research tax credit carryforwards............. 932 517
Other......................................... 970 429
-------- -------
Total deferred tax assets............. 26,584 9,945
Valuation allowance............................. (26,584) (9,945)
-------- -------
Net deferred tax assets......................... $ -- $ --
======== =======
</TABLE>
The Company had federal and California tax net operating loss carryforwards
at December 31, 1999 of approximately $65.0 million and $33.6 million,
respectively. The difference between the federal and California tax loss
carryforwards is attributable to the 50% limitation on California loss
carryforwards for 1999. The federal and California tax loss carryforwards will
begin to expire in 2010 and 2003, respectively, unless previously utilized. The
Company also has federal and California research tax credit carryforwards of
approximately $686,000 and $379,000, respectively, which will begin to expire in
2011 and 2010, respectively, unless previously utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, use of the
Company's net operating loss and credit carryforwards may be limited because of
a cumulative change in ownership of more than 50% which occurred during 1996.
However, the Company does not believe such limitation will have a material
impact on the Company's ability to use these carryforwards.
7. EMPLOYEE BENEFITS
In 1996, the Company established a cafeteria benefits plan whereby it
contributes for each employee an amount equal to $3,000 plus a percentage of
each employee's base salary, as approved by the Board of Directors, up to a
maximum contribution of $9,000. The employer contribution goes towards the
purchase of various benefit packages selected by the employee. The employee may
contribute additional amounts as desired. Benefit packages include health care
reimbursement, dependent care assistance, various insurance premium payments and
a 401(k) plan. Company contributions to the cafeteria benefits plan were $1.1
million, $418,000 and $182,000 for the years ended December 31, 1999, 1998, and
1997, respectively.
8. STRATEGIC ALLIANCES
NATIONAL BROADCASTING CORPORATION
On October 10, 1997, the Company entered into a strategic alliance with NBC
Multimedia, Inc. ("NBC Multimedia"), a wholly-owned subsidiary of the National
Broadcasting Corporation, Inc. ("NBC") whereby the Company became the exclusive
provider of technology and services for the distribution of most NBC
entertainment audio/visual content by means of the Internet. As consideration
for the formation of the strategic alliance, the Company issued to NBC 1,280,000
shares of Series G convertible preferred stock. The Company is entitled to
receive 30% of certain advertising revenues generated under this alliance from
NBC Web sites or, at a minimum, payments from NBC Multimedia for the video
delivery services at rates at least as favorable as the most favorable rates
offered by the Company to third parties. The Company was obligated
F-45
<PAGE> 123
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to make $2,000,000 in non-refundable payments to NBC Multimedia for certain
production, operating and advertising costs associated with certain NBC Web
sites including payments of (i) $750,000 paid on the completion of the initial
public offering completed in November 1997, (ii) $500,000 due in February 1999,
(iii) $500,000 due in May 1998, and (iv) $250,000 due in August 1998. Through
December 31, 1999, the Company has paid a total of $2.0 million in payments to
NBC Multimedia.
NBC Multimedia may terminate the agreement without cause by giving 90 days
written notice. NBC Multimedia was required to return all shares of Series G
convertible preferred stock if termination occurred prior to January 10, 1998
and NBC Multimedia had not promoted, at a minimum, the Company's logo on the NBC
Web site and was required to return 600,000 shares of Series G convertible
preferred stock if the termination occurred at any other time during the first
two years of the exclusive term. The Company determined the fair value of the
Series G convertible preferred stock issued to NBC on the dates the requirements
that NBC return some or all of the shares of Series G convertible preferred
stock lapsed. Based on these provisions, the Company has charged $3.4 million as
the fair value of 680,000 shares of Series G convertible preferred stock to
expense in 1998 and $17.2 million as the fair value of the remaining 600,000
shares of Series G convertible preferred stock to expense in 1999.
CNN NEWS GROUP
On November 11, 1999, the Company entered a strategic multi-tiered alliance
with the CNN News Group. As part of the agreement, the Company issued 349,612
shares of common stock to CNN. In return, CNN will provide the Company with
three years of on-air and online advertising and promotional opportunities
across CNN's properties, and the Company will sub-license CNN's domestic
television networks to its corporate clients for internal distribution on their
LANs. Through December 31, 1999, the Company has not received any services from
CNN under this agreement. The Company will, for a fee, be CNN's provider of
Internet video management and delivery services for three years beginning
November 1999 and will also deliver audio streaming services immediately.
Following the first anniversary of the agreement, if the market value of the
Company's common stock prior to the end of any fiscal quarter falls below $20.00
per share, the Company has agreed to issue a letter of credit in the amount of
$10.0 million to CNN prorated by the number of the Company's shares CNN
continues to hold and by the number of days into the agreement. In addition, the
Company may become obligated to pay CNN up to $10 million in cash or common
stock, at the Company's option, if CNN holds the shares for three years and the
price per share of common stock does not increase 1.5 times the initial price at
the effective date of the agreement. Either party may terminate the contract at
any time for material breach by the other party that remains uncured or the
other party's bankruptcy or similar adverse condition. In the event the
agreement is terminated by CNN, CNN is required to pay the Company as of the
date of the termination notice, the value of the undelivered services purchased
under this agreement in stock (the Company's stock to be valued at approximately
$57 per share). In the event the agreement is terminated by the Company because
CNN engages another party to provide internet video management and delivery
services, CNN is required to pay the Company as of the date of termination in
the Company's stock (the Company's stock to be valued at the issuance price of
approximately $57 per share) (i) the value of the undelivered services purchased
under the agreement and (ii) a breakup fee of $3,000,000 initially that declines
to zero over the term of the agreement.
MICROSOFT CORPORATION
On December 23, 1999, the Company and Microsoft Corporation ("Microsoft")
entered into a strategic alliance to expand the Company's broadband streaming
media network based on Microsoft's Windows Media platform. Microsoft purchased
30,000 shares of the Company's Series H 6.5% Convertible Redeemable Preferred
Stock due 2009 (the "Series H Preferred Stock"), a new series of preferred
stock. The shares of Series H Preferred Stock are convertible at the option of
the holder into an aggregate of 333,333 shares of the Company's common stock,
subject to customary anti-dilution adjustments. The terms of the Series H
F-46
<PAGE> 124
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Preferred Stock specify an annual dividend rate of 6.5%, payable quarterly in
Series H Preferred Stock, common stock or cash at the Company's option.
Microsoft also received a warrant to purchase 60,000 shares of the Company's
common stock at an exercise price of $90.00 per share, the conversion price of
the Series H Preferred Stock. Holders of Series H Preferred Stock have a
liquidation preference of $1,000 per share plus all accumulated dividends. On
December 19, 2009, if the Series H Preferred Stock has not been converted to
common, the Company will be required to redeem all outstanding shares of Series
H Preferred Stock at a price equal to the liquidation preference, plus
accumulated and unpaid dividends to the date of redemption.
9. ACQUISITIONS
On July 14, 1999, the Company acquired Videolinx Communications, Inc.
("Videolinx"), a Virginia-based visual communications services company, through
a merger of the Company's subsidiary with and into Videolinx. The acquisition
was accounted for as a purchase in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 16. Under the purchase method of
accounting, the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition. Under the terms of the acquisition agreement, the Company issued
38,399 shares of the Company's common stock to Videolinx's former stockholders
and repaid approximately $145,000 of Videolinx's indebtedness upon the closing.
The Company has integrated the product line and services acquired from
Videolinx. The Company's consolidated financial statements include the results
of Videolinx from July 15, 1999.
