Alamai Technologies, Inc. Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002.

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.

(Exact name of registrant as specified in its charter)


Delaware		04-3432319
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

500 Technology Square

Cambridge, MA 02139

(617) 444-3000

(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 þ No o

The number of shares outstanding of the registrant’s common stock as of August 9, 2002: 116,414,704 shares.

TABLE OF CONTENTS


TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 4. Submission of Matters to Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES

AKAMAI TECHNOLOGIES, INC.

FORM 10-Q

For the Quarterly Period Ended June 30, 2002

TABLE OF CONTENTS


			Page

PART I. Financial Information
	Item 1.	Financial Statements		3
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		32
PART II. Other Information
	Item 1.	Legal Proceedings		33
	Item 4.	Submission of Matters to Vote of Security Holders		33
	Item 5.	Other Information		34
	Item 6.	Exhibits and Reports on Form 8-K		34
		Signatures		35

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AKAMAI TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


			June 30,			December 31,
			2002			2001


			(In thousands, except share and
			per share data)
			(Unaudited)
Assets
Current assets:
	Cash and cash equivalents		$	88,141		$	78,774
	Marketable securities (including restricted securities of $7,881 and $11,166 at June 30, 2002 and December 31, 2001, respectively)			62,788			113,906
	Accounts receivable, net of allowance for doubtful accounts of $2,345 and $3,832 at June 30, 2002 and December 31, 2001, respectively			17,032			20,067
	Prepaid expenses and other current assets			13,145			15,252

		Total current assets		181,106			227,999
Property and equipment, net				97,458			132,237
Restricted marketable securities				9,313			17,831
Goodwill (Note 8)				4,937			3,979
Other intangible assets, net (Note 8)				6,935			15,372
Other assets				12,453			24,060

		Total assets	$	312,202		$	421,478

Liabilities and Stockholders’ (Deficit) Equity
Current liabilities:
	Accounts payable		$	22,175		$	32,076
	Accrued expenses			25,075			27,986
	Accrued interest payable			8,250			8,250
	Deferred revenue			4,181			4,948
	Current portion of obligations under capital leases and vendor financing			1,313			405
	Current portion of accrued restructuring (Note 11)			13,268			17,633

		Total current liabilities		74,262			91,298
Obligations under capital leases and vendor financing, net of current portion				1,569			113
Accrued restructuring, net of current portion (Note 11)				4,336			10,010
Other liabilities				2,725			2,823
Convertible notes				300,000			300,000

		Total liabilities		382,892			404,244

Commitments and contingencies (Note 12)				—			—
Stockholders’ (deficit) equity:
	Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued or outstanding at June 30, 2002 and December 31, 2001			—			—
	Common stock, $0.01 par value; 700,000,000 shares authorized; 116,396,797 shares issued and outstanding at June 30, 2002; 115,099,317 shares issued and outstanding at December 31, 2001			1,164			1,151
	Additional paid-in capital			3,436,918			3,438,706
	Deferred compensation			(23,722	)		(38,888	)
	Notes receivable from officers for stock			(3,406	)		(3,342	)
	Accumulated other comprehensive loss			(466	)		(515	)
	Accumulated deficit			(3,481,178	)		(3,379,878	)

		Total stockholders’ (deficit) equity		(70,690	)		17,234

		Total liabilities and stockholders’ (deficit) equity	$	312,202		$	421,478

The accompanying notes are an integral part of these condensed consolidated financial statements.

AKAMAI TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



			For the Three Months						For the Six Months
			Ended June 30,						Ended June 30,

			2002			2001			2002			2001


			(In thousands, except share and per share data)
			(Unaudited)
Revenue:
	Service		$	31,251		$	35,569		$	66,168		$	67,833
	License			2,517			2,322			2,981			5,822
	Service and license from related parties (Note 9)			2,554			5,250			5,100			9,695

		Total revenue		36,322			43,141			74,249			83,350

Cost and operating expenses:
	Cost of service (excludes $11,687, $10,276, $23,494 and $19,588, respectively, of network-related depreciation included in depreciation below)(1)			10,946			16,439			22,188			35,273
	Research and development(1)			4,624			9,595			9,493			20,879
	Sales and marketing(1)			15,083			21,085			29,939			45,413
	General and administrative(1)			15,215			24,532			29,181			47,154
	Depreciation			20,602			18,340			40,612			34,792
	Amortization of goodwill			—			1,093			—			235,732
	Amortization of other intangible assets			2,231			4,299			7,468			8,598
	Impairment of goodwill			—			—			—			1,912,840
	Equity-related compensation			4,646			11,038			11,017			15,552
	Restructuring charge (Note 11)			602			26,194			13,011			26,194

		Total cost and operating expenses		73,949			132,615			162,909			2,382,427

Loss from operations				(37,627	)		(89,474	)		(88,660	)		(2,299,077	)
Interest expense, net				(3,733	)		(1,637	)		(7,307	)		(1,056	)
Loss on investments, net (Note 6)				(759	)		(1,153	)		(5,087	)		(14,747	)

