<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER 0-27275
AKAMAI TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 04-3432319
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
500 TECHNOLOGY SQUARE
CAMBRIDGE, MA 02139
(617) 250-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock as of
November 10, 2000: 107,960,984 shares.
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<PAGE> 2
AKAMAI TECHNOLOGIES, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................... 2
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................. 25
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.......... 26
Item 6. Exhibits and Reports on Form 8-K................... 26
Signatures.................................................. 27
Exhibit Index............................................... 28
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $269,554 $ 371,195
Short-term investments.................................... -- 67,548
Accounts receivable, net of allowance for doubtful
accounts of $70 and $1,398 as of December 31, 1999 and
September 30, 2000, respectively....................... 1,588 15,592
Prepaid expenses and other current assets................. 2,521 19,565
-------- ----------
Total current assets................................... 273,663 473,900
Property and equipment, net............................... 23,875 121,812
Intangible assets, net.................................... 434 2,425,207
Long-term investments..................................... -- 12,637
Other assets.............................................. 2,843 24,770
-------- ----------
Total assets........................................... $300,815 $3,058,326
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 8,987 $ 28,883
Accrued expenses.......................................... 2,083 7,995
Accrued payroll and benefits.............................. 3,614 11,544
Deferred revenue.......................................... 698 5,073
Current portion of obligations under capital lease and
equipment loan......................................... 504 1,067
Current portion of long-term debt......................... 2,751 --
-------- ----------
Total current liabilities.............................. 18,637 54,562
Convertible subordinated notes.............................. -- 300,000
Obligations under capital leases and equipment loan, net of
current portion........................................... 733 689
Other liabilities........................................... -- 780
-------- ----------
Total liabilities...................................... 19,370 356,031
-------- ----------
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized, no shares issued and outstanding at
December 31, 1999 and September 30, 2000............... -- --
Common stock, $0.01 par value; 700,000,000 shares
authorized; 92,498,525 issued and outstanding at
December 31, 1999; 107,297,982 shares issued and
outstanding at September 30, 2000...................... 925 1,073
Additional paid-in capital................................ 374,739 3,373,474
Notes receivable from officers for stock.................. (5,907) (5,836)
Deferred compensation..................................... (29,731) (25,270)
Accumulated other comprehensive income.................... -- 143
Accumulated deficit....................................... (58,581) (641,289)
-------- ----------
Total stockholders' equity............................. 281,445 2,702,295
-------- ----------
Total liabilities and stockholders' equity............. $300,815 $3,058,326
======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 4
AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1999 2000 1999 2000
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Revenue............................................. $ 883 $ 27,156 $ 1,287 $ 52,522
-------- --------- -------- ---------
Operating expenses:
Cost of services.................................. 3,125 18,182 4,533 37,465
Engineering and development (excludes $3,410,
$6,244, $3,597 and $7,941, respectively, of
equity-related compensation disclosed
separately below).............................. 3,320 18,352 5,374 38,198
Sales, general and administrative (excludes
$2,870, $3,409, $4,021 and $13,322,
respectively, of equity-related compensation
disclosed separately below).................... 6,820 49,948 12,040 111,072
Amortization of intangible assets................. 13 238,700 36 436,780
Acquired in-process research and development...... -- -- -- 1,372
Equity-related compensation....................... 6,280 9,653 7,618 21,263
-------- --------- -------- ---------
Total operating expenses....................... 19,558 334,835 29,601 646,150
Operating loss...................................... (18,675) (307,679) (28,314) (593,628)
Interest income (expense), net...................... 133 3,624 (11) 11,052
-------- --------- -------- ---------
Loss before provision for income taxes.............. (18,542) (304,055) (28,325) (582,576)
Provision for income taxes........................ -- 20 -- 132
-------- --------- -------- ---------
Net loss............................................ (18,542) (304,075) (28,325) (582,708)
Dividends and accretion to preferred stock
redemption value.................................. 1,350 -- 1,645 --
-------- --------- -------- ---------
Net loss attributable to common stockholders........ $(19,892) $(304,075) $(29,970) $(582,708)
======== ========= ======== =========
Basic and diluted net loss per share................ $ (0.80) $ (3.27) $ (1.47) $ (6.84)
Weighted average common shares outstanding.......... 24,849 93,099 20,445 85,244
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 5
AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1999 2000
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(28,325) $(582,708)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 1,579 458,359
Amortization of deferred compensation.................. 7,618 21,263