Assuming that the acquisition of Videolinx had occurred on the first day of
the Company's fiscal year ended December 31, 1998, pro forma condensed
consolidated financial information would be as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998
------------ ------------
(IN THOUSANDS, EXCEPT FOR PER
SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Revenues..................................... $ 13,158 $ 4,131
Net loss..................................... (43,486) (17,416)
Net loss per share........................... $ (3.23) $ (1.81)
</TABLE>
This pro forma information is not necessarily indicative of the actual
results that would have been achieved had Videolinx been acquired the first day
of the Company's fiscal year ended December 31, 1998, nor is it necessarily
indicative of future results.
On August 25, 1999, the Company acquired Netpodium Inc. ("Netpodium"), a
Seattle-based innovator of live, interactive, Web-based communication software
and event hosting services. The acquisition will expand the Company's audio and
video Internet broadcasting offerings in the business services market. Under the
terms of the acquisition, which was accounted for as a pooling of interests, the
Company issued 996,882 shares of its common stock to Netpodium's shareholders
and assumed all outstanding Netpodium options, which now represent the right to
purchase 192,275 shares of the Company's common stock at a weighted average
price of $1.66 per share. In December 1998, Netpodium issued two warrants to
Intel. INTERVU assumed the warrants in connection with the acquisition of
Netpodium on August 1999. Each warrant represents the right to purchase 7,177
shares of the Company's common stock at the purchase price of $8.71 per share.
One of the warrants, however, did not become exercisable because Intel did not
satisfy a condition that it purchase an aggregate $75,000 of a product or
products from Netpodium on or before September 30, 1999. The remaining warrant
expires in December 2003.
F-47
<PAGE> 125
INTERVU INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenues and net loss for the periods preceding the merger with Netpodium
are as follows:
<TABLE>
<CAPTION>
INTERVU NETPODIUM COMBINED
------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Year ended December 31, 1997
Revenues.......................................... $ 144 $ -- $ 144
Net loss.......................................... $5,265 $ 2 $ 5,267
Year ended December 31, 1998
Revenues.......................................... $1,712 $ 49 $ 1,761
Net loss.......................................... $15,710 $ 1,891 $17,601
Six months ended June 30, 1999
Revenues (unaudited).............................. $2,966 $ 404 $ 3,370
Net loss (unaudited).............................. $(7,076) $(2,015) $(9,091)
</TABLE>
10. SUBSEQUENT EVENTS
On February 7, 2000, Akamai Technologies, Inc. ("Akamai") signed a
definitive agreement to acquire the Company in a stock-for-stock transaction.
Each share of the Company's common stock will be exchanged for 0.5957 shares of
Akamai's common stock.
Under terms of the agreement, Akamai will acquire the Company by issuing
approximately 9.3 million shares of Akamai common stock in exchange for all
outstanding shares of the Company's stock. Additionally, Akamai will convert the
Company's outstanding stock options and warrants into options and warrants to
purchase approximately 2.8 million shares of Akamai's common stock. It is
planned that the merger will be effected on a tax-free basis to the Company's
stockholders and will be accounted for as a purchase. The acquisition is subject
to certain closing conditions, including regulatory approvals and the approval
of the Company's stockholders, and is expected to close during the second
quarter of 2000.
In connection with the execution of the merger agreement, the Company and
Akamai entered into a Stock Option Agreement, dated as of February 6, 2000,
pursuant to which the Company granted Akamai an option to purchase up to 19.9%
of the outstanding shares of the Company's common stock, which option is
exercisable upon the occurrence of certain events specified in the Stock Option
Agreement. In addition, stockholders of the Company who beneficially own in the
aggregate approximately 26.5% of INTERVU's common stock entered into Stockholder
Voting Agreements with Akamai dated as of February 6, 2000, pursuant to which
these stockholders have agreed to vote their shares in favor of the merger and
against a competing proposal.
11. CONTINGENCIES
The Company is party to certain claims and legal actions arising in the
normal course of business. Although the ultimate outcome of these matters is not
presently determinable, management believes that the resolution of all such
pending matters will not have a material adverse affect on the Company's
financial position or liquidity; however, there can be no assurance that the
ultimate resolution of these matters will not have a material impact on the
Company's results of operations in any period.
F-48
<PAGE> 126
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Network24 Communications, Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders' equity and cash flows present fairly, in
all material respects, the financial position of Network24 Communications, Inc.
at December 31, 1999 and 1998 and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
On February 10, 2000, Network24 Communications, Inc. was acquired by Akamai
Technologies, Inc. (Note 10).
/s/ PRICEWATERHOUSECOOPERS LLP
February 14, 2000
Boston, Massachusetts
F-49
<PAGE> 127
NETWORK24 COMMUNICATIONS, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------ ------------ ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 3,260,553 $ 13,470
Accounts receivable....................................... 222,933 59,255
Prepaid expenses and other current assets................. 40,700 --
------------ ---------
Total current assets.............................. 3,524,186 72,725
Property and equipment, net (Note 3)...................... 444,867 66,737
------------ ---------
Total assets...................................... $ 3,969,053 $ 139,462
============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------------------------------
Current liabilities:
Accounts payable and accrued expenses..................... $ 301,674 $ 2,014
Accrued payroll........................................... 71,022 7,017
Current portion of obligations under capital leases....... 38,554 --
Loans payable -- stockholder.............................. -- 128,860
Deferred revenue.......................................... 44,444 --
------------ ---------
Total current liabilities......................... 455,694 137,891
Obligations under capital leases, net of current
portion................................................ 21,572 --
------------ ---------
Total liabilities................................. 477,266 137,891
------------ ---------
Commitments (Note 9)
Stockholders' equity:
Series A convertible preferred stock, $0.01 par value:
20,000,000 shares authorized; 5,793,925 shares issued
and outstanding at December 31, 1999 (liquidation
preference of $5,500,000).............................. 57,939 --
Common stock, $0.01 par value: 100,000,000 shares
authorized; 12,191,574 and 11,283,848 issued and
outstanding at December 31, 1999 and 1998,
respectively........................................... 121,916 112,838
Additional paid-in capital................................ 19,592,213 668,028
Note receivable for stock................................. (227,500) --
Deferred compensation and other equity related charges.... (12,931,053) (361,692)
Accumulated deficit....................................... (3,121,728) (417,603)
------------ ---------
Total stockholders' equity........................ 3,491,787 1,571
------------ ---------
Total liabilities and stockholders' equity........ $ 3,969,053 $ 139,462
============ =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE> 128
NETWORK24 COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Revenue..................................................... $ 735,333 $ 59,255
----------- ---------
Operating expenses:
Cost of service........................................... 767,650 80,093
Engineering and development............................... 462,507 87,209
Sales, general and administrative......................... 2,271,416 191,151
----------- ---------
Total operating expenses.......................... 3,501,573 358,453
----------- ---------
Operating loss.............................................. (2,766,240) (299,198)
Interest income............................................. 62,115 --
----------- ---------
Net loss.................................................... $(2,704,125) $(299,198)
=========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE> 129
NETWORK24 COMMUNICATIONS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE DEFERRED
PREFERRED STOCK COMMON STOCK ADDITIONAL COMPENSATION
--------------------- ---------------------- PAID-IN NOTE AND OTHER EQUITY
SHARES PAR VALUE SHARES PAR VALUE CAPITAL RECEIVABLE RELATED CHARGES
--------- --------- ---------- --------- ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997..... -- $ -- 10,800,000 $108,000 $ 125,280 $ -- $ (104,400)
Issuance of common stock....... 330,000 3,300 177,842
Issuance of common stock in
exchange of services
received...................... 153,848 1,538 25,392
Deferred compensation related
to stock options granted...... 339,514 (339,514)
Amortization of deferred
compensation.................. 82,222
Net loss.......................
