-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hz8CegVbMIuxfRAECMko5TUXNkXMU/TvoSjFezu3x2dURTZgO8odxDv0loHYWTQv LDYjOc3/FpMTV/QVSf7qEQ== 0001012870-99-003980.txt : 19991108 0001012870-99-003980.hdr.sgml : 19991108 ACCESSION NUMBER: 0001012870-99-003980 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991001 ITEM INFORMATION: FILED AS OF DATE: 19991105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INKTOMI CORP CENTRAL INDEX KEY: 0001024302 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 943238130 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-24339 FILM NUMBER: 99741457 BUSINESS ADDRESS: STREET 1: 4100 EAST 3RD AVENUE CITY: FOSTER CITY STATE: CA ZIP: 94404 BUSINESS PHONE: 6506532800 MAIL ADDRESS: STREET 1: 4100 EAST 3RD AVENUE CITY: FOSTER CITY STATE: CA ZIP: 94404 8-K/A 1 AMENDMENT NO. 1 TO FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A Amendment No. 1 CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) October 1, 1999 INKTOMI CORPORATION (Exact name of registrant as specified in its charter)
Delaware 000-24339 94-3238130 (State of incorporation) (Commission File Number) (IRS Employer Identification No.)
4100 East 3/rd/ Avenue, Foster City, CA 94404 (Address of principal executive offices of Registrant) (650) 653-2800 (Registrant's telephone number, including area code) The undersigned Registrant hereby amends the following items, financial statements, exhibits or other portions of its Current Report on Form 8-K, originally filed with the Securities and Exchange Commission on October 15, 1999, as set forth below: Item 7. Financial Statements, Pro Forma Financial Information and Exhibits ------------------------------------------------------------------ (a) Financial Statements of Business Acquired. The required financial statements are included herein as Exhibit 99.2. (b) Pro Forma Financial Information The requirement to include pro forma financial information is met through the inclusion of supplemental financial information as Exhibit 99.3. (c) Exhibits. Exhibit No. Description ----------- ----------- 2.1 Agreement and Plan of Reorganization, dated October 1, 1999, by and among Inktomi Corporation, WS Acquisition Corporation and WebSpective Software, Inc. (previously filed) 99.1 Press release of Inktomi Corporation, dated September 16, 1999 (previously filed) 99.2 WebSpective Software, Inc. Financial Statements 99.3 Inktomi Corporation Supplementary Consolidated Financial Statements -2- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. INKTOMI CORPORATION By: /s/ JERRY M. KENNELLY Dated: November 3, 1999 --------------------------- Jerry M. Kennelly Vice President of Finance and Chief Financial Officer INDEX TO EXHIBITS Exhibit No. Description - ----------- ----------- 2.1 Agreement and Plan of Reorganization, dated October 1, 1999, by and among Inktomi Corporation, WS Acquisition Corporation and WebSpective Software, Inc. (previously filed) 99.1 Press release of Inktomi Corporation, dated September 16, 1999 (previously filed) 99.2 WebSpective Software, Inc. Financial Statements 99.3 Inktomi Corporation Supplementary Consolidated Financial Statements EX-99.2 2 WEBSPECTIVE SOFTWARE, INC. FINANCIAL STATEMENTS EXHIBIT 99.2 WebSpective Software, Inc. Financial Statements December 31, 1998 Report of Independent Accountants To the Board of Directors and Stockholders of WebSpective Software, Inc. In our opinion, the accompanying balance sheet and the related statements of operations, of changes in stockholders' deficit and of cash flows present fairly, in all material respects, the financial position of WebSpective Software, Inc. at December 31, 1998, and the results of its operations and its cash flows for the year ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Boston, Massachusetts March 16, 1999 WebSpective Software, Inc. Balance Sheet
- ----------------------------------------------------------------------------------------------------------------- December 31, June 30, 1998 1999 ------------ ----------- (Unaudited) Assets Current assets: Cash and cash equivalents $ 3,782,900 $ 5,796,400 Restricted cash 62,400 62,400 Accounts receivable 14,000 59,700 Prepaid expenses and other current assets 167,400 229,400 ----------- ----------- Total current assets 4,026,700 6,147,900 Fixed assets, net 580,100 496,200 Other assets 13,500 31,400 ----------- ----------- $ 4,620,300 $ 6,675,500 ----------- ----------- Liabilities, Redeemable Preferred Stock and Stockholders' Deficit Current liabilities: Current portion of long-term debt and capital lease obligations $ 108,200 $ 501,200 Accounts payable 124,600 95,500 Accrued expenses 632,200 1,087,600 Deferred revenue 608,800 829,200 ----------- ----------- Total current liabilities 1,473,800 2,513,500 Long-term debt and capital lease obligations 172,700 2,434,300 ----------- ----------- Total liabilities 1,646,500 4,947,800 ----------- ----------- Commitments (Note 11) Redeemable preferred stock: Series A redeemable convertible preferred stock, $.01 par value; 3,035,000 shares authorized; at December 31, 1998 and June 30, 1999 (unaudited), respectively, 3,028,333 shares issued and outstanding at December 31, 1998 and June 30, 1999 (unaudited), at redemption value 3,028,400 3,028,400 Series B redeemable convertible preferred stock, $.01 par value; 3,525,364 and 3,905,984 shares authorized at December 31, 1998 and at June 30, 1999 (unaudited), respectively; 3,525,324 and 3,545,324 shares issued and outstanding at December 31, 1998 and June 30, 1999 (unaudited), respectively, at redemption value 8,561,600 8,610,200 Shareholder notes receivable (145,700) (109,300) ----------- ----------- Total redeemable preferred stock 11,444,300 11,529,300 ----------- ----------- Stockholders' deficit: Common stock, $.01 par value; 13,000,000 and 13,380,660 shares authorized at December 31, 1998 and June 30, 1999 (unaudited) respectively; 2,605,000 and 3,523,000 shares issued at December 31, 1998, and June 30, 1999 (unaudited), respectively; 2,486,500 and 3,523,000 shares outstanding at December 31, 1998 and June 30, 1999 (unaudited), respectively 26,100 35,200 Additional paid-in capital 97,500 3,354,800 Deferred compensation - (843,300) Shareholder notes receivable (87,000) (237,600) Treasury stock (11,800) - Accumulated deficit (8,495,300) (12,110,700) ----------- ----------- Total stockholders' deficit (8,470,500) (9,801,600) ----------- ----------- $ 4,620,300 $ 6,675,500 =========== ===========