Amortization of prepaid advertising acquired for stock
(Note 9)............................................. -- 4,529
Accrued interest on notes receivable from officers for
stock................................................ -- (256)
Amortization of discount on senior subordinated notes
and equipment loan................................... 340 --
Loss on disposal of fixed assets....................... 33 --
Acquired in-process research and development........... -- 1,372
Changes in operating assets and liabilities, net of
effects of acquired businesses:
Accounts receivable, net............................. (552) (9,075)
Prepaid expenses and other current assets............ (4,119) (14,407)
Accounts payable and accrued expenses................ 9,036 17,065
Deferred revenue..................................... -- 3,712
Other noncurrent asset and liabilities............... -- 1,043
-------- ---------
Net cash used in operating activities....................... (14,390) (99,103)
-------- ---------
Cash flows from investing activities:
Purchases of property and equipment....................... (12,768) (96,012)
Cash acquired from the acquisition of businesses, net of
cash paid.............................................. -- 17,207
Purchase of investments................................... (475) (282,170)
Proceeds from sales and maturities of investments......... -- 250,564
-------- ---------
Net cash used in investing activities....................... (13,243) (110,411)
-------- ---------
Cash flows from financing activities:
Proceeds from the issuance of convertible subordinated
notes, net of offering costs........................... -- 290,500
Proceeds from the issuance of senior subordinated notes,
net of offering costs.................................. 14,970 --
Proceeds from equipment financing loan.................... 1,500 --
Proceeds from the issuance of Series B convertible
preferred stock, net................................... 19,875 --
Payments on capital leases and equipment financing loan... (285) (498)
Payment on the senior subordinated notes.................. -- (2,751)
Proceeds from the issuance of common stock under stock
option and employee stock purchase plans............... 30 23,645
Proceeds from the issuance of Series D convertible
preferred stock, net................................... 12,475 --
Proceeds from the issuance of Series E convertible
preferred stock, net................................... 48,966 --
Proceeds from the issuance of Series F convertible
preferred stock, net................................... 14,988 --
Proceeds from the issuance of common stock upon the
exercise of warrants................................... -- 10
Proceeds from the issuance of restricted common stock..... 293 555
-------- ---------
Net cash provided by financing activities................... 112,812 311,461
-------- ---------
Effects of exchange rate translation on cash and cash
equivalents............................................... -- (306)
-------- ---------
Net increase in cash and cash equivalents................... 85,179 101,641
Cash and cash equivalents, beginning of the period.......... 6,580 269,554
-------- ---------
Cash and cash equivalents, end of the period................ $ 91,759 $ 371,195
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 6
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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. Approximately 97% of revenue earned
in the current fiscal year has been generated from U.S.-based customers.
2. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION:
The accompanying interim consolidated financial statements, together with
the related notes, are unaudited and reflect all adjustments, consisting only of
normal recurring adjustments, that in the opinion of management are necessary
for a fair presentation of the Company's financial position, results of
operations and cash flows as of the dates and for the periods presented. 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. Accordingly, reference should be made to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999 for additional
disclosures. 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 intercompany transactions and balances have
been eliminated in consolidation.
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 date of 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.
The following is a summary of investments at September 30, 2000 (in
thousands):
<TABLE>
<CAPTION>
UNREALIZED
AMORTIZED -------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ------ ---------- ----------
<S> <C> <C> <C> <C>
Certificates of deposit........................... $ 509 $ -- $ -- $ 509
U.S. corporate debt securities.................... 63,384 3 -- 63,387
Equity securities................................. 15,850 3,149 2,710 16,289
------- ------ ------ -------
$79,743 $3,152 $2,710 $80,185
======= ====== ====== =======
</TABLE>
5
<PAGE> 7
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(unaudited)
Available-for-sale debt securities by contractual maturity are as follows
at September 30, 2000 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Due in one year or less..................................... $57,384
Due after one year through two years........................ 6,003
-------
$63,387
=======
</TABLE>
For all periods presented, realized gains and losses on sales of
available-for-sale securities were immaterial. The Company determines the cost
basis of securities by specific identification.
INTANGIBLE ASSETS
Intangible assets consist 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 include the cost of
acquired license rights to content delivery technology. These license 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.
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. All stock-based awards to
nonemployees are accounted for at their fair value in accordance with SFAS No.
123. The Company has adopted the conclusions of Financial Accounting Standards
Board ("FASB") Interpretation No. 44 ("FIN 44") for the period ended September
30, 2000.
Equity-related compensation is comprised of the following: (a) the
amortization of deferred compensation resulting from the granting 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 (b)
compensation expense equal to the intrinsic value of modified stock options or
restricted stock awards, measured at the modification date, for the number of
awards that, absent the modification, would have expired unexercisable. For the
three and nine month periods ended September 30, 1999, equity-related
compensation includes $6.3 million and $7.6 million, respectively, for the
amortization of deferred compensation. For the three and nine month period ended
September 30, 2000, equity-related compensation includes $2.8 million and $7.3
million, respectively, for the amortization of deferred compensation and $6.9
million and $14.0 million, respectively, for compensation related to modified
awards.
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 three and nine month period ended September 30, 1999.
Comprehensive loss is equal to net loss,
6
<PAGE> 8
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(unaudited)
unrealized gain and loss on investments and foreign currency translation
adjustments for the three and nine month period ended September 30, 2000.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133" and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities -- an Amendment of FASB Statement No.
133," 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 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 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 application of FIN No. 44 did
not have a significant impact on the Company's 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. Diluted 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.
7
<PAGE> 9
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(unaudited)
The following table sets forth potential common stock excluded from the
calculation of earnings per share since their inclusion would be antidilutive:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
----------------------------
1999 2000
---------- ----------
<S> <C> <C>
Stock options......................................... 11,236,650 15,938,887
Unvested restricted common stock...................... 18,049,104 12,394,250
Convertible preferred stock........................... 37,519,041 --
Warrants.............................................. 2,075,100 2,146,494
Convertible subordinated notes........................ -- 2,598,074
Contingently issuable stock
(see Note 9)........................................ -- 190,420
</TABLE>
5. GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill and other intangible assets consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, ESTIMATED USEFUL
1999 2000 LIVES IN YEARS
------------ ------------- ----------------
<S> <C> <C> <C>
Goodwill.................................. $ -- $2,816,138 3
Completed technology...................... -- 28,130 3
Assembled workforce....................... -- 12,384 2-3
Trademarks and tradenames................. -- 4,901 3
Acquired license rights................... 490 490 10
---- ----------
490 2,862,043
Less accumulated amortization............. 56 436,836
---- ----------
$434 $2,425,207
==== ==========
</TABLE>
Goodwill and other intangible assets will be amortized as follows (in
millions):
<TABLE>
<S> <C>
Three months ending December 31, 2000....................... $ 239
2001........................................................ 955
2002........................................................ 955
2003........................................................ 276
------
Total....................................................... $2,425
======
</TABLE>
6. CONVERTIBLE SUBORDINATED NOTES:
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 expenses of $9.5
million). The Convertible Notes are due July 1, 2007, and are convertible at any
time 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
<PAGE> 10
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(unaudited)
7. COMPREHENSIVE LOSS:
The following table presents the calculation of comprehensive loss and its
components for the three and nine month periods ended September 30, 1999 and
2000 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1999 2000 1999 2000
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net loss.............................. $(18,542) $(304,075) $(28,325) $(582,708)
Other comprehensive income (loss):
Foreign currency translation
adjustment....................... -- (284) -- (299)
Unrealized (loss) gain on
securities....................... -- (301) -- 442
-------- --------- -------- ---------
Comprehensive loss.................... $(18,542) $(304,660) $(28,325) $(582,565)
======== ========= ======== =========
</TABLE>
8. ACQUISITIONS:
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 nine months
ended September 30, 2000. The purchase price allocation is as follows (in
millions):
<TABLE>
<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 5).
9
<PAGE> 11
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(unaudited)
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 nine months ended September 30, 2000.
The total purchase price of $2.8 billion includes the fair market value as of
the acquisition date 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 (in millions):
<TABLE>
<S> <C>
Tangible net assets......................................... $ 126.1
Intangible assets acquired:
Completed technology...................................... 21.4
Assembled workforce....................................... 10.7
Trademarks and tradenames................................. 3.5
In-process research and development....................... 1.4
Goodwill.................................................. 2,621.6
--------
Total purchase price allocation............................. $2,784.7
========
</TABLE>
Tangible net assets acquired include cash, short-term and long-term
investments, accounts receivable, fixed assets and prepaid advertising (see Note
9). 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
5).
A portion of the INTERVU 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 are being 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.