--------- ------- ---------- -------- ----------- --------- ------------
Balance, December 31, 1998..... -- -- 11,283,848 112,838 668,028 -- (361,692)
Issuance of common stock....... 207,690 2,078 177,600
Issuance of common stock in
exchange of services
received...................... 20,036 200 29,272
Issuance of common stock in
exchange for note
receivable.................... 350,000 3,500 224,000 (227,500)
Issuance of Series A
convertible preferred stock,
net of issuance costs of
$81,113....................... 5,793,925 57,939 5,360,948
Issuance of common stock upon
exercise of stock options..... 330,000 3,300 (1,389)
Deferred charges related to
stock options granted,
issuance of restricted stock,
and issuance of a warrant..... 13,133,754 (13,133,754)
Amortization of deferred
compensation and other
deferred equity charges....... 564,393
Net loss.......................
--------- ------- ---------- -------- ----------- --------- ------------
Balance, December 31, 1999..... 5,793,925 $57,939 12,191,574 $121,916 $19,592,213 $(227,500) $(12,931,053)
========= ======= ========== ======== =========== ========= ============
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
----------- -------------
<S> <C> <C>
Balance, December 31, 1997..... $ (118,405) $ 10,475
Issuance of common stock....... 181,142
Issuance of common stock in
exchange of services
received...................... 26,930
Deferred compensation related
to stock options granted...... --
Amortization of deferred
compensation.................. 82,222
Net loss....................... (299,198) (299,198)
----------- -----------
Balance, December 31, 1998..... (417,603) 1,571
Issuance of common stock....... 179,678
Issuance of common stock in
exchange of services
received...................... 29,472
Issuance of common stock in
exchange for note
receivable.................... --
Issuance of Series A
convertible preferred stock,
net of issuance costs of
$81,113....................... 5,418,887
Issuance of common stock upon
exercise of stock options..... 1,911
Deferred charges related to
stock options granted,
issuance of restricted stock,
and issuance of a warrant..... --
Amortization of deferred
compensation and other
deferred equity charges....... 564,393
Net loss....................... (2,704,125) (2,704,125)
----------- -----------
Balance, December 31, 1999..... $(3,121,728) $ 3,491,787
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 130
NETWORK24 COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(2,704,125) $(299,198)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 53,369 22,713
Amortization of deferred compensation and other
deferred equity charges............................... 738,969 109,152
Changes in assets and liabilities:
Accounts receivable.................................. (163,678) (59,255)
Prepaid expenses and other current assets............ (40,700) --
Accounts payable and accrued expenses................ 299,660 (6,071)
Accrued payroll...................................... 64,005 7,017
Deferred revenue..................................... 44,444 --
----------- ---------
Net cash used in operating activities..................... (1,708,056) (225,642)
----------- ---------
Cash flows from investing activities:
Additions to property and equipment....................... (347,750) (70,890)
----------- ---------
Cash flows from financing activities:
Proceeds from loan payable -- stockholder................. -- 128,860
Repayment of loan payable -- stockholder.................. (128,860) --
Proceeds from bridge loan................................. 250,000 --
Repayments of capital lease obligations................... (23,623) --
Proceeds from the issuance of common stock................ 36,485 181,142
Proceeds from issuance of Series A convertible preferred
stock, net of issuance costs........................... 5,168,887 --
----------- ---------
Net cash provided by financing activities................. 5,302,889 310,002
----------- ---------
Increase in cash and cash equivalents....................... 3,247,083 13,470
Cash and cash equivalents at beginning of year.............. 13,470 --
----------- ---------
Cash and cash equivalents at end of year.................... $ 3,260,553 $ 13,470
=========== =========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 2,592 $ --
Noncash investing and financing activities:
Additions to capital lease obligations for purchases of
property and equipment................................. $ 83,749 $ --
Conversion of bridge loan to Series A convertible
preferred stock........................................ 250,000 --
Issuance of common stock in exchange for note
receivable............................................. 227,500 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 131
NETWORK24 COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Network24 Communications, Inc. ("Network24") was founded in October 1997,
and is engaged in the business of hosting, on its own servers and its
proprietary EventCast broadcast management server platform, customized EventCast
websites for broadcasting live interactive and on-demand, online events.
Network24 manages its business as a single segment and has no organizational
structure dictated by product lines, geography, or customer type. All revenue
earned to date is from U.S. based customers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Network24 considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Network24
invests primarily in money market funds, commercial paper and United States
government agency notes.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets
ranging from three to five years. Assets held under capital leases are amortized
over the remaining lease term.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1999 and 1998, Network24's financial instruments consist of
cash and cash equivalents, accounts receivable, loans payable, accounts payable
and accrued expenses. The carrying amount of these instruments approximate their
fair values.
REVENUE RECOGNITION
Network24 derives revenue from four principal activities: broadcast and
hosting; production; maintenance and service; and consulting, design and
development.
Broadcast, hosting and production revenue is derived from the process of
delivering live programming with streaming audio and/or video to the end-users
desktop. Revenue is recognized when the event has been broadcast, all
significant contractual obligations have been satisfied and collection of the
related receivable is probable. Maintenance and service revenue consists of
amounts generated from server maintenance contracts and data backup service
contracts. Maintenance revenue is billed and recognized monthly over the
contractual periods services are provided. Consulting, design and development
revenue is derived primarily from the development of web sites used in
production and broadcast events. Revenue is recognized when the corresponding
production and broadcast revenue is recognized.
Deferred revenue consists of billings in excess of revenue recognized.
ENGINEERING AND DEVELOPMENT COSTS
Cost incurred for engineering and development of Network24's products are
expensed as incurred, except for certain software development costs. Network24
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 SOP 98-1 have been insignificant to date.
F-54
<PAGE> 132
NETWORK24 COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STOCK-BASED COMPENSATION
Network24 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 Network24's common stock at the date of grant. Network24 has
adopted the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," through disclosure only
(Note 7). All stock-based awards to nonemployees are accounted for at their fair
value in accordance with SFAS No. 123.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments which potentially expose Network24 to concentration
of credit risk include trade accounts receivable. At December 31, 1999, three
customers accounted for 54%, 30% and 11% of Network24's accounts receivable. At
December 31, 1998, one customer accounted for 100% of Network24's accounts
receivable.
For the year ended December 31, 1999, sales to two customers accounted for
77% and 13% of Network24's total revenue, while for the year ended December 31,
1998 sales to one customer accounted for 100% of Network24's total revenue.
INCOME TAXES
Network24 operated as an S Corporation under Subchapter S of the Internal
Revenue Code from inception to July 15, 1999 after which time Network24 has
operated as a C Corporation under Subchapter C of the Internal Revenue Code.
During the S Corporation period, Network24 recognized no provision for income
taxes. All income, losses and credits flowed through to Network24's shareholders
and are, therefore, not available to offset future taxable income of Network24.
Had Network24 recognized a provision for income taxes during the S Corporation
period, the provision would have been nominal due to the net operating losses
incurred since inception.
Deferred tax assets and liabilities are recognized based on temporary
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
temporary differences are expected to reverse. The measurement of deferred tax
assets is reduced by a valuation allowance if, based upon the weight of
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles generally requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
F-55
<PAGE> 133
NETWORK24 COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- -------
<S> <C> <C>
Computer equipment...................................... $438,177 $90,427
Equipment under capital leases.......................... 83,749 --
-------- -------
521,926 90,427
Accumulated depreciation and amortization............... (77,059) (23,690)
-------- -------
$444,867 $66,737
======== =======
</TABLE>
Depreciation expense relating to fixed assets was $53,369 and $22,713 for
the years ended December 31, 1999 and 1998, respectively, of which $13,369 and
$0, respectively, related to amortization of equipment held under capital
leases.
4. LOAN PAYABLE -- SHAREHOLDER
At December 31, 1998, Network24 issued a loan payable to an officer and
director of Network24. This loan was issued to meet short-term cash needs of
Network24. The note was noninterest bearing and was fully repaid in 1999.
5. BRIDGE LOAN
In July 1999, Network24 entered into a convertible subordinated promissory
note with a third party for $250,000. In August 1999, the note was converted
into 263,360 shares of Series A convertible preferred stock.
6. CAPITAL STOCK
In August 1999, Network24 issued 5,793,925 shares of Series A convertible
preferred stock at $0.95 per share to investors for total consideration of
$5,418,887, net of issuance costs of $81,113.
The holders of the Series A preferred stock are entitled to vote, together
with the holders of common stock, as a single class on all matters. Each
preferred stockholder is entitled to the number of votes equal to the number of
whole shares of common stock into which such shares convert. Each Series A
preferred share is convertible into common stock at the option of the
stockholder or automatically upon the closing of a public offering of
Network24's common stock, if a majority of Series A preferred stockholders elect
conversion, or if at any time there remains outstanding less than 10% of the
number of shares of Series A preferred stock issued on the original issue date.
The number of shares of common stock into which holders of the preferred stock
shall be entitled upon conversion shall be the product obtained by multiplying
the invested amount per share of Series A preferred stock by the number of
shares of Series A preferred stock being converted. The holders of the preferred
stock are entitled to receive dividends, when and if declared by the Board of
Directors, at a noncumulative rate of 4% per annum. No dividends may be paid on
the common stock until all dividends on the preferred stock have been fully
paid. Through December 31, 1999, no dividends have been declared or paid by
Network24. In the event of any liquidation, dissolution or winding-up of
Network24, the holders of the Series A preferred stock are entitled to receive
an amount per share equal to the invested amount per share of Series A preferred
stock, plus all declared but unpaid dividends. Any assets remaining after the
initial distribution to the preferred stockholders shall be available for
distribution ratably among the common stockholders.
F-56
<PAGE> 134
NETWORK24 COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUTHORIZED SHARES
The authorized capital stock of Network24 consists of (i) 100,000,000
shares of voting common stock authorized for issuance with a par value of $0.01
and (ii) 20,000,000 shares of preferred stock with a par value of $0.01.
STOCK SPLIT
On August 3, 1998, Network24 authorized and effected a two-for-one stock
split on the common stock. On June 7, 1999, Network24 authorized and effected a
second two-for-one stock split on the common stock. All references to common
stock amounts, including options and warrants to purchase common stock, have
been retroactively restated to reflect the stock splits.
WARRANTS
In December 1999, Network24 entered into a strategic agreement with a
customer, whereby the parties have selected each other as their preferred
service providers. Additionally, the two parties will engage in a joint
promotional plan and co-branding arrangement. In connection with this agreement,
Network24 issued a warrant to purchase 1,136,605 shares of Network24's common
stock at an exercise price of $3.47 per share. Network24 estimated the value of
the warrants to be $7.1 million using the Black-Scholes valuation model. This
value was recorded as a deferred charge in shareholders' equity and is being
recognized as an expense over the contract period. For the year ended December
31, 1999, Network24 recorded $296,322 of the expense related to these warrants.
In January 2000, Network24 issued an additional warrant to purchase 436,272
shares of outstanding common stock to this customer at an exercise price of
$3.47 per share. Network24 has estimated the value of these warrants to be
$2,997,625 using the Black-Scholes valuation model.
RESERVED SHARES
At December 31, 1999, Network24 had reserved 10,870,530 shares of common
stock for future issuance upon conversion of the Series A convertible preferred
stock, the exercise of stock options under the 1997 Stock Option Plan and the
exercise of outstanding warrants.
7. 1997 OPTION PLAN
In October 1997, Network24 adopted the 1997 Stock Option Plan (the "1997
Option Plan") which provides for the granting of incentive stock options and
nonqualified stock options to employees, including Board members, and
consultants of Network24. The Board of Directors is responsible for
administration of the plan. The Board determines the term of each option, the
option exercise price, the number of shares for which each option is exercisable
and the vesting period, generally ratably over one to four years. The exercise
price of incentive stock options shall not be less than 100% of the fair value
of the common stock at the date of grant (not less than 110% of fair value in
the case of holders of more than 10% of the Company's stock). Options granted
under the 1997 Option Plan generally expire ten years from the date of the
grant. The 1997 Option Plan allows for the issuance of options to purchase up to
3,940,000 shares of common stock. In the event of a "Corporate Transaction," as
defined by the Internal Revenue Code Section 424(a), whereby a successor
corporation, other than Network24, refuses to assume or substitute options
granted under the 1997 stock option plan, the plan allows for all options to
become fully vested and exercisable for a period of 15 days from the date of
notice.
F-57
<PAGE> 135
NETWORK24 COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of activity under Network24's 1997 Option Plan as of December 31,
1998 and 1999, and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Outstanding -- December 31, 1997............................ 1,440,000 $0.0025
Granted................................................... 1,340,000 0.0382
Exercised................................................. (120,000) 0.0025
Forfeited................................................. (1,320,000) 0.0025
----------
Outstanding -- December 31, 1998............................ 1,340,000 0.0382
Granted................................................... 2,031,081 0.6500
Exercised................................................. (210,000) 0.0032
----------
Outstanding -- December 31, 1999............................ 3,161,081 0.4333
==========
</TABLE>
As of December 31, 1999 and 1998, 307,500 and 10,000 options were
exercisable, respectively, under the 1997 Option Plan. As of December 31, 1999,
there were 448,919 shares of common stock available for grant under the 1997
Option Plan.
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING
NUMBER CONTRACTUAL NUMBER
EXERCISE PRICES OUTSTANDING LIFE EXERCISABLE
--------------- ----------- ----------- -----------
<S> <C> <C> <C>
$0.0025 700,000 9.4 137,500
$0.1111 430,000 9.6 155,000
$0.6500 2,031,081 9.9 15,000
--------- --- -------
3,161,081 9.8 307,500
========= === =======
</TABLE>
In 1998, 1,340,000 options were granted with an exercise price less than
fair market value of the common stock. The weighted average exercise price and
weighted average fair value of options granted in 1998 were $0.04 and $0.31 per
share, respectively. In 1999, 2,011,081 and 20,000 options were granted with an
exercise price less than the fair market value and with an exercise price equal
to the fair market value, respectively. The weighted average exercise price and
weighted average fair value of options granted at an exercise price less than
fair market value were $0.65 and $3.06 per share, respectively. The weighted
average exercise price and weighted average fair value of options granted at an
exercise price equal to fair market value were $0.65 and $0.09 per share,
respectively.
As discussed in Note 2, Network24 has adopted the disclosure-only provision
of SFAS No. 123. Had compensation costs been determined based on the fair value
of the options granted to employees at the grant date consistent with the
provisions of SFAS No. 123, Network24's net loss would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998
----------- ---------
<S> <C> <C>
Net loss:
As reported........................................ $2,704,125 $299,198
Pro forma.......................................... 2,722,815 301,449
</TABLE>
F-58
<PAGE> 136
NETWORK24 COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions for grants in 1999 and
1998: no dividend yield for both years; zero volatility for both years;
risk-free interest rates of 5.2% for 1999 and 4.7% to 5.5% for 1998; and
expected lives of three years for both years. Since options vest over several
years and additional option grants are expected to be made in future years, the
above pro forma results are not representative of pro forma results for future
years.
