SECURITIES AND EXCHANGE COMMISSION
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 JUNE 30, 2001. |
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
Commission file number 0-27275
AKAMAI TECHNOLOGIES, INC.
|
Delaware
(State or other jurisdiction of incorporation or organization) |
04-3432319 (I.R.S. Employer Identification Number) |
500 Technology Square
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 o
The number of shares outstanding of the registrant’s common stock as of July 20, 2001: 15,130,774 shares.
AKAMAI TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
| Page | ||||||
|
PART I.
|
Financial Information | |||||
| Item 1. Financial Statements | 2 | |||||
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 | |||||
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 23 | |||||
|
PART II.
|
Other Information | |||||
| Item 1. Legal Proceedings | 24 | |||||
| Item 4. Submission of Matters to Vote of Security Holders | 24 | |||||
| Item 5. Other Information | 25 | |||||
| Item 6. Exhibits and Reports on Form 8-K | 25 | |||||
| Signatures | 26 | |||||
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
| June 30, | December 31, | |||||||||
| 2001 | 2000 | |||||||||
| (in thousands, except share | ||||||||||
| and per share data) | ||||||||||
| (unaudited) | ||||||||||
|
Assets
|
||||||||||
|
Current assets:
|
||||||||||
|
Cash and cash equivalents
|
$ | 120,254 | $ | 150,130 | ||||||
|
Marketable securities
|
146,849 | 159,522 | ||||||||
|
Accounts receivable, net of allowance for
doubtful accounts of $4,279 and $2,291 at June 30, 2001 and
December 31, 2000, respectively
|
25,226 | 22,670 | ||||||||
|
Prepaid expenses and other current assets
|
18,495 | 23,022 | ||||||||
|
Total current assets
|
310,824 | 355,344 | ||||||||
|
Property and equipment, net
|
150,824 | 143,041 | ||||||||
|
Marketable securities
|
— | 77,282 | ||||||||
|
Goodwill and other intangible assets, net
|
30,811 | 2,186,157 | ||||||||
|
Other assets
|
27,136 | 28,953 | ||||||||
|
Total assets
|
$ | 519,595 | $ | 2,790,777 | ||||||
|
Liabilities and Stockholders’
Equity
|
||||||||||
|
Current liabilities:
|
||||||||||
|
Accounts payable
|
$ | 38,112 | $ | 52,212 | ||||||
|
Accrued expenses
|
11,475 | 4,327 | ||||||||
|
Accrued restructuring (Note 10)
|
8,646 | — | ||||||||
|
Accrued interest payable
|
8,250 | 8,754 | ||||||||
|
Accrued payroll and benefits
|
13,278 | 14,240 | ||||||||
|
Deferred revenue
|
5,334 | 4,335 | ||||||||
|
Current portion of obligations under capital
lease and equipment loan
|
915 | 1,080 | ||||||||
|
Total current liabilities
|
86,010 | 84,948 | ||||||||
|
Obligations under capital leases and equipment
loan, net of current portion
|
171 | 421 | ||||||||
|
Accrued restructuring and other liabilities
(Note 10)
|
16,373 | 1,009 | ||||||||
|
Convertible notes
|
300,000 | 300,000 | ||||||||
|
Total liabilities
|
402,554 | 386,378 | ||||||||
|
Contingencies (Note 11)
|
— | — | ||||||||
|
Stockholders’ equity:
|
||||||||||
|
Preferred stock, $0.01 par value; 5,000,000
shares authorized; no shares issued or outstanding at
June 30, 2001 and December 31, 2000
|
— | — | ||||||||
|
Common stock, $0.01 par value; 700,000,000 shares
authorized; 115,070,779 shares issued and outstanding at
June 30, 2001; 108,203,290 shares issued and outstanding at
December 31, 2000
|