PRO FORMA INFORMATION
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>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1999
---------
2000
---------
Revenue..................................................... $ 5,025 $ 59,208
Net loss.................................................... (515,123) (871,898)
Loss per share.............................................. (16.57) (9.53)
</TABLE>
10
<PAGE> 12
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(unaudited)
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 31,493 shares of
Akamai common stock and $259,000 in cash. In addition, 20,458 shares of Akamai
common stock and $434,000 in cash have been placed in an escrow account and will
be released over one year to certain CTS selling shareholders as they continue
employment with Akamai. The Company will record equity-related compensation for
the escrowed shares in the amount of $1.7 million ratably over the contingency
period based on the fair value of Akamai common stock on the closing date of the
acquisition. The acquisition has been accounted for using the purchase method.
The purchase price of $3.7 million was based on the fair value of the
consideration paid plus direct acquisition costs. Accordingly, the Company
allocated the purchase price to the assets and liabilities of CTS based on their
fair values. The values assigned included $4.0 million for goodwill, $150,000
for assembled workforce, and $466,000 for net liabilities assumed. The goodwill
and assembled workforce are being amortized on a straight-line basis over their
estimated useful lives of three and two years, respectively. The Company has
included the results of operations of CTS subsequent to July 25, 2000 in its
statement of operations for the three and nine months ended September 30, 2000.
CTS develops services that enable Web site visitors to personalize their
interaction with such site. Pro forma information for CTS has not been presented
as the historical operating results of CTS are not material to those of the
combined Company.
9. CNN NEWS GROUP STRATEGIC ALLIANCE:
On November 11, 1999, INTERVU, which the Company acquired in April 2000
(see Note 8), entered into 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 $18.4 million. This amount has been recorded in
Other Assets, less the current portion of $6.9 million recorded in Other Current
Assets, and is being amortized over the remaining life of the agreement to
advertising expense. In addition, for a fee INTERVU agreed to be CNN's exclusive
provider of Internet video management and delivery services and to deliver audio
streaming services.
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
$33.57 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 its Akamai shares until November 11, 2002 and the price per
share of Akamai common stock is less than $144.05 at such date. 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 allocation
of INTERVU. Either party may terminate the contract at any time for a 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.
11
<PAGE> 13
AKAMAI TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(unaudited)
10. CONTINGENCIES:
The Company is subject to legal proceedings, claims, and litigation arising
in the ordinary course of business. While the outcome of these matters is
currently not determinable, at this time, management does not expect that the
ultimate costs to resolve these matters will have a material adverse effect on
the Company's consolidated financial position, results of operations or cash
flows.
11. RELATED PARTY TRANSACTIONS:
During the nine months ended September 30, 2000, the Company purchased
bandwidth and colocation space from LIG Holdings, L.P. ("LIG"), an Internet
service provider. An officer of the Company is a principal of LIG with a 35%
ownership interest. Any transactions with LIG are approved by the Company's
management committee. During the nine months ended September 30, 2000, the
Company paid approximately $73,000 to LIG for colocation space and bandwidth.
The Company has obligations to LIG for future colocation space and bandwidth and
has paid $972,000 to LIG for a refundable security deposit. During the nine
months ended September 30, 2000, the Company sold a perpetual license to LIG
covering certain technology for $500,000. As of September 30, 2000, this amount
was included in accounts receivable.
12
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. For this
purpose, statements contained herein that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the foregoing,
the words "believes," "anticipates," "plans," "expects" and similar expressions
are intended to identify forward-looking statements. These forward-looking
statements involve risks and uncertainties and are not guarantees of future
performance. Actual results may differ materially from those indicated in such
forward-looking statements as a result of certain factors including, but not
limited to, those set forth under the heading "Factors Affecting Future
Operating Results."
OVERVIEW
We provide global delivery services for Internet content, streaming media
and applications, and global Internet traffic management services. We currently
offer nine services that, among other things, 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 of over 6,000 servers, which locates the
content and applications geographically closer to users. As of September 30,
2000, we had more than 2,800 customers, including over 1,100 customers under
recurring contract.
We derive our revenue primarily 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 typically 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 from
implementation and installation fees that are recognized over the period of the
related contracts. In addition, we recognize revenue from stand-alone
professional services as these services are performed.