The accompanying notes are an integral part of these financial statements. WebSpective Software, Inc. Statement of Operations
- ------------------------------------------------------------------------------------------------------------------- Year ended Six Months Ended December 31, June 30, June 30, 1998 1998 1999 ----------- ----------- ----------- (Unaudited) (Unaudited) Revenue: Product $ 270,000 $ 270,000 $ 796,200 Service 623,900 170,000 526,400 ----------- ----------- ----------- Total revenue 893,900 440,000 1,322,600 ----------- ----------- ----------- Cost of sales: Product 14,400 14,400 25,800 Service 124,100 31,500 361,700 ----------- ----------- ----------- Total cost of sales 138,500 45,900 387,500 ----------- ----------- ----------- Gross profit 755,400 394,100 935,100 ----------- ----------- ----------- Operating expenses: Research and development 2,804,700 1,057,900 1,227,800 Selling and marketing 3,205,100 1,543,300 2,517,600 General and administrative 1,171,800 474,600 742,400 ----------- ----------- ----------- Total operating expenses 7,181,600 3,075,800 4,487,800 ----------- ----------- ----------- Loss from operations (6,426,200) (2,681,700) (3,552,700) Interest income/(expense), net 86,300 14,000 (62,700) ----------- ----------- ----------- Net loss $(6,339,900) $(2,667,700) $(3,615,400) =========== =========== ===========
The accompanying notes are an integral part of these financial statements. WebSpective Software, Inc. Statement of Changes in Stockholders' Deficit
Common stock ------------------- Additional Deferred Shareholder Par paid-in stock notes Shares value capital compensation receivable --------- -------- ----------- ------------ ------------ Balance at December 31, 1997 1,500,000 $15,000 $ (14,000) $ - $ - Exercise of common stock options 1,169,000 11,700 121,300 (95,000) Issuance costs of Series B preferred stock Repurchase of common stock held in treasury 8,000 Repurchase and retirement of common stock (64,000) (600) (9,800) Net loss --------- ------- ---------- ---------- --------- Balance at December 31, 1998 2,605,000 26,100 97,500 (87,000) Exercise of common stock options (unaudited) 538,000 5,400 174,000 - (152,600) Exercise of Fidelity warrants A (unaudited) 500,000 5,000 495,000 Payments on shareholder loans (unaudited) 2,000 Retirement of common stock held in treasury (unaudited) (118,500) (1,200) (10,600) Repurchase and retirement of common stock (unaudited) (1,500) (100) (400) Deferred stock compensation related to stock option and warrant grants (unaudited) 2,599,300 (920,900) Amortization of deferred stock compensation (unaudited) 77,600 Net loss (unaudited) --------- ------- ---------- ---------- --------- Balance at June 30, 1999 (unaudited) 3,523,000 $35,200 $3,354,800 $ (843,300) $(237,600) ========= ======= ========== ========== ========= Total Treasury Accumulated stockholders' stock deficit deficit -------- ----------- ------------- Balance at December 31, 1997 $ - $(2,076,500) $ (2,075,500) Exercise of common stock options 38,000 Issuance costs of Series B preferred stock (78,900) (78,900) Repurchase of common stock held in treasury (11,800) (3,800) Repurchase and retirement of common stock (10,400) Net loss (6,339,900) (6,339,900) -------- ------------ ----------- Balance at December 31, 1998 (11,800) (8,495,300) (8,470,500) Exercise of common stock options (unaudited) 26,800 Exercise of Fidelity warrants A (unaudited) 500,000 Payments on shareholder loans (unaudited) 2,000 Retirement of common stock held in treasury (unaudited) 11,800 - Repurchase and retirement of common stock (unaudited) (500) Deferred stock compensation related to stock option and warrant grants (unaudited) 1,678,400 Amortization of deferred stock compensation (unaudited) 77,600 Net loss (unaudited) (3,615,400) (3,615,400) -------- ------------ ----------- Balance at June 30, 1999 (unaudited) $ - $(12,110,700) $(9,801,600) ======== ============ ===========
The accompanying notes are an integral part of these financial statements. WebSpective Software, Inc. Statement of Cash Flows
- ------------------------------------------------------------------------------------------------------------------ Year Ended Six Months Ended December 31, June 30, June 30, 1998 1998 1999 ------------ ------------ ------------ (Unaudited) (Unaudited) Increase (Decrease) in Cash Equivalents Cash flows from activities: Net loss $ (6,339,900) $ (2,667,700) $ (3,615,400) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation 191,700 56,300 129,200 Compensation and marketing expense related to stock option and warrant grants - - 1,464,000 Loss on equipment disposal 19,400 1,400 - Changes in assets and liabilities: Accounts receivable 211,200 188,400 (45,700) Prepaid expenses and other current assets (74,600) (31,400) (62,000) Accounts payable 48,400 268,800 (29,000) Accrued expenses 535,200 (134,500) 455,400 Deferred revenue 365,000 206,100 220,400 ------------ ------------ ------------ Net cash used in operating activities (5,043,600) (2,112,600) (1,483,100) ------------ ------------ ------------ Cash flows from investing activities: Investment in certificate of deposit (62,400) - - Purchases of fixed assets (419,100) (122,400) (45,200) Decrease (increase) in other assets 18,800 1,300 (17,900) Payments received on shareholder loans - - 38,400 ------------ ------------ ------------ Net cash used in investing activities (462,700) (121,100) (24,700) ------------ ------------ ------------ Cash flows from financing activities: Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs 8,337,000 8,337,000 48,600 Proceeds from issuance