1,151 | 1,082 | ||||||||
|
Additional paid-in capital
|
3,444,291 | 3,382,582 | ||||||||
|
Deferred compensation
|
(63,005 | ) | (22,313 | ) | ||||||
|
Notes receivable from officers for stock
|
(5,869 | ) | (5,704 | ) | ||||||
|
Accumulated other comprehensive income (loss)
|
227 | (6,882 | ) | |||||||
|
Accumulated deficit
|
(3,259,754 | ) | (944,366 | ) | ||||||
|
Total stockholders’ equity
|
117,041 | 2,404,399 | ||||||||
|
Total liabilities and stockholders’ equity
|
$ | 519,595 | $ | 2,790,777 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the three months | For the six months | |||||||||||||||||
| ended June 30, | ended June 30, | |||||||||||||||||
| 2001 | 2000 | 2001 | 2000 | |||||||||||||||
| (in thousands, except per share data) | ||||||||||||||||||
| (unaudited) | ||||||||||||||||||
|
Revenue:
|
||||||||||||||||||
|
Service
|
$ | 35,569 | $ | 18,144 | $ | 67,833 | $ | 25,366 | ||||||||||
|
License
|
2,322 | — | 5,822 | — | ||||||||||||||
|
Service and license from affiliates (Note 8)
|
5,250 | — | 9,695 | — | ||||||||||||||
|
Total revenue
|
43,141 | 18,144 | 83,350 | 25,366 | ||||||||||||||
|
Operating expenses:
|
||||||||||||||||||
|
Cost of service (excludes $10,276, $4,016,
$19,588 and $5,622, respectively, of network-related
depreciation included in depreciation below)
|
13,622 | 8,631 | 29,782 | 13,661 | ||||||||||||||
|
Engineering and development (excludes $3,749,
$590, $4,777 and $1,697, respectively, of equity-related
compensation disclosed separately below)
|
16,737 | 12,931 | 35,369 | 19,846 | ||||||||||||||
|
Sales, general and administrative (excludes
$7,289, $8,831, $10,775 and $9,913, respectively, of
equity-related compensation disclosed separately below)
|
41,292 | 36,373 | 83,568 | 56,378 | ||||||||||||||
|
Depreciation
|
18,340 | 7,305 | 34,792 | 10,368 | ||||||||||||||
|
Amortization of goodwill and other intangible
assets
|
5,392 | 189,080 | 244,330 | 198,080 | ||||||||||||||
|
Acquired in-process research and development
|
— | 1,372 | — | 1,372 | ||||||||||||||
|
Equity-related compensation
|
11,038 | 9,421 | 15,552 | 11,610 | ||||||||||||||
|
Impairment of goodwill (Note 7)
|
— | — | 1,912,840 | — | ||||||||||||||
|
Restructuring charge (Note 10)
|
26,194 | — | 26,194 | — | ||||||||||||||
|
Total operating expenses
|
132,615 | 265,113 | 2,382,427 | 311,315 | ||||||||||||||
|
Loss from operations
|
(89,474 | ) | (246,969 | ) | (2,299,077 | ) | (285,949 | ) | ||||||||||
|
Interest (expense) income, net
|
(1,637 | ) | 3,803 | (1,056 | ) | 7,428 | ||||||||||||
|
Equity in losses of affiliate (Note 8)
|
(153 | ) | — | (2,000 | ) | — | ||||||||||||
|
Loss on investments (Note 6)
|
(1,000 | ) | — | (12,747 | ) | — | ||||||||||||
|
Loss before provision for income taxes
|
(92,264 | ) | (243,166 | ) | (2,314,880 | ) | (278,521 | ) | ||||||||||
|
Provision for income taxes
|
344 | 70 | 508 | 112 | ||||||||||||||
|
Net loss
|
$ | (92,608 | ) | $ | (243,236 | ) | $ | (2,315,388 | ) | $ | (278,633 | ) | ||||||
|
Basic and diluted net loss per share
|
$ | (0.91 | ) | $ | (2.78 | ) | $ | (23.11 | ) | $ | (3.43 | ) | ||||||
|
Weighted average common shares outstanding
|
101,629 | 87,374 | 100,205 | 81,251 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
AKAMAI TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the six months ended | |||||||||||