For the year ended December 31, 1999, Network24 recorded $6,022,017 in
deferred compensation for options to purchase common stock granted at exercise
prices determined to be below the fair market value of common stock. For the
year ended December 31, 1998, Network24 recorded $413,074 in deferred
compensation for options to purchase common stock granted at exercise prices
determined to be below the fair market value of the common stock. Deferred
compensation is amortized over the contractual vesting period. Amortization of
deferred compensation of $268,071 and $82,222 was recognized for the years ended
December 31, 1999 and 1998, respectively.
8. INCOME TAXES
The provision for income taxes for the year ended December 31, 1999
consists of the following:
<TABLE>
<S> <C>
Deferred tax benefit..................................... $(769,000)
Valuation allowance...................................... 769,000
---------
$ --
=========
</TABLE>
The Network24's effective tax rate varies from the statutory rate as
follows:
<TABLE>
<CAPTION>
1999
----
<S> <C>
US federal income tax rate.................................. (34)%
State taxes................................................. (4)
Equity compensation......................................... 7
S-Corp loss................................................. 3
Valuation allowance......................................... 28
---
--%
===
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets at December 31, 1999 are as follows:
<TABLE>
<S> <C>
Federal and state net operating loss carryforwards....... $ 680,000
Accrual to cash adjustment............................... 49,000
Other temporary differences.............................. 66,000
Valuation allowance...................................... (795,000)
---------
Net deferred tax asset................................... $ --
=========
</TABLE>
A valuation allowance is established if it is more likely than not that all
or a portion of the deferred tax asset will not be realized. Accordingly, a
valuation allowance has been recorded for the full amount of the deferred tax
asset.
As of December 31, 1999, Network24 has a net operating loss carryforward
for federal and state income tax purposes of approximately $1,700,000, which
will begin to expire in 2019. Ownership changes resulting from issuance of
capital stock may limit the amount of net operating loss carryforwards that can
be utilized annually to offset future taxable income. The amount of the annual
limitation is determined based upon Network24's value immediately prior to the
ownership change.
F-59
<PAGE> 137
NETWORK24 COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Prior to July 15, 1999, Network24 operated as an S Corporation under
Subchapter S of the Internal Revenue Code, and consequently, all income, loss,
and credits flowed directly to Network24's shareholders. Accordingly, only 1999
amounts are presented.
9. COMMITMENTS
Network24 leases its office facilities and certain equipment under various
operating and capital leases. Total rent expense under operating leases was
approximately $123,787 and $25,482 for the years ended December 31, 1999 and
1998, respectively. Future minimum lease commitments under capital leases and
operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS ENDING DECEMBER 31, LEASES LEASES
------------------------- ------- ---------
<S> <C> <C>
2000.................................................... $42,133 $297,600
2001.................................................... 17,453 --
2002.................................................... 6,050 --
2003.................................................... 504 --
------- --------
Total minimum lease payments............................ 66,140 $297,600
========
Less -- amount representing interest.................... (6,014)
-------
Present value of minimum lease payments................. $60,126
=======
</TABLE>
10. SUBSEQUENT EVENT
On February 10, 2000, Network24 was acquired by Akamai Technologies, Inc.
("Akamai"), a public corporation headquartered in Cambridge, Massachusetts.
Pursuant to the merger agreement, cash of $12.5 million and approximately
620,872 shares of common stock of Akamai were exchanged for all of the issued
and outstanding capital stock of Network24 for an estimated purchase price of
$203.6 million. This transaction is being accounted for using the purchase
method of accounting.
F-60
<PAGE> 138
[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.
<PAGE> 139
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
the convertible notes and common stock being registered. All amounts are
estimates except the SEC registration fee, the NASD filing fees and the Nasdaq
National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 79,200
NASD filing fee............................................. 0
Nasdaq National Market listing fee.......................... 0
Printing and engraving expenses............................. 100,000
Legal fees and expenses..................................... 75,000
Accounting fees and expenses................................ 55,500
Blue Sky fees and expenses (including legal fees)........... 0
Transfer agent and registrar fees and expenses.............. 5,000
Miscellaneous............................................... 5,300
--------
Total............................................. $320,000
========
</TABLE>
The Registrant will bear all expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article SEVENTH of the Registrant's Amended and Restated Certificate of
Incorporation (the "Restated Certificate") provides that no director of the
Registrant shall be personally liable for any monetary damages for any breach of
fiduciary duty as a director, except to the extent that the Delaware General
Corporation Law prohibits the elimination or limitation of liability of
directors for breach of fiduciary duty.
Article EIGHTH of the Restated Certificate provides that a director or
officer of the Registrant (a) shall be indemnified by the Registrant against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement incurred in connection with any litigation or other legal proceeding
(other than an action by or in the right of the Registrant) brought against him
by virtue of his position as a director or officer of the Registrant if he acted
in good faith and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the Registrant, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful and (b) shall be indemnified by the Registrant against all expenses
(including attorneys' fees) and amounts paid in settlement incurred in
connection with any action by or in the right of the Registrant brought against
him by virtue of his position as a director or officer of the Registrant if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Registrant, except that no indemnification
shall be made with respect to any matter as to which such person shall have been
adjudged to be liable to the Registrant, unless the Court of Chancery of
Delaware determines that, despite such adjudication but in view of all of the
circumstances, he is entitled to indemnification of such expenses.
Notwithstanding the foregoing, to the extent that a director or officer has been
successful, on the merits or otherwise, including, without limitation, the
dismissal of an action without prejudice, he is required to be indemnified by
the Registrant against all expenses (including attorneys' fees) incurred in
connection therewith. Expenses shall be advanced to a director or officer at his
request, unless it is determined that he did not act in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the Registrant, and, with respect to any criminal action or proceeding had
reasonable cause to believe that his conduct was unlawful, provided that he
undertakes to repay the amount advanced if it is ultimately determined that he
is not entitled to indemnification for such expenses.
II-1
<PAGE> 140
Indemnification is required to be made unless the Registrant determines
that the applicable standard of conduct required for indemnification has not
been met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
indemnification, or if the Registrant fails to make an indemnification payment
within 60 days after such payment is claimed by such person, such person is
permitted to petition the court to make an independent determination as to
whether such person is entitled to indemnification. As a condition precedent to
the right of indemnification, the director or officer must give the Registrant
notice of the action for which indemnity is sought and the Registrant has the
right to participate in such action or assume the defense thereof.
Article EIGHTH of the Restated Certificate further provides that the
indemnification provided therein is not exclusive, and provides that in the
event that the Delaware General Corporation Law is amended to expand the
indemnification permitted to directors or officers the Registrant must indemnify
those persons to the fullest extent permitted by such law as so amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
The Registrant has obtained liability insurance for its officers and
directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since incorporation in August 20, 1998, the Registrant has issued the
following securities that were not registered under the Securities Act as
summarized below. Shares on a post-split basis reflect a 3-for-1 stock dividend
on January 28, 1999, a 3-for-1 stock dividend on May 25, 1999 and a 2-for-1
stock dividend on September 8, 1999.
(a) Issuances of Capital Stock.
1. On September 2, 1998, the Registrant issued and sold an aggregate
of 25,159,500 shares of its common stock at a purchase price of
approximately $0.006 per share, to F. Thomson Leighton, Daniel M. Lewin,
and Jonathan Seelig pursuant to their respective stock restriction
agreements.
2. On September 2, 1998, the Registrant issued and sold an aggregate
of 742,500 shares of its common stock at a purchase price of approximately
$0.006 per share, to Preetish Nijhawan pursuant to a right of first refusal
agreement.