Loss before provision for income taxes				(42,119	)		(92,264	)		(101,054	)		(2,314,880	)
Provision for income taxes				123			344			246			508

		Net loss	$	(42,242	)	$	(92,608	)	$	(101,300	)	$	(2,315,388	)

Basic and diluted net loss per share			$	(0.38	)	$	(0.91	)	$	(0.91	)	$	(23.11	)

Weighted average common shares outstanding				112,253			101,629			110,973			100,205

(1) Excludes non-cash equity-related compensation presented separately as follows:


Cost of service	$	172	$	195	$	327	$	267
Research and development		585		3,429		2,104		4,827
Sales and marketing		1,536		5,087		3,692		6,644
General and administrative		2,353		2,327		4,894		3,814

	$	4,646	$	11,038	$	11,017	$	15,552

The accompanying notes are an integral part of these condensed consolidated financial statements.

AKAMAI TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



				For the Six Months
				Ended June 30,

				2002			2001


				(In thousands)
				(Unaudited)
Cash flows from operating activities:
	Net loss			$	(101,300	)	$	(2,315,388	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation, amortization and impairment of long-lived assets			51,263			2,195,060
		Equity-related compensation			11,017			15,552
		Interest income on notes receivable from officers for stock			(64	)		(165	)
		Non-cash portion of restructuring charge			602			—
		Loss on investments and disposal of property and equipment			5,528			14,747
		Changes in operating assets and liabilities:
			Accounts receivable, net		3,141			(4,491	)
			Prepaid expenses and other current assets		470			904
			Accounts payable, accrued expenses and other current liabilities		(10,678	)		(993	)
			Deferred revenue		(734	)		998
			Other noncurrent assets and liabilities		(3,225	)		19,362

	Net cash used in operating activities				(43,980	)		(74,414	)

Cash flows from investing activities:
	Purchases of property and equipment				(6,454	)		(42,548	)
	Purchases of investments				(24,551	)		(64,673	)
	Proceeds from sales of property and equipment				221			—
	Proceeds from sales and maturities of investments				83,138			147,393

Net cash provided by investing activities					52,354			40,172

Cash flows from financing activities:
	Payments on capital leases and equipment financing loan				(851	)		(609	)
	Proceeds from the issuance of common stock under stock option and employee stock purchase plans				1,623			4,931

Net cash provided by financing activities					772			4,322

Effects of exchange rate translation on cash and cash equivalents					221			44

Net increase (decrease) in cash and cash equivalents					9,367			(29,876	)
Cash and cash equivalents, beginning of period					78,774			150,130

Cash and cash equivalents, end of period				$	88,141		$	120,254

Supplemental disclosure of non-cash financing activities:
	Assets acquired under capital lease obligations and vendor financing			$	3,214		$	89

The accompanying notes are an integral part of these condensed consolidated financial statements.

AKAMAI TECHNOLOGIES, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business:

Akamai Technologies, Inc. (“Akamai” or the “Company”) is the leading provider of edge computing solutions, delivering content and distributed applications across the Internet, intranets and extranets. Akamai’s globally distributed edge computing platform comprises more than 12,900 servers in more than 1,000 networks in 66 countries, ensuring the highest levels of availability, reliability and performance. The Company was incorporated in Delaware in 1998 and is headquartered in Cambridge, Massachusetts. Akamai provides services and world-class customer care to hundreds of successful enterprises, government entities and leading e-businesses worldwide. Akamai currently operates in one business segment: outsourced e-business infrastructure services and software.

2. Basis of Presentation and Principles of Consolidation:

The accompanying interim condensed 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 condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Consequently, these interim financial statements do not include all disclosures normally required by accounting principles generally accepted in the United States 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, 2001 for additional disclosures. Results of the interim periods are not necessarily indicative of results for the entire year.

The interim condensed 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 June 2001, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations,” which will be effective in January 2003. SFAS No. 143 addresses financial accounting and reporting requirements for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company has not yet completed its assessment of the potential impact on its financial statements of adopting SFAS No. 143.

In July 2002, FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities,” which will be effective for exit and disposal activities initiated after December 31, 2002. SFAS No. 146 addresses financial accounting and reporting requirements for costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The Company has not yet completed its assessment of the potential impact on its financial statements of adopting SFAS No. 146.

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 notes and contingently issuable common stock.

AKAMAI TECHNOLOGIES, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table sets forth the components of potential common stock excluded from the calculation of diluted net loss per share because their inclusion would be antidilutive:



	As of June 30,

	2002		2001

Stock options		15,927,248		9,346,644
Warrants		1,052,694		1,052,694
Unvested restricted common stock		2,672,695		12,316,176
Convertible notes		2,598,077		2,598,077
Contingently issuable common stock (Note 12)		7,692,308		1,089,325

5. Comprehensive Loss:

The following table presents the calculation of comprehensive loss and its components for the three and six-month periods e

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þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002.


o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.


(1)	Excludes non-cash equity-related compensation presented separately as follows: