UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
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(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004 | |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | |
Commission file number 0-27275
Akamai Technologies, Inc.
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Delaware
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04-3432319 | |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
8 Cambridge Center
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 (the “Exchange Act”) 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
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
The number of shares outstanding of the registrant’s common stock as of November 5, 2004: 126,118,847 shares.
AKAMAI TECHNOLOGIES, INC.
FORM 10-Q
For the quarterly period ended September 30, 2004
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
| Item 1. | Financial Statements |
AKAMAI TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||||
| 2004 | 2003 | |||||||||
| (In thousands, except share data) | ||||||||||
| ASSETS | ||||||||||
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Current assets:
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Cash and cash equivalents
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$ | 45,943 | $ | 160,074 | ||||||
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Restricted cash
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— | 5,000 | ||||||||
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Marketable securities (including restricted
securities of $932 and $726 at September 30, 2004 and
December 31, 2003, respectively)
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26,629 | 4,910 | ||||||||
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Accounts receivable, net of allowance for
doubtful accounts of $779 and $1,241 at September 30, 2004
and December 31, 2003, respectively
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28,525 | 20,727 | ||||||||
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Prepaid expenses and other current assets
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7,189 | 11,705 | ||||||||
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Total current assets
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108,286 | 202,416 | ||||||||
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Property and equipment, net
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21,811 | 23,878 | ||||||||
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Marketable securities (including restricted
securities of $3,722 and $3,922 at September 30, 2004 and
December 31, 2003, respectively)
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47,224 | 38,371 | ||||||||
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Goodwill
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4,937 | 4,937 | ||||||||
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Other intangible assets, net
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203 | 239 | ||||||||
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Other assets
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6,526 | 9,100 | ||||||||
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Total assets
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$ | 188,987 | $ | 278,941 | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||||
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Current liabilities:
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Accounts payable
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$ | 9,517 | $ | 6,711 | ||||||
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Accrued expenses
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32,528 | 35,520 | ||||||||
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Deferred revenue
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1,844 | 3,016 | ||||||||
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Current portion of obligations under capital
leases and vendor financing
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372 | 775 | ||||||||
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Current portion of accrued restructuring
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1,407 | 1,638 | ||||||||
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Current portion of 5 1/2% convertible
subordinated notes
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— | 15,000 | ||||||||
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Total current liabilities
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45,668 | 62,660 | ||||||||
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Accrued restructuring, net of current portion
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2,598 | 3,641 | ||||||||
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Other liabilities
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2,843 | 1,994 | ||||||||
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1% convertible senior notes
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200,000 | 175,000 | ||||||||
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5 1/2% convertible subordinated notes,
net of current portion
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81,489 | 211,000 | ||||||||
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Total liabilities
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332,598 | 454,295 | ||||||||
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Commitments, contingencies and guarantees
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Stockholders’ deficit:
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Preferred stock, $0.01 par value;
5,000,000 shares authorized; no shares issued or
outstanding at September 30, 2004 and December 31, 2003
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— | — | ||||||||
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Common stock, $0.01 par value;
700,000,000 shares authorized; 125,939,174 shares
issued and 125,839,174 shares outstanding at
September 30, 2004; 122,154,517 shares issued and
121,875,286 shares outstanding at December 31, 2003
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1,259 | 1,222 | ||||||||
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Additional paid-in capital
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3,447,715 | 3,437,186 | ||||||||
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Deferred compensation
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(1,164 | ) | (1,545 | ) | ||||||
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Accumulated other comprehensive income
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1,202 | 1,379 | ||||||||
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Accumulated deficit
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(3,592,623 | ) | (3,613,596 | ) | ||||||
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Total stockholders’ deficit
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(143,611 | ) | (175,354 | ) | ||||||
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Total liabilities and stockholders’ deficit
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$ | 188,987 | $ | 278,941 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
AKAMAI TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Three Months | For the Nine Months | |||||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||||
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Revenues:
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Services
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$ | 52,163 | $ | 41,493 | $ | 149,536 | $ | 113,932 | ||||||||||
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Software and software-related
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1,123 | 274 | 2,903 | 2,021 | ||||||||||||||
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Services and software from related parties
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— | — | — | 137 | ||||||||||||||
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Total revenues
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53,286 | 41,767 | 152,439 | 116,090 | ||||||||||||||
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Costs and operating expenses:
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Costs of revenues
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11,748 | 14,207 | 34,977 | 47,789 | ||||||||||||||
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Research and development
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3,222 | 3,595 | 8,788 | 10,062 | ||||||||||||||
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Sales and marketing
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12,965 | 11,787 | 40,646 | 34,925 | ||||||||||||||
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General and administrative
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11,874 | 13,318 | 33,592 | 45,148 | ||||||||||||||
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Amortization of other intangible assets
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12 | 12 | 36 | 2,222 | ||||||||||||||
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Restructuring benefit, net
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— | — | — | (8,521 | ) | |||||||||||||
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Total costs and operating expenses
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39,821 | 42,919 | 118,039 | 131,625 | ||||||||||||||
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Income (loss) from operations
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13,465 | (1,152 | ) | 34,400 | (15,535 | ) | ||||||||||||
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Interest income
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507 | 213 | 1,555 | 904 | ||||||||||||||
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Interest expense
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(2,040 | ) | (4,556 | ) | (8,291 | ) | (13,743 | ) | ||||||||||
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Other income (expense), net
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101 | 31 | (122 | ) | (172 | ) | ||||||||||||
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Loss on early extinguishment of debt
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(634 | ) | — | (5,916 | ) | — | ||||||||||||
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(Loss) gain on investments, net
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(79 | ) | 1,637 | (68 | ) | 1,622 | ||||||||||||
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Income (loss) before provision for income taxes
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11,320 | (3,827 | ) | 21,558 | (26,924 | ) | ||||||||||||
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Provision for income taxes
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71 | 82 | 585 | 278 | ||||||||||||||
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Net income (loss)
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$ | 11,249 | $ | (3,909 | ) | $ | 20,973 | $ | (27,202 | ) | ||||||||
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Net income (loss) per share:
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Basic
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$ | 0.09 | $ | (0.03 | ) | $ | 0.17 | $ | (0.23 | ) | ||||||||
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Diluted
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$ | 0.08 | $ | (0.03 | ) | $ | 0.16 | $ | (0.23 | ) | ||||||||
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Shares used in per share calculation:
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Basic
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125,618 | 118,596 | 123,789 | 117,368 | ||||||||||||||
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Diluted
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134,349 | 118,596 | 133,557 | 117,368 | ||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
AKAMAI TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Nine Months | |||||||||||
| Ended September 30, | |||||||||||
| 2004 | 2003 | ||||||||||
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Cash flows from operating activities:
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Net income (loss)
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$ | 20,973 | $ | (27,202 | ) | ||||||
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Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
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Depreciation and amortization of long-lived assets
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16,155 | 42,834 | |||||||||
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Equity-related compensation
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1,056 | 8,295 | |||||||||
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Interest income on notes receivable for stock
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— | (73 | ) | ||||||||
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Non-cash portion of loss on early extinguishment
of debt
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2,161 | — | |||||||||
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Non-cash portion of restructuring charges
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— | 144 | |||||||||
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Loss (gain) on investments, property and
equipment and foreign currency, net
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118 | (2,069 | ) | ||||||||
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Provision for doubtful accounts
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(422 | ) | 184 | ||||||||
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Changes in operating assets and liabilities:
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Accounts receivable, net
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(7,105 | ) | (7,479 | ) | |||||||
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Prepaid expenses and other current assets
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4,494 | 3,464 | |||||||||
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Accounts payable, accrued expenses and other
current liabilities
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(168 | ) | 1,008 | ||||||||
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Accrued restructuring
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(1,278 | ) | (21,322 | ) | |||||||
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Deferred revenue
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(1,236 | ) | 464 | ||||||||
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Other noncurrent assets and liabilities
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914 | (23,986 | ) | ||||||||
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Net cash provided by (used in) operating
activities
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35,662 | (25,738 | ) | ||||||||
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Cash flows from investing activities:
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Purchases of property and equipment
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(7,394 | ) | (448 | ) | |||||||