3. On September 2, 1998, the Registrant issued and sold an aggregate
of 3,564,000 shares of its common stock at a purchase price of
approximately $0.006 per share, to Randall Kaplan and David Karger,
pursuant to their respective stock restriction agreements.
4. On September 2, 1998, the Registrant issued and sold 180,000 shares
of its common stock at a purchase price of approximately $0.006 per share,
to Marco Greenberg pursuant to a right of first refusal agreement.
5. On October 28, 1998, the Registrant issued and sold 2,383,200
shares of its common stock at a purchase price of approximately $0.014 per
share to Paul Sagan pursuant to a restricted stock agreement.
6. On November 13, 1998, the Registrant issued and sold 360,000 shares
of its common stock at a purchase price of approximately $0.014 per share,
to Gilbert Friesen pursuant to a stock restriction agreement.
II-2
<PAGE> 141
7. On November 19, 1998, the Registrant issued and sold 594,000 shares
of its common stock at a purchase price of approximately $0.014 per share,
to Arthur H. Bilger pursuant to a stock restriction agreement.
8. On November 23, 1998, the Registrant issued and sold an aggregate
of 682,110 shares of its common stock to the Massachusetts Institute of
Technology in consideration for an exclusive patent and non-exclusive
copyright license agreement dated as of October 26, 1998 between the
Registrant and the Massachusetts Institute of Technology.
9. On November 23, 1998, the Registrant issued and sold 467,101 shares
of its Series A convertible preferred stock at a purchase price of $7.60
per share, to seven investors pursuant to a Series A convertible preferred
stock purchase agreement.
10. On November 30, 1998, the Registrant issued and sold 205,258
shares of its Series A convertible preferred stock at a purchase price of
$7.60 per share, to ten investors pursuant to a Series A convertible
preferred stock purchase agreement.
11. On December 14, 1998, the Registrant issued and sold 427,641
shares of its Series A convertible preferred stock at a purchase price of
$7.60 per share, to eight investors pursuant to a Series A convertible
preferred stock purchase agreement.
12. On December 3, 1998, the Registrant issued and sold an aggregate
of 900,000 shares of its common stock at a purchase price of approximately
$0.042 per share, to William Bogstad and Yoav Yerushalmi pursuant to their
respective stock restriction agreements.
13. On March 15, 1999, the Registrant issued and sold 1,260,000 shares
of its common stock at a purchase price of approximately $0.042 per share,
to Earl P. Galleher III pursuant to a stock restriction agreement.
14. On March 26, 1999, the Registrant issued and sold 120,000 shares
of its common stock at a purchase price of approximately $0.333 per share,
to Steven P. Heinrich.
15. On March 26, 1999, the Registrant issued 600,000 shares of its
common stock at a purchase price of approximately $0.333 per share, to
Arthur H. Bilger pursuant to a stock restriction agreement.
16. On March 26, 1999, the Registrant issued and sold 5,940,000 shares
of its common stock at a purchase price of approximately $0.333 per share,
to George H. Conrades pursuant to a stock restriction agreement.
17. On April 16, 1999, the Registrant issued and sold 929,244 shares
of its Series B convertible preferred stock at a purchase price of $15.066
per share, to Baker Communications Fund, L.P. pursuant to a Series B
convertible preferred stock and Series C convertible preferred stock
purchase agreement.
18. On April 30, 1999, the Registrant issued and sold 398,256 shares
of its Series B convertible preferred stock to 23 investors pursuant to a
Series B convertible preferred stock and Series C convertible preferred
stock purchase agreement.
19. On May 18, 1999, the Registrant issued and sold 600,000 shares of
common stock at price of approximately $0.833 per share, to Paul Sagan
pursuant to a stock restriction agreement granted under 1998 Stock
Incentive Plan.
20. On June 21, 1999, the Registrant issued and sold 685,194 shares of
its Series D convertible preferred shares at a purchase price of $18.243
per share, to Apple Computer Inc. Ltd. pursuant to the Series D convertible
preferred stock purchase agreement.
21. On July 1, 1999, the Registrant issued and sold 10,000 shares of
its common stock at a purchase price of $0.835 per share, to Amos Hostetter
pursuant to the exercise of a stock option.
22. On July 1, 1999, the Registrant issued and sold 10,000 shares of
its common stock at a purchase price of $0.835 per share, to Benjamin A.
Gomez pursuant to the exercise of a stock option.
II-3
<PAGE> 142
23. On July 23, 1999, the Registrant issued and sold an aggregate of
1,300,000 shares of its common stock at a purchase price of $2.50 per
share, to Timothy Weller and Robert O. Ball III pursuant to their
respective stock restriction agreements.
24. On August 6, 1999, the Registrant issued and sold 1,867,480 shares
of its Series E convertible preferred stock at a purchase price of $26.239
per share, to Cisco Systems, Inc. pursuant to a Series E convertible
preferred stock purchase agreement.
25. On August 23, 1999, the Registrant issued and sold 112,500 shares
of its common stock at a purchase price of approximately $0.014 per share,
to Bruce Maggs pursuant to the exercise of a stock option.
26. On August 30, 1999 the Registrant issued and sold 315,000 shares
of its common stock at a purchase price of $1.0833 per share, to Warren
Recicar pursuant to the exercise of a stock option.
27. On September 20, 1999, the Registrant issued and sold 985,545
shares of Series F convertible preferred stock at a purchase price of
$15.22 per share, to Microsoft Corporation pursuant to a Series F
convertible preferred stock purchase agreement.
28. On October 7, 1999, the Registrant issued and sold 90,000 shares
of its common stock at a purchase price of approximately $0.011 per share,
to Scott Smith pursuant to the exercise of a stock option.
29. On June 15, 2000, the Registrant issued and sold to Donaldson,
Lufkin & Jenrette Securities Corporation, Morgan Stanley & Co.
Incorporated, Salomon Smith Barney Inc. and Thomas Weisel Partners LLC an
aggregate principal amount of $250,000,000 of the convertible notes in
accordance with Rule 144A under the Securities Act, for cash in an amount
equal to 97% of the principal amount of the convertible notes. The
convertible notes are due July 1, 2007, are convertible at any time prior
to maturity at the option of the holder into shares of our common stock at
a conversion price of $115.47 per share (subject to certain adjustment
events) and accrued interest payable semiannually. On June 23, 2000, the
purchasers identified above exercised their option to purchase an
additional $50,000,000 aggregate principal amount of the convertible notes
for cash in an amount equal to 97% of the principal amount of such
convertible notes. The three percent discount represented an underwriting
commission for the initial purchasers.
(b) Grants of Stock Options.
1. From inception through June 30, 1999, the Registrant granted stock
options to purchase 9,116,000 shares of common stock at exercise prices
ranging from $0.125 to $1.00 per share to employees, consultants and
directors pursuant to its 1998 Stock Incentive Plan.
2. On April 16, 1999, the Registrant granted an option to purchase up
to 145,195 shares of its Series C convertible preferred stock at an
exercise price of $34.436 per share to Baker Communications Fund, L.P.
pursuant to a Series B convertible preferred stock and Series C convertible
preferred stock purchase agreement.
(c) Issuances of Notes and Warrants
1. On January 27, 1999, the Registrant issued a warrant to purchase up
to 71,046 shares of common stock at an exercise price of approximately
$0.422 per share. As of June 30, 1999, this warrant was exercisable for up
to 72,264 shares of common stock at an exercise price of approximately
$0.422 per share.