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, the majority of our
revenue has been derived from direct sales; however, we anticipate that revenue
through indirect distribution channels will increase in future periods. For the
nine months ended September 30, 1999, Apple Computer ("Apple"), Yahoo! and
Artisan represented 45%, 18% and 11% of total revenue, respectively. For the
three and nine month periods ended September 30, 2000, Apple represented 15% and
16% of total revenue, respectively. We expect Apple revenue to decline as a
percentage of our total revenue for the next two quarters.
Cost of services consists primarily 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.
In addition, cost of services includes network storage costs, live event costs
including costs for production, encoding and signal acquisition, and costs of
professional services. 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, Internet service providers provide us with rack space for our servers
and access to their bandwidth at no cost. We do not recognize as revenue any
value to the Internet service providers associated with the deployment of our
servers and do not expense the value of the rack space and bandwidth we receive.
We expect our cost of services 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.
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<PAGE> 15
Sales, general and administrative expenses consist primarily of salaries
and related costs of sales and marketing, operations and finance personnel,
recruiting expenses, professional fees, advertising costs 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 acquired from INTERVU that had not
reached technological feasibility and had no alternative future use.
Equity-related compensation consists of: (a) the amortization of deferred
compensation resulting from the granting 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 (b) compensation expense equal
to the intrinsic value of modified stock options or restricted stock awards,
measured at the modification date, for the number of awards that, absent the
modification, would have expired unexercisable.
Since our inception, we have incurred significant losses, and as of
September 30, 2000. 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 acquired all the outstanding common and
preferred stock of Network24 Communications, Inc. ("Network24"). In the second
quarter of 2000, we acquired all of the outstanding common stock and preferred
stock of INTERVU Inc. ("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 three and nine months ended
September 30, 2000. Both acquisitions have been accounted for using the purchase
method of accounting.
In the third quarter of 2000, we issued 31,493 shares of common stock and
made a cash payment of $259,000 to the former stockholders of CallTheShots Inc.
("CTS") in connection with our acquisition of CTS in a merger transaction. The
acquisition has been accounted for using the purchase method. We have included
the results of operations of CTS subsequent to July 25, 2000 in our statements
of operations for the three and nine months ended September 30, 2000.
In connection with the Network24, INTERVU and CTS acquisitions, we expect
amortization expense for the next four years to be as follows (in millions):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
2000...................................................... $676
2001...................................................... 955
2002...................................................... 955
2003...................................................... 276
</TABLE>
RESULTS OF OPERATIONS
Revenue. Revenue was $883,000 and $1.3 million for the three and nine
months ended September 30, 1999, respectively. Revenue for the three and nine
months ended September 30, 2000 was $27.2 million and
14
<PAGE> 16
$52.5 million, respectively. The increase in revenue in the third quarter of
2000 over the comparable period in the prior year was primarily due to the
significant growth in our customer base. Revenue increased 50% in the third
quarter of 2000 from the second quarter of 2000. The increase in revenue from
the second quarter was due to several factors including the growth of our
customer base, an increase in the amount of services sold to existing customers,
the introduction of new services, and an increase in sales through our expanded
reseller channel. We expect quarterly revenue to increase in the future as we
add customers and sell new services to our existing customers. However, the rate
of revenue growth could vary from quarter to quarter due to many factors. See
"Factors Affecting Future Operating Results."
Cost of Services. Cost of services expense was $3.1 million and $4.5
million for the three and nine months ended September 30, 1999, respectively,
and represented 16% and 15% of total operating expenses for the respective
periods. Cost of services expense was $18.2 million and $37.5 million for the
three and nine months ended September 30, 2000, respectively, and represented 5%
and 6% of total operating expenses for the respective periods. Cost of services
expenses were 19% and 18% of operating expenses before the amortization of
intangible assets for the three and nine months ended September 30, 2000,
respectively. The increase in cost of services expense for each of the three and
nine month periods in 2000 compared to the comparable periods in the prior year
was due to the commercial introduction of services in April 1999, increased
depreciation expense on our servers as we expanded our network, and increased
bandwidth costs as we delivered more content over our network. Gross margins,
defined as revenue less cost of services, were negative for the nine months
ended September 30, 1999 largely due to the fixed cost of building our network
of servers. Gross margins were positive for the quarter ended September 30, 2000
due to an increase in the number of customers and volume of revenue relative to
the growth in network infrastructure. Gross margins grew from 30% in the three
months ended June 30, 2000 to 33% in the three months ended September 30, 2000.
The increase in gross margins primarily reflects consistent pricing of our
products and the declining cost of bandwidth as a percentage of content
delivered over our network. 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.