| June 30, | |||||||||||
| 2001 | 2000 | ||||||||||
| (in thousands) | |||||||||||
| (unaudited) | |||||||||||
|
Cash flows from operating activities:
|
|||||||||||
|
Net loss
|
$ | (2,315,388 | ) | $ | (278,633 | ) | |||||
|
Adjustments to reconcile net loss to net cash
used in operating activities:
|
|||||||||||
|
Depreciation and amortization
|
279,122 | 208,448 | |||||||||
|
Equity-related compensation
|
15,552 | 11,610 | |||||||||
|
Amortization of prepaid advertising acquired in
business acquisition
|
2,403 | — | |||||||||
|
Accrued interest on notes receivable from
officers for stock
|
(165 | ) | (171 | ) | |||||||
|
Amortization of deferred financing costs
|
695 | — | |||||||||
|
Loss on investments
|
12,747 | — | |||||||||
|
Equity in losses of affiliate
|
2,000 | — | |||||||||
|
Impairment of goodwill
|
1,912,840 | — | |||||||||
|
Acquired in-process research and development
|
— | 1,372 | |||||||||
|
Changes in operating assets and liabilities, net
of effects of acquired businesses:
|
|||||||||||
|
Accounts receivable, net
|
(4,491 | ) | (3,991 | ) | |||||||
|
Prepaid expenses and other current assets
|
904 | (7,638 | ) | ||||||||
|
Accounts payable and accrued expenses
|
(993 | ) | 15,670 | ||||||||
|
Deferred revenue
|
998 | 3,076 | |||||||||
|
Other noncurrent assets and liabilities
|
19,362 | 1,065 | |||||||||
|
Net cash used in operating activities
|
(74,414 | ) | (49,192 | ) | |||||||
|
Cash flows from investing activities:
|
|||||||||||
|
Purchases of property and equipment
|
(42,548 | ) | (55,624 | ) | |||||||
|
Purchase of investments
|
(64,673 | ) | (277,588 | ) | |||||||
|
Cash acquired from the acquisition of businesses,
net of cash paid
|
— | 17,466 | |||||||||
|
Proceeds from sales and maturities of investments
|
147,393 | 147,777 | |||||||||
|
Net cash provided by (used in) investing
activities
|
40,172 | (167,969 | ) | ||||||||
|
Cash flows from financing activities:
|
|||||||||||
|
Proceeds from the issuance of 5 1/2%
convertible subordinated notes, net of financing costs
|
— | 290,200 | |||||||||
|
Payments on capital leases and equipment
financing loan
|
(609 | ) | (273 | ) | |||||||
|
Payment on senior subordinated notes
|
— | (2,751 | ) | ||||||||
|
Proceeds from the issuance of common stock under
stock option and employee stock purchase plans
|
4,931 | 14,987 | |||||||||
|
Net cash provided by financing activities
|
4,322 | 302,163 | |||||||||
|
Effects of exchange rate translation on cash and
cash equivalents
|
44 | (16 | ) | ||||||||
|
Net (decrease) increase in cash and cash
equivalents
|
(29,876 | ) | 84,986 | ||||||||
|
Cash and cash equivalents, beginning of period
|
150,130 | 269,554 | |||||||||
|
Cash and cash equivalents, end of period
|
$ | 120,254 | $ | 354,540 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
AKAMAI TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business:
Akamai Technologies, Inc. (“Akamai” or the “Company”) was formed in August 1998 and is a provider of globally distributed application and Internet content delivery services. Akamai’s services improve the speed, quality, availability, reliability and scalability of Web sites by delivering customers’ Internet content, streaming media and applications through a distributed worldwide network of servers that locate content and applications geographically closer to users.