of common stock 38,000 28,800 526,800 Repurchase and retirement of common stock (10,400) - (500) Purchase of common stock held in treasury (3,800) - - Proceeds from issuance of long-term debt 110,500 110,500 3,000,000 Principal payments on long-term debt (41,600) - (40,100) Payments under capital lease obligations (17,100) (3,600) (13,500) ------------ ------------ ------------ Net cash provided by financing activities 8,412,600 8,472,700 3,521,300 ------------ ------------ ------------ Net increase in cash and cash equivalents 2,906,300 6,239,000 2,013,500 Cash and cash equivalents, beginning of period 876,600 876,600 3,782,900 ------------ ------------ ------------ Cash and cash equivalents, end of period $ 3,782,900 $ 7,115,600 $ 5,796,400 ============ ============ ============ Non-cash financing and investing activities: Capital lease obligations incurred for fixed assets $ 63,100 $ 46,600 $ - Note payable issued in exchange for fixed assets 87,400 - - Notes received from shareholders in exchange for Series B Preferred stock 145,700 145,700 152,600 Notes received from employees in connection with exercise of options to purchase common stock 95,000 95,000 - Cancellation of employee note in connection with repurchase of common shares held in treasury (8,000) - - Retirement of common stock held in treasury - - 11,800 Supplemental disclosure of cash flow information: Interest paid $ 26,000 $ 9,900 $ 103,200
The accompanying notes are an integral part of these financial statements. WebSpective Software, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- 1. Nature of Business and Basis of Presentation Nature of Business WebSpective Software, Inc. (the "Company") commenced operations in March 1997 and is engaged in the research, development, marketing, and sale of Internet operations management solutions for commerce-critical web sites. The Company's software and related services allow users to effectively manage multi-server, multi-location web environments. The Company's principal markets are domestic and international businesses with commerce- critical web sites. Basis of Presentation Since its organization, the Company has devoted a significant portion of its efforts to research and development, recruiting management and technical staff, business planning and raising capital. Accordingly, through December 31, 1998, the Company was considered to be in the development stage, as defined in Statement of Financial Accounting Standards ("SFAS") No. 7, Accounting and Reporting by Development Stage Enterprises. However, in 1999, the Company has commenced its planned principal operations and, accordingly, is no longer considered to be a development stage enterprise. 2. Summary of Significant Accounting Policies Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company invests its excess cash in money market funds of major financial institutions and U.S. Treasury securities which are subject to minimal credit and market risk. Restricted cash represents a certificate of deposit required by the lease agreement for the Company's principal operating facility. All of the Company's cash equivalents are recorded at fair value and classified as available-for-sale in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. At December 31, 1998, the Company's cash equivalents include money market funds of $3,427,300. Unrealized gains and losses on the Company's cash equivalents were insignificant at December 31, 1998. Financial Instruments At December 31, 1998, the Company's financial instruments consist of cash and cash equivalents, accounts receivable, and short- and long-term debt. The carrying value of these instruments approximates their fair value. Revenue Recognition Revenue from the sale of software is recognized in accordance with Statement of Position 97-2, Software Revenue Recognition. Product revenue consists of revenue from the licensing of software rights and is recognized at the time of shipment of the product to the customer, provided that the Company has no remaining obligations, collectibility is considered probable and fees are fixed and determinable. Where there are obligations that are essential to the functionality of the software installed, license fees are recorded over the expected term of the customization period. Service revenues consist primarily of installation, training and project management, which are recognized as the related services are performed, and of maintenance revenue, which is recognized ratably over the contractual period, generally twelve months. 1 WebSpective Software, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- Fixed Assets Fixed assets are recorded at cost and are depreciated using the straight- line method over the estimated useful lives of the related assets, ranging from three to four years. Assets held under capital lease and leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or remaining lease term. Research and Development and Software Development Costs Costs incurred in the research and development of the Company's products are expensed as incurred. Costs associated with the development of computer software are expensed prior to establishment of technological feasibility (as defined by SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed) and capitalized thereafter. No software development costs were capitalized through December 31, 1998 since such costs incurred subsequent to establishment of technological feasibility were not material to the financial statements. Stock-Based Compensation The Company accounts for employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting For Stock Issued to Employees, and related interpretations ("APB No. 25"); accordingly, compensation expense is recorded for options awarded to employees and directors to the extent that the exercise prices are less than the common stock's fair market value on the date of grant, where the number of options and exercise price are fixed. The difference between the fair value of the Company's common stock and the exercise price of the stock option is recorded as deferred stock compensation. Deferred stock compensation is amortized to compensation expense over the vesting period of the underlying stock option. The Company follows the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation (Note 8). Concentration of Credit Risk and Major Customer Information Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company performs ongoing evaluations of customers' financial condition and generally does not require collateral. One customer accounted for 100% of revenues and accounts receivable at December 31, 1998. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Unaudited Interim Financial statements The financial statements and related notes as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 are unaudited. In the opinion of the Company's management, the unaudited interim financial statements included all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for these interim periods. The results of operations for the six months ended June 30, 1999 are not necessarily indicative of the results of operations for the year ended December 31, 1999 or any other future period. 2 WebSpective Software, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- 3. Fixed Assets Fixed assets at December 31, 1998 consist of the following:
Useful Life December 31, (years) 1998 ----------- --------- Computers and equipment 3-4 $ 382,500 Furniture and fixtures 3 240,900 Purchased software 3 77,500 Leasehold improvements lease term 100,000 --------- 800,900 Less - accumulated depreciation (220,800) --------- $ 580,100 ---------
Depreciation expense relating to fixed assets was $191,700 for the year ended December 31, 1998. Furniture and fixtures includes $49,100 for assets held under capital leases at December 31, 1998. Computers and equipment includes $14,000 at December 31,1998 for assets held under capital leases. Accumulated depreciation for assets under capital lease was $13,900 at December 31, 1998. 4. Accrued Expenses Accrued expenses consist of the following:
December 31, 1998 ------------ Royalty $100,000 Payroll and related 229,500 Other 302,700 -------- $632,200 --------
5. Long-Term Debt During 1997, the Company entered into a Loan and Security Agreement ("Loan Agreement") with a bank, which provided for a $200,000 line of credit for equipment purchases ("Equipment Line"). The Equipment Line bears interest at the bank's prime rate plus 1.5% (9.5% at December 31, 1998) and is secured by all assets of the Company. 3 WebSpective Software, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- On December 19, 1997, the Company entered into a Loan Modification Agreement ("Loan Modification"), which extended the date through which advances could be requested on the Equipment Line to June 30, 1998. In addition, under the Loan Modification, principal payments on borrowings made against the Equipment Line were suspended until July 31, 1998. Through July 31, 1998, the Company was required to make monthly interest payments only, on outstanding balances. On July 31, 1998, borrowings of $185,000 under the Equipment Line were converted into a three-year term loan payable in 36 equal monthly installments of $5,200 plus interest. The Company is committed to pay principal amounts under the term loan of approximately $62,000, $62,000 and $31,000 during the years ended December 31, 1999, 2000 and 2001. The Company is required to maintain compliance with certain restrictive and financial covenants, as defined in the Loan Agreement. As of December 31, 1998, the Company was in compliance with these covenants. On July 1, 1998, the Company purchased office equipment from its landlord by issuing a non-interest bearing note payable ("Note Payable") for $100,800, to be paid in 36 equal monthly installments. The Company recorded the Note and office equipment at $87,400, which represents the present value of the Note using a 9.5% implied interest rate. The discount on the Note of $13,400 is being amortized to interest expense over the 36 month term. The Company is committed to pay principal amounts under the Note of approximately $27,500, $30,200 and $19,000 during the years ended December 31, 1999, 2000 and 2001. Long-term debt at December 31, 1998 consists of the following:
December 31, 1998 ------------ Term loan/Equipment Line $154,600 Note Payable 76,700 Capital lease obligations (Note 9) 49,600 -------- 280,900 Less - current portion 108,200 -------- $172,700 --------
In March 1999, the Company entered into a Subordinated Loan and Security Agreement ("Subordinated Loan") with a financing company ("Lender"). Under the Subordinated Loan, the Company has the ability to borrow up to $3,000,000, in minimum installments of $500,000 each through March 2000. The repayment schedule for each installment consists of nine monthly payments of interest only, followed by 27 monthly payments of principal and interest. The loan is subordinate in right of payment of interest and principal to the Equipment Line, bears interest at 12% and is collateralized by substantially all the assets of the Company. In addition, the Company is required to comply with certain restrictive covenants under the Subordinated Loan. 4 WebSpective Software, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- The Company also entered into a Master Lease Agreement ("Master Lease") during March 1999 with the same Lender. Under the Master Lease, the Company is able to finance the purchase of equipment, software and leasehold improvements ("Property") up to $750,000. The initial term under the Master Lease is 48 months, with the option to extend for an additional year. Payments under the Master Lease are due monthly commencing generally upon acquisition of the Property. In connection with the Subordinated Loan and Master Lease, the Company issued the Lender two warrants to purchase 166,763 and 13,897 shares of Series B Preferred, respectively, at an exercise price of $2.43 per share, subject to certain anti-dilutive adjustments. The warrants are exercisable for a period of ten years, or for a period of five years from the effective date of the Company's initial public offering, whichever is earlier. The Company recorded the fair value of the warrants as additional paid-in capital and debt discount and will amortize the discount to interest expense over the term of the Subordinated Loan and Master Lease. Actual drawdowns during the six months ended June 30, 1999 (unaudited) totaled $3,000,000. (Unaudited) - During the six months ended June 30, 1999, the Company recorded a debt discount of $318,500 related to these warrants and recognized $26,550 in interest expense related to amortization of the debt discount. 6. Redeemable Convertible Preferred Stock The Series A and Series B redeemable convertible preferred stock (the "Series A Preferred" and "Series B Preferred") have the following rights: Voting Rights Preferred stockholders are entitled to the number of votes equal to the number of shares of common stock into which the Series A Preferred or Series B Preferred shares are then convertible. Preferred stockholders vote together with common stockholders as one class. The holders of Series A Preferred, voting as a single class, have the right to elect two members of the Board of Directors. The holders of Series B Preferred, voting as a single class, have the right to elect one member of the Board of Directors. Conversion Each share of the Series A Preferred and Series B Preferred is currently convertible, at the option of the holder, into one share of common stock, subject to certain anti-dilutive adjustments. Each share will automatically convert into common stock upon the completion of an initial public offering of the Company's common stock at a price of at least $5.00 per share and with gross proceeds to the Company of at least $15.0 million. 5 WebSpective Software, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- Dividends and Liquidation Preferences The holders of Series A Preferred and Series B Preferred are entitled to receive dividends in the same amounts as declared on the number of shares of common stock into which each share is then convertible. In the event of liquidation of the Company, the holders of Series B Preferred are entitled to receive, prior and in preference to any distribution to the holders of the Series A Preferred and the common stock, an amount equal to $2.43 per share, plus any declared but unpaid dividends ("Series B Liquidation Amount"). The holders of Series A Preferred are entitled to receive, prior and in preference to any distribution to the holders of the common stock, an amount equal to $1.00 per share, plus any declared but unpaid dividends ("Series A Liquidation Amount"). In addition, the Series A Preferred and Series B Preferred stockholders are entitled to share ratably with the holders of common stock in any remaining distribution, provided that the total amount paid does not exceed $5.00 per share. Redemption Rights At the election of any holder of Series A Preferred or Series B Preferred, the Company is required to redeem any outstanding shares of the stock for cash consideration equal to the respective Series A and Series B Liquidation Amounts. The Series A Preferred and Series B Preferred are redeemable at any time on or after February 28, 2004 and the liquidation preference amount is payable in three equal annual installments beginning on the date of redemption. 7. Stockholders' Equity Common Stock Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company's common stockholders. Common stockholders are entitled to receive dividends, as may be declared by the Board of Directors, if any, subject to any preferential dividend rights of the preferred stockholders. At December 31, 1998, the Company had reserved a total of 8,632,911 shares of common stock for issuance under the Company's stock option plan, conversion of preferred stock and exercise of stock purchase warrants. Common Stock Purchase Warrants In April 1997, the Company issued a warrant to a customer/shareholder for the purchase of 120,000 shares of the Company's common stock at an exercise price of $1.50 per share; the warrant expires in April 2002. In conjunction with the issuance of the Series B Preferred in June 1998, the Company fully vested the existing warrant and issued to the same customer/shareholder "Warrant-A" and "Warrant-B." The existing purchase warrant was determined to have an insignificant fair value. Warrant-A is for the purchase of 500,000 shares of the Company's common stock at an exercise price of $1.00 per share. The warrant becomes exercisable if the warrant holder pays at least $500,000 during the period May 1, 1998 through December 31, 1998 and $1,000,000 during the period May 1, 1998 through December 31, 1999 for the licensing of software products or the performance of consulting services. Of these payments, at least 50% of the aggregate dollar amount must be for the licensing of the Company's software products. The warrant holder satisfied these conditions during December 1998 and the warrant vested accordingly. Warrant-A was determined to have an insignificant fair value. 