Engineering and Development. Engineering and development expenses were
$3.3 million and $5.4 million for the three and nine months ended September 30,
1999, respectively, and represented 17% and 18% of total operating expenses for
the respective periods. Engineering and development expenses were $18.4 million
and $38.2 million for the three and nine months ended September 30, 2000,
respectively, and represented 5% and 6% of total operating expenses for the
respective periods. Engineering and development expenses were 19% and 18% of
operating expenses before the amortization of intangible assets for the three
and nine months ended September 30, 2000, respectively. The increase in
engineering and development expenses in the three and nine month periods in 2000
over the comparable periods 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
increase headcount and invest in new technology.
Sales, General and Administrative. Sales, general and administrative
expenses were $6.8 million and $12.0 million for the three and nine months ended
September 30, 1999, respectively, and represented 35% and 41% of total operating
expenses for the respective periods. Sales, general and administrative expenses
for the three and nine months ended September 30, 2000 were $49.9 million and
$111.1 million, respectively, and represented 15% and 17% of total operating
expenses for the respective periods. Sales, general and administrative expenses
were 52% and 53% of operating expenses before the amortization of intangible
assets for the three and nine months ended September 30, 2000, respectively. The
increase in sales, general and administrative expenses in the three and nine
month periods over the comparable periods 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 continue to increase in the future.
Amortization of Intangible Assets. Amortization of intangible assets for
the three and nine months ended September 30, 2000 was $238.7 million and $436.8
million, respectively, and represented 71% and 68% of total operating expenses
for the respective periods. Amortization expense primarily relates to the
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<PAGE> 17
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 our intangible assets as of September 30, 2000 to be
approximately $239 million per quarter through 2003.
Equity-Related Compensation. Equity-related compensation was $6.3 million
and $7.6 million for the three and nine months ended September 30, 1999,
respectively, and $9.7 million and $21.3 million for the three and nine months
ended September 30, 2000, respectively. For the nine months ended September 30,
2000, equity-related compensation includes $7.3 million for the amortization of
deferred compensation and $14.0 million for the acceleration of stock option
vesting for certain terminated employees. At September 30, 2000, deferred
compensation, which is a component of stockholders' equity, was $25.3 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. Related to the amortization of deferred compensation, we
expect to incur equity-related compensation expenses of at least $10.1 million
in 2000, $10.2 million in 2001, $8.7 million in 2002 and $3.6 million in 2003.
Interest Income (Expense), Net. Interest income (expense), net, was
$133,000 and $(11,000) for the three and nine months ended September 30, 1999,
respectively, and $3.6 million and $11.1 million for the three and nine months
ended September 30, 2000, respectively. Interest income (expense), net, consists
of interest earned on cash, cash equivalents and short-term and long-term
investment balances, net of interest expense. Interest income increased in the
first nine months of 2000 due to interest earned 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.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering, 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 our 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 commissions to the underwriters. In June 2000, we received net
proceeds of $290.5 million from the sale of 5 1/2% convertible subordinated
notes due 2007 ("Convertible Notes"). At September 30, 2000, cash, cash
equivalents and short-term investments totaled $438.7 million.
Cash used in operating activities was $14.4 million for the nine months
ended September 30, 1999 and $99.1 million for the nine months ended September
30, 2000. Cash used in operating activities for the nine months ended September
30, 2000 compared to the prior year reflects increasing operating losses.
Cash used in investing activities was $13.2 million for the nine months
ended September 30, 1999 and $110.4 million for the nine months ended September
30, 2000. Cash used for investing activities in the current period reflects net
purchases of short-term investments of $282.2 million, sales and maturities of
investments of $250.6 million and purchases of property and equipment of $96.0
million, consisting primarily of servers for the 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, acquired $29.2
million of cash in our acquisition of INTERVU and made a cash payment of
$259,000 for the acquisition of CTS. We expect to continue to expand our
infrastructure by making approximately $40 million in additional capital
expenditures during the remainder of the year.
Cash provided by financing activities was $112.8 million for the nine
months ended September 30, 1999 and $311.5 million for the nine months ended
September 30, 2000. Cash provided by financing activities for the nine months
ended September 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
16
<PAGE> 18
remainder was paid during the nine months ended September 30, 2000. Cash
provided by financing activities for the nine months ended September 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 FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133" and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities -- an Amendment of FASB Statement No.
133," 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. To date, we have not
engaged in derivative and hedging activities, and accordingly we do not believe
that the adoption of SFAS No. 133 will have a material impact on our financial
reporting and related disclosures. We will adopt SFAS No. 133 as required by
SFAS No. 137 in fiscal year 2001.
In December 1999, the Securities and Exchange 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 (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 application of FIN No. 44 did not have a significant impact on our
financial position or results of operations.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The following important factors, among other things, could cause our actual
operating results to differ materially from those indicated or suggested by
forward-looking statements made in this Quarterly Report on Form 10-Q or
presented elsewhere by management from time to time.
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<PAGE> 19
OUR BUSINESS IS DIFFICULT TO EVALUATE AND OUR BUSINESS STRATEGY MAY NOT
SUCCESSFULLY ADDRESS RISKS WE FACE 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 historical financial data upon which to base
planned operating expenses and upon which investors may evaluate us and our
prospects. In addition, while our operating expenses are largely based on
anticipated but unpredictable revenue trends, a high percentage of these
expenses are and will continue to be fixed in the short-term. Because of our
limited operating history, our business strategy may not successfully address
all of the risks we face.
WE ARE PRIMARILY DEPENDENT ON OUR INTERNET CONTENT, APPLICATIONS AND STREAMING
MEDIA DELIVERY SERVICES AND OUR FUTURE REVENUE DEPENDS ON CONTINUED DEMAND FOR
OUR SERVICES.
Currently, our future growth depends on the commercial success of our
Internet content, applications 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
for a variety of reasons. First, the market for our existing services is
relatively new, and 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 its development.
Furthermore, our new services and products under development may not achieve
widespread market acceptance. Failure of our current and planned services to
operate as expected could also hinder or prevent their adoption. If a
broad-based, sustained market for our services does not emerge and 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.
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;
- fire, earthquake, flood and other natural disasters;
- power loss; and
- similar events.
We currently provide a content delivery 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 SERVICES ARE COMPLEX AND ARE DEPLOYED IN COMPLEX ENVIRONMENTS,
THEY MAY HAVE ERRORS OR DEFECTS THAT COULD SERIOUSLY HARM OUR BUSINESS.
Our services are highly complex and are designed to be deployed in and
across numerous large and complex networks. As of September 30, 2000, our
network consisted of over 6,000 servers across 335 different networks. We and
our customers have from time to time discovered errors and defects in our
software. In the
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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;
- 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, broader customer relationships and industry alliances and
substantially greater financial, technical and marketing resources than we do.
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. These companies include 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.
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AS PART OF OUR BUSINESS STRATEGY, WE HAVE ENTERED INTO AND MAY ENTER INTO OR
SEEK TO ENTER INTO BUSINESS COMBINATIONS AND ACQUISITIONS THAT MAY BE DIFFICULT
TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR DIVERT
MANAGEMENT ATTENTION.
We acquired Network24 in February 2000, INTERVU in April 2000 and
CallTheShots Inc. ("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
potential disruption of our ongoing business and distraction of management,
expenses related to the acquisition and potential unknown liabilities associated
with acquired businesses.
If we are not successful in completing acquisitions that we may pursue in
the future, we may 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 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
ultimately help us achieve our strategic goals and may pose other risks to us.
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 16% of our revenue for the nine months ended September 30, 2000.
We expect that sales to Apple Computer as a percentage of total sales will
decrease, but that during 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 nine months ended September 30, 2000
was derived from customers that are emerging Internet-based businesses, and a
portion of our future revenue will 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.
IF WE ARE UNABLE TO SCALE OUR NETWORK AS DEMAND INCREASES, THE QUALITY OF OUR
SERVICES MAY DIMINISH WHICH COULD CAUSE A LOSS OF CUSTOMERS.
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. 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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IF WE DO NOT RESPOND RAPIDLY TO TECHNOLOGICAL CHANGES, THEN WE MAY LOSE
CUSTOMERS.
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.
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 patent 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. We have filed suit in federal court in Massachusetts against Digital
Island, Inc. for infringing one of our licensed patents and patents issued to
INTERVU; however, we may not prevail in these proceedings. In general,
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.
Although we have licensed and proprietary technology covered by 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.
FAILURE TO INCREASE OUR REVENUE WOULD PREVENT US FROM ACHIEVING AND MAINTAINING
PROFITABILITY.