II-4
<PAGE> 143
2. On May 7, 1999, the Registrant issued 15% senior subordinated notes
in the principal amount of $15,000,000 and warrants to purchase up to
2,002,836 shares of common stock at an exercise price of approximately
$2.497 per share to 20 investors pursuant to a 15% senior subordinated
notes and warrants to purchase common stock purchase agreement.
Except for the sale of our convertible notes (see paragraph 29 above), no
underwriters were involved in any of the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of options to purchase common stock, Rule 701 of the
Securities Act. All of the foregoing securities are deemed restricted securities
for the purposes of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
*****1.1 Purchase Agreement, dated as of June 15, 2000, by and among
the Registrant and Donaldson, Lufkin & Jenrette Securities
Corporation, Morgan Stanley & Co. Incorporated, Salomon
Smith Barney Inc. and Thomas Weisel Partners LLC.
******3.1 Amended and Restated Certificate of Incorporation of the
Registrant, as amended.
*3.2 By-Laws of the Registrant.
*3.3 Form of Amended and Restated By-Laws of the Registrant.
*4.1 Specimen common stock certificate.
*4.2 Fourth Amended and Restated Registration Rights Agreement
dated September 20, 1999.
*****4.3 Indenture, dated as of June 20, 2000, by and between the
Registrant and State Street Bank and Trust Company.
*****4.4 5 1/2% Convertible Subordinated Notes due 2007 Registration
Rights Agreement, dated as of June 20, 2000, by and among
the Registrant and Donaldson, Lufkin & Jenrette Securities
Corporation, Morgan Stanley & Co. Incorporated, Salomon
Smith Barney Inc. and Thomas Weisel Partners LLC.
5.1 Opinion of Hale and Dorr LLP.
*******10.1 Second Amended and Restated 1998 Stock Incentive Plan, as
amended.
*10.2 Form of Restricted Stock Agreement granted under 1998 Stock
Incentive Plan.
*10.3 Form of Incentive Stock Option Agreement granted under 1998
Stock Incentive Plan.
*10.4 Form of Nonstatutory Stock Option Agreement granted under
1998 Stock Incentive Plan.
*10.5 1999 Employee Stock Purchase Plan.
*10.6 Broadway Hampshire Associates Lease dated March 8, 1999, as
amended, by and between Broadway/Hampshire Associates
Limited Partnership and the Registrant.
*10.7 Loan and Security Agreement dated as of January 27, 1999
between Silicon Valley Bank and the Registrant.
*+10.8 Strategic Alliance and Master Services Agreement effective
as of April 1, 1999 by and between the Registrant and Apple
Computer, Inc.
*+10.9 Strategic Alliance and Joint Development Agreement dated as
of August 6, 1999 by and between the Registrant and Cisco
Systems, Inc.
*10.10 Series A Convertible Preferred Stock Purchase Agreement
dated as of November 23, 1998 between the Registrant and the
Purchasers named therein.
*10.11 Series B Convertible Preferred Stock and Series C
Convertible Preferred Stock Purchase Agreement dated as of
April 16, 1999 between the Registrant and the Purchasers
named therein.
*10.12 Series D Convertible Preferred Stock Purchase Agreement
dated as of June 21, 1999 between the Registrant and Apple
Computer Inc. Ltd.
</TABLE>
II-5
<PAGE> 144
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
*10.13 Series E Convertible Preferred Stock Purchase Agreement
dated as of August 6, 1999 between the Registrant and Cisco
Systems, Inc.
*10.14 Form of Master Services Agreement.
*10.15 Severance Agreement dated March 26, 1999 by and between
George Conrades and the Registrant.
*+10.16 Exclusive Patent and Non-Exclusive Copyright License
Agreement dated as of October 26, 1998 between the
Registrant and the Massachusetts Institute of Technology.
*10.17 $1,980,000 Promissory Note dated as of March 26, 1999 by and
between the Registrant and George H. Conrades.
*10.18 $500,000 Promissory Note dated as of May 18, 1999 by and
between the Registrant and Paul Sagan.
*10.19 $623,750 Promissory Note dated as of July 23, 1999 by and
between the Registrant and Robert O. Ball III.
*10.20 15% Senior Subordinated Note and Warrant to Purchase Common
Stock Purchase Agreement dated as of May 7, 1999 between the
Registrant and the Purchasers named therein.
*10.21 $2,619,750 Promissory Note dated July 23, 1999 by and
between the Registrant and Timothy Weller.
*10.22 Series F Convertible Preferred Stock Purchase Agreement
dated as of September 20, 1999 between the Registrant and
Microsoft Corporation.
*10.23 Broadband Streaming Initiative Agreement dated as of
September 20, 1999 between the Registrant and Microsoft
Corporation.
**10.24 Agreement and Plan of Merger dated as of January 14, 2000 by
and among the Registrant, Aloha Merger Corporation and
Network24 Communications, Inc.
***10.25 Agreement and Plan of Merger dated as of February 6, 2000 by
and among the Registrant, Alli Merger Corporation and
INTERVU Inc.
****10.26 Lease dated as of September 22, 1999 by and between the
Registrant and Technology Square LLC, as amended December 1,
1999.
12.1 Computation of Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Ernst & Young LLP, Independent Auditors.
23.4 Consent of Hale and Dorr LLP (included in Exhibit 5.1).
24.1 Powers of Attorney (see page II-9).
25.1 Statement of Eligibility of Trustee on Form T-1.
!27.1 Financial Data Schedule.
</TABLE>
---------------
* Incorporated by reference to the Registrant's Form S-1 (File No.
333-85679), as amended, filed with the Securities and Exchange
Commission on August 21, 1999.
** Incorporated by reference to the Registrant's Current Report on Form
8-K filed with the Securities and Exchange Commission on February 8,
2000.
*** Incorporated by reference to the Registrant's Schedule 13D filed with
the Securities and Exchange Commission on February 16, 2000.
**** Incorporated by reference to the Registrant's Form 10-K for the year
ended December 31, 2000 filed with the Securities and Exchange
Commission on March 3, 2000.
***** Incorporated by reference to the Registrant's Current Report on Form 8-K
filed with the Securities and Exchange Commission on June 27, 2000.
II-6
<PAGE> 145
****** Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission on August 14,
2000.
******* Incorporated by reference to the Registrant's Form S-8 filed with the
Securities and Exchange Commission on May 25, 2000.
! Incorporated by reference from previous filings.
+ Confidential treatment requested for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act, which
portions were omitted and filed separately with the Securities and
Exchange Commission.
(b) Financial Statement Schedules:
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering rage may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration be means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the registrant pursuant to the Delaware General
Corporation Law, the Restated Certificate of the registrant, the Underwriting
Agreement,
II-7
<PAGE> 146
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the registrant
will, unless in the opinion of counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that:
(1) For purpose of determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Act shall be
deemed to be part of this Registration Statement as of the time it was declared
effective.
(2) For purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
The undersigned Registrant hereby undertakes to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Commission under Section 305(b)(2) of the Act.
II-8
<PAGE> 147
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Cambridge, Massachusetts, on this
13th day of September, 2000.
AKAMAI TECHNOLOGIES, INC.
By: /s/ KATHRYN L. JORDEN
------------------------------------
Kathryn L. Jorden
Vice President, General Counsel and
Secretary
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers, directors and authorized representatives of
Akamai Technologies, Inc. hereby severally constitute and appoint George H.
Conrades, Paul Sagan and Kathryn L. Jorden, and each of them singly, our true
and lawful attorneys with full power to them, and each of them singly, with full
powers of substitution and resubstitution, to sign for us and in our names in
the capacities indicated below, the Registration Statement on Form S-1 files
herewith and any and all pre-effective and post-effective amendments to said
Registration Statement, and any subsequent Registration Statement for the same
offering which may be filed under Rule 462(b), and generally to do all such
things in our names and on our behalf in our capacities as officers and
directors to enable Akamai Technologies, Inc. to comply with the provisions of
the Securities Act of 1933, as amended, and all requirements of the Securities
and Exchange Commission, hereby ratifying and confirming our signatures as they
may be signed by our said attorneys, or any of them, or their substitute or
substitutes, to said Registration Statement and any and all amendments thereto
or to any subsequent Registration Statement for the same offering which may be
filed under Rule 462(b).
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ GEORGE H. CONRADES Chairman and Chief Executive September 13, 2000
--------------------------------------------------- Officer (Principal Executive
George H. Conrades Officer)
/s/ TIMOTHY WELLER Chief Financial Officer and September 13, 2000
--------------------------------------------------- Treasurer (Principal
Timothy Weller Financial Officer)
/s/ KAREN C. STUMCKE Vice President and Chief September 13, 2000
--------------------------------------------------- Accounting Officer
Karen C. Stumcke (Principal Accounting
Officer)
Director
---------------------------------------------------
Arthur H. Bilger
/s/ TODD A. DAGRES Director September 13, 2000
---------------------------------------------------
Todd A. Dagres
/s/ F. THOMSON LEIGHTON Director September 13, 2000
---------------------------------------------------
F. Thomson Leighton
/s/ DANIEL M. LEWIN Director September 13, 2000
---------------------------------------------------
Daniel M. Lewin
/s/ TERRANCE G. MCGUIRE Director September 13, 2000
---------------------------------------------------
Terrance G. McGuire
Director
---------------------------------------------------
Edward W. Scott
</TABLE>
II-9
<PAGE> 148
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
*****1.1 Purchase Agreement, dated as of June 15, 2000, by and among
the Registrant and Donaldson, Lufkin & Jenrette Securities
Corporation, Morgan Stanley & Co. Incorporated, Salomon
Smith Barney Inc. and Thomas Weisel Partners LLC.
******3.1 Amended and Restated Certificate of Incorporation of the
Registrant, as amended.
*3.2 By-Laws of the Registrant.
*3.3 Form of Amended and Restated By-Laws of the Registrant.
*4.1 Specimen common stock certificate.
*4.2 Fourth Amended and Restated Registration Rights Agreement
dated September 20, 1999.
*****4.3 Indenture, dated as of June 20, 2000, by and between the
Registrant and State Street Bank and Trust Company.
*****4.4 5 1/2% Convertible Subordinated Notes due 2007 Registration
Rights Agreement, dated as of June 20, 2000, by and among
the Registrant and Donaldson, Lufkin & Jenrette Securities
Corporation, Morgan Stanley & Co. Incorporated, Salomon
Smith Barney Inc. and Thomas Weisel Partners LLC.
5.1 Opinion of Hale and Dorr LLP.
*******10.1 Second Amended and Restated 1998 Stock Incentive Plan, as
amended.
*10.2 Form of Restricted Stock Agreement granted under 1998 Stock
Incentive Plan.
*10.3 Form of Incentive Stock Option Agreement granted under 1998
Stock Incentive Plan.
*10.4 Form of Nonstatutory Stock Option Agreement granted under
1998 Stock Incentive Plan.
*10.5 1999 Employee Stock Purchase Plan.
*10.6 Broadway Hampshire Associates Lease dated March 8, 1999, as
amended, by and between Broadway/Hampshire Associates
Limited Partnership and the Registrant.
*10.7 Loan and Security Agreement dated as of January 27, 1999
between Silicon Valley Bank and the Registrant.
*+10.8 Strategic Alliance and Master Services Agreement effective
as of April 1, 1999 by and between the Registrant and Apple
Computer, Inc.
*+10.9 Strategic Alliance and Joint Development Agreement dated as
of August 6, 1999 by and between the Registrant and Cisco
Systems, Inc.
*10.10 Series A Convertible Preferred Stock Purchase Agreement
dated as of November 23, 1998 between the Registrant and the
Purchasers named therein.
*10.11 Series B Convertible Preferred Stock and Series C
Convertible Preferred Stock Purchase Agreement dated as of
April 16, 1999 between the Registrant and the Purchasers
named therein.
*10.12 Series D Convertible Preferred Stock Purchase Agreement
dated as of June 21, 1999 between the Registrant and Apple
Computer Inc. Ltd.
*10.13 Series E Convertible Preferred Stock Purchase Agreement
dated as of August 6, 1999 between the Registrant and Cisco
Systems, Inc.
*10.14 Form of Master Services Agreement.
*10.15 Severance Agreement dated March 26, 1999 by and between
George Conrades and the Registrant.
*+10.16 Exclusive Patent and Non-Exclusive Copyright License
Agreement dated as of October 26, 1998 between the
Registrant and the Massachusetts Institute of Technology.
*10.17 $1,980,000 Promissory Note dated as of March 26, 1999 by and
between the Registrant and George H. Conrades.
*10.18 $500,000 Promissory Note dated as of May 18, 1999 by and
between the Registrant and Paul Sagan.
</TABLE>
<PAGE> 149
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
*10.19 $623,750 Promissory Note dated as of July 23, 1999 by and
between the Registrant and Robert O. Ball III.
*10.20 15% Senior Subordinated Note and Warrant to Purchase Common
Stock Purchase Agreement dated as of May 7, 1999 between the
Registrant and the Purchasers named therein.
*10.21 $2,619,750 Promissory Note dated July 23, 1999 by and
between the Registrant and Timothy Weller.
*10.22 Series F Convertible Preferred Stock Purchase Agreement
dated as of September 20, 1999 between the Registrant and
Microsoft Corporation.
*10.23 Broadband Streaming Initiative Agreement dated as of
September 20, 1999 between the Registrant and Microsoft
Corporation.
**10.24 Agreement and Plan of Merger dated as of January 14, 2000 by
and among the Registrant, Aloha Merger Corporation and
Network24 Communications, Inc.
***10.25 Agreement and Plan of Merger dated as of February 6, 2000 by
and among the Registrant, Alli Merger Corporation and
INTERVU Inc.
****10.26 Lease dated as of September 22, 1999 by and between the
Registrant and Technology Square LLC, as amended December 1,
1999.
12.1 Computation of Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Ernst & Young LLP, Independent Auditors.
23.4 Consent of Hale and Dorr LLP (included in Exhibit 5.1).
24.1 Powers of Attorney (see page II-9).
25.1 Statement of Eligibility of Trustee on Form T-1.
!27.1 Financial Data Schedule.
</TABLE>
---------------
* Incorporated by reference to the Registrant's Form S-1 (File No.
333-85679), as amended, filed with the Securities and Exchange
Commission on August 21, 1999.
** Incorporated by reference to the Registrant's Current Report on Form
8-K filed with the Securities and Exchange Commission on February 8,
2000.
*** Incorporated by reference to the Registrant's Schedule 13D filed with
the Securities and Exchange Commission on February 16, 2000.
**** Incorporated by reference to the Registrant's Form 10-K for the year
ended December 31, 1999 filed with the Securities and Exchange
Commission on March 3, 2000.
***** Incorporated by reference to the Registrant's Current Report of Form 8-K
filed with the Securities and Exchange Commission on June 27, 2000.
****** Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission on August 14,
2000.
******* Incorporated by reference to the Registrant's Form S-8 filed with the
Securities and Exchange Commission on May 25, 2000.
! Incorporated by reference from previous filings.
+ Confidential treatment requested for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act, which
portions were omitted and filed separately with the Securities and
Exchange Commission.