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, 2000 for additional disclosures. Results of the interim periods are not necessarily indicative of results for the entire year.
The interim consolidated financial statements include the accounts of Akamai and its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation. Certain reclassifications of prior period amounts have been made to conform with current period presentation.
3. Recent Accounting Pronouncements:
In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 141 (“SFAS 141”), “Business Combinations.” SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS 141 will have a significant impact on its financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets”, which is effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is currently assessing but has not yet determined the impact of SFAS 142 on its financial position and 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 stock options, warrants, unvested restricted common stock, convertible subordinated notes and contingently issuable common stock. All potential common stock has been excluded from diluted net loss per share as its inclusion would be anti-dilutive for all periods presented.
5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table sets forth potential common stock excluded from the calculation of earnings per share:
| As of June 30, | ||||||||
| 2001 | 2000 | |||||||
|
Stock options
|
9,346,644 | 19,235,704 | ||||||
|
Warrants
|
1,052,694 | 2,283,732 | ||||||
|
Unvested restricted common stock
|
12,316,176 | 14,360,695 | ||||||
|
Convertible subordinated notes
|
2,598,074 | 2,598,074 | ||||||
|
Contingently issuable common stock
|
1,089,325 | 44,477 | ||||||
5. Comprehensive Loss:
The following table presents the calculation of comprehensive loss and its components for the three and six months ended June 30, 2001 and 2000 (in thousands):
| Three months ended | Six months ended | ||||||||||||||||
| June 30, | June 30, | ||||||||||||||||
| 2001 | 2000 | 2001 | 2000 | ||||||||||||||
|
Net loss
|
$ | (92,608 | ) | $ | (243,236 | ) | $ | (2,315,388 | ) | $ | (278,633 | ) | |||||
|
Other comprehensive income (loss):
|
|||||||||||||||||
|
Foreign currency translation adjustment
|
— | (10 | ) | — | (15 | ) | |||||||||||
|
Unrealized gain (loss) on investments
|
1,108 | (5,977 | ) | (1,528 | ) | 743 | |||||||||||
|
Reclassification adjustment for investment losses
included in net loss
|
— | — | 8,637 | — | |||||||||||||
|
Comprehensive loss
|
$ | (91,500 | ) | $ | (249,223 | ) | $ | (2,308,279 | ) | $ | (277,905 | ) | |||||
6. Loss on Investments:
The Company reviews its investment holdings for reductions in market value below cost basis that, in the opinion of the Company, represent a permanent or other-than-temporary impairment. The Company recorded a loss of approximately $9.0 million in the consolidated statement of operations for the three months ended March 31, 2001 to adjust the cost basis of the investments to fair value as of March 31, 2001. Loss on investments for the six months ended June 30, 2001 also includes a realized loss of $2.7 million on an exchange of an equity holding in a private company as a result of its merger with an unrelated company and a $1.0 million impairment of an investment in a private company.
7. Impairment of Goodwill:
The Company reviews goodwill and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may exceed their fair value. The Company considers several factors in determining whether an impairment may have occurred, including the Company’s market capitalization compared to its book value per share, the overall business climate and current estimates for operating results of acquired businesses. A review of these factors as of March 31, 2001 indicated that an impairment assessment was required for long-lived assets of acquired businesses. The Company grouped all long-lived assets for acquired businesses, including goodwill and other intangible assets, and estimated the future discounted cash flows related to these long-lived assets. The discount rate used was based on the risks associated with the acquired businesses. As a result of this analysis, the Company recorded an impairment charge of $1,912.8 million for the three months ended March 31, 2001 to adjust the carrying amount of goodwill arising from the acquisitions of Network24 Communications, Inc. (“Network24”) and InterVU Inc. (“InterVu”) to its fair value as of March 31, 2001.
6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
8. Related Party Transactions:
(a) I