We have never been profitable. We have incurred significant losses since
inception and expect to continue to incur losses in the future. As of September
30, 2000, we had an accumulated deficit of $641.3 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.
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
providing additional bandwidth and volume discounts available to us as our
network usage
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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 or, in any event, if we are
unable to sell our services at acceptable prices relative to our bandwidth
costs, or if we fail to offer additional services from which we can derive
additional revenue, our revenue will decrease and our business and financial
results will suffer.
OUR BUSINESS 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 our headcount has grown substantially.
Our total number of employees increased from 385 at December 31, 1999 to 1,229
at September 30, 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.
In order to grow and achieve future success, we must also improve our ability to
effectively manage multiple relationships with our customers, suppliers and
other third parties. Failure to take any of the steps necessary to manage our
growth properly would have a material adverse effect on our business, results of
operations and financial condition.
WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY. IF WE ARE
UNABLE TO RETAIN OUR KEY EMPLOYEES AND HIRE QUALIFIED SALES AND TECHNICAL
PERSONNEL, 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 personnel and other persons with necessary technical skills,
particularly in the Boston, Massachusetts and San Mateo, California areas. Our
employees require extensive training in our Internet content delivery services.
If we are unable to hire and promptly train service and support personnel, we
may not be able to increase sales of our services, which would seriously harm
our business.
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. 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;
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- 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 October 31, 2000, the executive officers, directors and entities
affiliated with them, in the aggregate, beneficially owned approximately 46% 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.
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.
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 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
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significantly harmed. Companies in the Internet market are increasingly bringing
suits alleging infringement of their proprietary rights, particularly patent
rights. Digital Island, Inc. has filed a patent infringement suit against us in
California. We intend to aggressively defend this lawsuit and to prosecute
vigorously the patent infringement suit that we had previously filed against
Digital Island, Inc. We may not prevail in either of these actions. These claims
and any other 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. In particular, the growth and development
of the market for online commerce has prompted calls for more stringent consumer
protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business online. This could
negatively affect the businesses of our customers and reduce their demand for
our services. Internet-related laws, however, remain largely unsettled, even in
areas where there has been some legislative action. The adoption or modification
of laws or regulations relating to the Internet, or interpretations of existing
law, could adversely affect our business.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE, WHICH COULD RESULT
IN LITIGATION AGAINST US.
The market price of our common stock has been extremely volatile and has
fluctuated significantly in the past. The following factors could cause the
market price of common stock to continue to fluctuate significantly:
- the addition or departure of our key personnel;
- variations in our quarterly operating results;
- announcements by us or our competitors of significant contracts, new or
enhanced products or service offerings, acquisitions, distribution
partnerships, joint ventures or capital commitments;
- changes in financial estimates by securities analysts;
- our sales of common stock or other securities in the future;
- changes in market valuations of networking, Internet and
telecommunications companies;
- fluctuations in stock market prices and volumes; and
- changes in general economic conditions, including interest rate levels.
In the past, class action litigation has often been brought against
companies following periods of volatility in the market price of those
companies' common stock. We may become involved in this type of litigation in
the future. Litigation is often expensive and diverts management's attention and
resources which could materially adversely affect our business and results of
operations.
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ITEM 3. 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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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities
On July 25, 2000, we issued 51,951 shares of our common stock to the former
stockholders of CallTheShots, Inc., a Delaware corporation ("CTS"), in
connection with our acquisition of CTS in a merger transaction. The shares of
common stock were exempt from registration under Section 4(2) of the Securities
Act of 1933, as amended, because there was no public offering of the common
stock issued. No underwriters were involved in the sale of these securities.
(d) Use of Proceeds from Sales of Registered Securities
On November 3, 1999, we sold 9,000,000 shares of our common stock in an
initial public offering pursuant to a Registration Statement on Form S-1
(Registration No. 333-85679) (the "Registration Statement") that was declared
effective by the Securities and Exchange Commission on October 28, 1999. During
the period from the offering to September 30, 2000, we have used the proceeds as
follows: approximately $64 million for capital expenditures, $15 million for the
repayment of senior subordinated notes, $13 million for the acquisition of
businesses, and approximately $110 million for operating expenses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AKAMAI TECHNOLOGIES, INC.
<TABLE>
<S> <C>
Date: November 14, 2000 By: /s/ KAREN C. STUMCKE
-----------------------------------------
Karen C. Stumcke
Vice President and Chief Accounting
Officer
</TABLE>
27