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Capitalization of internal-use software costs
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(5,569 | ) | (5,721 | ) | |||||||
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Proceeds from sales of property and equipment
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9 | 114 | |||||||||
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Purchases of investments
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(61,560 | ) | (10,071 | ) | |||||||
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Proceeds from sales and maturities of investments
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30,713 | 10,639 | |||||||||
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Decrease in restricted cash held for security
deposits
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96 | — | |||||||||
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Decrease in restricted cash held for note
repurchases
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5,000 | — | |||||||||
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Net cash used in investing activities
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(38,705 | ) | (5,487 | ) | |||||||
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Cash flows from financing activities:
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Payments on capital leases
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(402 | ) | (1,301 | ) | |||||||
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Proceeds from note receivable for stock
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— | 1,770 | |||||||||
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Proceeds from the issuance of 1% convertible
senior notes, net of financing costs
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24,313 | — | |||||||||
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Repurchase and retirement of
5 1/2% convertible subordinated notes
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(144,511 | ) | — | ||||||||
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Proceeds from the issuance of common stock under
stock options and employee stock purchase plans
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9,890 | 1,896 | |||||||||
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Net cash (used in) provided by financing
activities
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(110,710 | ) | 2,365 | ||||||||
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Effects of exchange rate translation on cash and
cash equivalents
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(378 | ) | 1,494 | ||||||||
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Net decrease in cash and cash equivalents
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(114,131 | ) | (27,366 | ) | |||||||
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Cash and cash equivalents, beginning of period
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160,074 | 111,262 | |||||||||
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Cash and cash equivalents, end of period
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$ | 45,943 | $ | 83,896 | |||||||
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Supplemental disclosure of cash flow information:
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Cash paid for interest
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$ | 13,756 | $ | 16,645 | |||||||
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Non-cash financing activities:
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Deferred compensation recorded for issuance of
deferred stock units and restricted stock
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$ | 601 | $ | 638 | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
AKAMAI TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
| 1. | Nature of Business, Basis of Presentation and Principles of Consolidation |
Akamai Technologies, Inc. (“Akamai” or the “Company”) provides distributed computing solutions and services that are designed to enable customers to extend and control their Web operations without the cost of building out their Internet-related infrastructures. Akamai’s globally distributed platform comprises more than 15,000 servers in 1,000 networks in 69 countries. The Company was incorporated in Delaware in 1998 and is headquartered in Cambridge, Massachusetts. Akamai currently operates in one business segment: providing Internet-related infrastructure services and software.
The consolidated financial statements of Akamai have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission. The financial information included herein, other than the consolidated balance sheet as of December 31, 2003, has been prepared without audit. The consolidated balance sheet at December 31, 2003 has been derived from, but does not include all the disclosures contained in, the audited consolidated financial statements for the year ended December 31, 2003. In the opinion of management, these unaudited statements include all adjustments and accruals consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of all interim periods reported herein. These consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in Akamai’s Annual Report on Form 10-K for the year ended December 31, 2003. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for a full year.
The accompanying condensed consolidated financial statements include the accounts of Akamai and its wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated in consolidation. Certain reclassifications of prior year amounts have been made to conform to current year presentation.
| 2. | Recent Accounting Pronouncement |
In September 2004, the Emerging Issues Task Force (the “EITF”) reached consensus on Issue 04-8 “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.” EITF 04-8 provides guidance on when the dilutive effect of contingently convertible debt securities with a market trigger should be included in diluted earnings per share (“EPS”). The guidance states that these securities should be treated the same as other convertible securities and included in diluted EPS computation, regardless of whether the market price trigger has been met. If EITF 04-8 becomes finalized, it will be effective for all periods ending after December 15, 2004 and would be applied by retrospectively, restating previously reported EPS. (See Footnote 4.)
| 3. | Equity-Related Compensation |
Akamai 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 stock-based awards issued to employees and directors 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. Akamai applies the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (“SFAS No. 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123, Accounting for Stock-Based Compensation,” (“SFAS No. 148”), through disclosure only for stock-based awards issued to employees and directors. All stock-based awards to non-employees are accounted for at their fair value in accordance with SFAS No. 123.
4
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
The following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had accounted for stock options issued to employees and directors under the fair value recognition provisions of FAS No. 123, as amended by SFAS No. 148 (in thousands, except per share data):
| For the | For the | |||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||
| September 30, | September 30, | |||||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||||
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Net income (loss), as reported
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$ | 11,249 | $ | |||||||||||||||