6 WebSpective Software, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- Warrant-B is for the purchase of 205,880 shares of the Company's common stock at an exercise price of $2.43 per share. The warrant becomes exercisable if the warrant holder pays at least $2,000,000 during the period May 1, 1998 through December 31, 1999 for the licensing of software products or the performance of consulting services. Of these payments, at least 50% of the aggregate dollar amount must be for the licensing of the Company's software products. As of December 31, 1998, these vesting conditions were not met. Warrant-B was determined to have an insignificant value at December 31, 1998. (Unaudited) - During the six months ended June 30, 1999, the customer/shareholder met the requirements for Warrant-B to become exercisable. Accordingly, the Company updated its computation of the fair value of Warrant-B and, in the six months ended June 30, 1999, recognized related expense of $1,003,000. Treasury Shares Of the common stock issued, 118,500 shares with a cost basis of $11,800 were held by the Company as treasury shares at December 31, 1998. Shareholder Notes Receivable During 1998, the Company accepted full recourse promissory notes from certain officers and employees totaling $240,700 for the purchase of 60,000 shares of Series B Preferred and the exercise of options to purchase 850,000 shares of the Company's common stock. Interest on the notes is computed annually at the "Applicable Federal Rate" prescribed under the Internal Revenue Code of 1986. Principal and accrued interest are due at the end of five years or 90 days after an employee's termination, whichever is earlier. The notes, which are included in stockholders' equity, are secured by the related Series B Preferred and common shares or other marketable securities having a fair market value at least equal to the amount of the note. In 1998, no principal or interest payments were paid to the Company by the borrowers and $8,000 in notes were forgiven to repurchase common shares held in treasury. 8. Stock Option Plan In March 1997, the Company's stockholders approved the 1997 Stock Option Plan (the "1997 Plan") which provides for the grant of incentive and nonqualified stock options for the purchase of up to an aggregate of 1,500,000 shares of the Company's common stock by officers, employees, non- employee directors and consultants of the Company. In June 1998, the number of shares issuable under the 1997 Plan was increased to 2,351,667. The Board of Directors which is responsible for administering the 1997 Plan, determines the term of each option, option exercise price, number of shares for which each option is granted, the rate at which each option is exercisable and the vesting term. Generally, options granted under the 1997 Plan are immediately exercisable and the rights of the underlying common stock vest over a period of four to five years from the date of grant. Any unvested stock issued is subject to repurchase agreements whereby the Company has the right, but not the obligation, to repurchase unvested shares upon termination of employment at the original exercise price per share for the option. At December 31, 1998, 789,366 shares of the Company's common stock issued pursuant to the 1997 Plan remained subject to repurchase. 7 WebSpective Software, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- Under the 1997 Plan, incentive and nonqualified stock options may be granted to any officer, employee, consultant or director at an exercise price per share of not less than the fair value per common share on the date of grant (not less than 110% of the fair value in the case of holders of more than 10% of the Company's voting stock). Options granted under the 1997 Plan generally expire ten years from the date of grant (five years for incentive stock options granted to holders of more than 10% of the Company's voting stock). The Company granted options to purchase 5,000 and 104,000 shares of common stock during 1998 and 1997, respectively, and 22,500 of restricted stock to consultants and advisory board members in exchange for services rendered. The options granted in 1998 and options granted in 1997 for 4,000 shares were exercisable immediately; the remaining 1997 options and restricted stock vest ratably over five years. The value ascribed to these options was not material to the financial statements at December 31, 1998. (Unaudited) - During the six months ended June 30, 1999, the Company remeasured the fair value of the unvested non-employee options and restricted common stock granted during 1997. Such remeasurement resulted in the Company recognizing compensation expense of $357,000 in the six months ended June 30, 1999. The fair values were determined under the Black-Scholes model including adjustments for revaluations at each period- end of the unvested options. Transactions under the 1997 Plan for the year ended December 31, 1998 are summarized as follows:
Weighted Average Exercise Shares Price ----------- ----------- Outstanding at beginning of year 935,000 $.10 Granted 787,750 .21 Exercised (1,169,000) .11 Canceled (90,500) .22 ----------- Outstanding at end of year 463,250 $.22 ----------- Options exercisable at year end 463,250 Weighted average fair value of options granted during the year $ .06 Options available for future grant 783,417
8 WebSpective Software, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- The following table summarizes information about options outstanding at December 31, 1998:
Weighted- Average Remaining Exercise Number Contractual Number Price Outstanding Life (Years) Exercisable -------- ----------- ------------ ----------- $0.10 182,000 8.56 182,000 $0.30 281,250 9.10 281,250 ------- ------- 463,250 463,250 ------- -------
The fair value of each option grant was estimated on the date of grant using the minimum value method with the following assumptions for grants in 1998: dividend yield of 0.0%; no volatility; risk free interest rates of 5.3% at December 31, 1998, and a weighted average expected option term of 5.5 years. Compensation expense recognized for the Company's stock option plan under APB No. 25 was not significant through December 31, 1998. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant dates, as prescribed in SFAS No. 123, the Company's net loss would not have been materially different. Since options vest over several years and additional option grants are expected to be made each year, the above pro forma disclosures are not necessarily representative of pro forma effects on reported operations for future years. (Unaudited) During the six months ended June 30, 1999, stock options to purchase 595,250 and 74,000 shares of common stock and 20,000 shares of Series B Preferred were granted to employees with exercise prices of $0.30, $0.60, and $2.43, respectively. These exercise prices were below the estimated fair market value of the Company's common stock and Series B Preferred at the date of grant. Deferred stock compensation of $920,900 was recorded in accordance with APB No. 25, and will be amortized over the vesting periods of the underlying options, generally four years. Related stock compensation expense of $77,600 was recognized during the six months ended June 30, 1999. 9 WebSpective Software, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- 9. Income Taxes The significant components of the net deferred tax asset are as follows:
December 31, 1998 ------------ Deferred tax assets: Net operating loss carryforwards $ 3,325,000 Research and development tax credit carryforwards 231,000 Reserves not currently deductible 36,000 Depreciation 1,000 ----------- 3,593,000 Deferred tax asset valuation allowance (3,593,000) ----------- $ - -----------
Income taxes computed using the federal statutory income tax rate differ from the Company's effective tax rate primarily due to the following:
December 31, 1998 ------------ Income tax expense (benefit) at US federal statutory tax rate $(2,155,600) State income taxes, net of federal tax effect (700,000) Permanent items (84,800) Other 234,400 Change in deferred tax asset valuation allowance 2,706,000 ----------- $ - -----------
The Company has provided a valuation allowance for the full amount of its net deferred tax asset since realization of these future benefits is not sufficiently assured at December 31, 1998. Should the Company achieve profitability, these deferred tax assets may be available to offset future income tax liabilities and expense. At December 31, 1998, the Company had federal and state net operating loss carryforwards of approximately $8,244,000 which expire at various dates through 2018. The Company also had federal and state research and development tax credit carryforwards of approximately $231,000 which expire at various dates through 2018. Under the Internal Revenue Code, certain substantial changes in the Company's ownership may limit the amount of net operating loss and tax credit carryforwards that can be utilized to offset future taxable income or tax liability. 10. Employee Retirement Plan 10 WebSpective Software, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- In 1998, the Company adopted a defined contribution plan established under the guidelines of Section 401(k) of the Internal Revenue Code. This plan covers substantially all employees and allows participants to defer a portion of their annual compensation on a pre-tax basis. Company contributions to the plan may be made at the discretion of the Board of Directors. There have been no contributions made by the Company since inception of the plan. 11. Commitments The Company leases its office facilities and certain equipment under various operating and capital leases. Total rent expense under operating leases was approximately $277,500 for the year ended December 31, 1998. Future minimum lease commitments at December 31, 1998 under capital leases and operating leases are as follows:
Capital Operating leases leases ------- ---------- 1999 $24,700 $ 381,800 2000 23,900 374,500 2001 5,500 374,500 2002 5,900 374,500 ------- ---------- Total minimum lease payments 60,000 $1,505,300 ---------- Less - Amount representing interest 10,400 ------- Present value of minimum lease payments $49,600 -------
12. Acquisitions of the Company (unaudited) On September 15, 1999, the Company entered into a purchase and sale agreement with Inktomi Corporation, whereby Inktomi will issue shares of Inktomi common stock in exchange for all of the outstanding equity of the Company with the result that the Company will become a subsidiary of Inktomi Corporation. 11 EX-99.3 3 INKTOMI CORPORATION FINANCIAL STATEMENTS EXHIBIT 99.3 INKTOMI CORPORATION INDEX TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Accountants.............................................................................. F-2 Supplementary Consolidated Balance Sheets...................................................................... F-3 Supplementary Consolidated Statements of Operations............................................................ F-4 Supplementary Consolidated Statements of Changes in Stockholders' Equity....................................... F-5 Supplementary Consolidated Statements of Cash Flows............................................................ F-6 Notes to Supplementary Consolidated Financial Statements....................................................... F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Inktomi Corporation In our opinion, the accompanying supplementary consolidated balance sheet and the related supplementary consolidated statement of operations, changes in stockholders' equity and cash flows, present fairly, in all material respects, the financial position of Inktomi Corporation and its subsidiaries at September 30, 1998 and the results of their operations and cash flows for the year then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. As described in Note 1, on October 1, 1999 Inktomi Corporation acquired WebSpective Software, Inc. in a transaction accounted for as a pooling of interests. The accompanying supplementary consolidated financial statements give retroactive effect to the acquisition of WebSpective Software, Inc. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling of interests method in financial statements that do not include the date of consummation. These financial statements do not extend through the date of consummation; however, they will become the historical consolidated financial statements of Inktomi Corporation and its subsidiaries after financial statements following the date of consummation of the business combination are issued. PRICEWATERHOUSECOOPERS LLP San Francisco, California October 16, 1998, except as to the pooling of interests with Impulse! Buy Network, Inc. which is as of April 30, 1999, and the pooling of interests of WebSpective Software, Inc. which is as of October 1, 1999. F-2 INKTOMI CORPORATION SUPPLEMENTARY CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts)
September 30, June 30, 1998 1999 ----------------- --------------- (unaudited) Assets Current assets Cash and cash equivalents............................................................ $ 33,050 $ 35,634 Short-term investments............................................................... 19,752 82,707 -------- -------- Total cash, cash equivalents and short-term investments............................. 52,802 118,341 Accounts receivable, net of allowances of $632 and $1,368, respectively.............. 5,103 14,337 Prepaid expenses and other current assets............................................ 755 1,537 -------- -------- Total current assets................................................................ 58,660 134,215 Property and equipment, net............................................................ 18,096 27,652 Security deposits and other long-term assets........................................... 225 2,233 -------- -------- Total assets........................................................................ $ 76,981 $164,100 ======== ======== Liabilities and Stockholders' Equity Current liabilities Current portion of notes payable..................................................... $ 3,921 $ 5,117 Current portion of capital lease obligations......................................... 2,073 2,643 Accounts payable..................................................................... 5,063 6,935 Accrued liabilities.................................................................. 7,395 9,293 Deferred revenue..................................................................... 1,979 6,142 -------- -------- Total current liabilities........................................................... 20,431 30,130 Notes payable........................................................................ 4,378 7,954 Capital lease obligations, less current portion...................................... 4,677 2,569 -------- -------- Total liabilities................................................................... 29,486 40,653 Commitments (Note 6) Stockholders' equity Common Stock, $0.001 par value; Authorized: 100,000 at September 30, 1998 and 300,000 at June 30, 1999 (unaudited); Outstanding: 48,158 at September 30, 1998 and 51,035 at June 30, 1999 (unaudited)......................................................................... 48 51 Additional paid-in capital........................................................... 97,728 195,062 Deferred compensation and other...................................................... (3,419) (1,894) Accumulated deficit.................................................................. (46,862) (69,772) -------- -------- Total stockholders' equity.......................................................... 47,495 123,447 -------- -------- Total liabilities and stockholders' equity.......................................... $ 76,981 $164,100 ======== ========
The accompanying notes are an integral part of these supplementary consolidated financial statements. F-3 INKTOMI CORPORATION SUPPLEMENTARY CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
For the Year For the Nine Months For the Nine Months Ended September 30, 1998 Ended June 30, 1998 Ended June 30, 1999 ------------------------ ------------------- ------------------- (unaudited) (unaudited) Revenues Network products............................... $ 8,856 $ 4,261 $ 26,908 Portal services................................ 12,476 8,419 19,477 -------- -------- -------- Total revenues............................. 21,332 12,680 46,385 Operating expenses Cost of revenues............................... 5,026 3,032 8,664 Sales and marketing............................ 25,145 14,924 37,328 Research and development....................... 16,260 10,580 20,975 General and administrative..................... 5,267 3,531 5,452 Acquisition related costs...................... 1,018 -- 1,110 -------- -------- -------- Total operating expenses................... 52,716 32,067 73,529 -------- -------- -------- Operating loss.................................. (31,384) (19,387) (27,144) Other income, net............................... 510 19 2,394 -------- -------- -------- Net loss................................... $(30,874) $(19,368) $(24,750) ======== ======== ======== Basic and diluted net loss per share............ $(0.78) $(0.52) $(0.50) ======== ======== ======== Shares used in calculating basic and diluted net loss per share............................ 39,626 36,971 49,971 ======== ======== ========
The accompanying notes are an integral part of these supplementary consolidated financial statements. F-4 INKTOMI CORPORATION SUPPLEMENTARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the year ended September 30, 1998 and the nine months ended June 30, 1999 (unaudited) (in thousands)
Convertible Preferred Stock Common Stock Additional Deferred ------------------ --------------- Paid-in Compensation Accumulated Shares Amount Shares Amount Capital & Other Deficit Total -------- ------- ------ ------ ---------- ------------- ------------ --------- Balance, October 1, 1997 ...... 14,938 $ 15 12,262 $12 $ 20,752 $ 909 $(15,988) $ 5,700 Issuance of Preferred Stock, net of issuance costs of $1,128... 3,298 3 12,884 12,887 Issuance of Common Stock for cash, notes, or services, including for exercise of options and warrants ............ 9,557 10 48,742 (1,886) 46,866 Exercise of Preferred Stock warrants ........................ 1,225 1 4,071 4,072 Conversion of Preferred Stock to Common Stock ................. (19,461) (19) 26,339 26 8,476 8,483 Stock compensation in connection with issuance of 2,394 (2,078) 316 stock options ................... Foreign currency translation ..... (49) (49) Stock compensation in connection with issuance of stock options by Impulse! Buy 409 (315) 94 Network ......................... Net loss ......................... (30,874) (30,874) ------- ------ ------ --- -------- ------- -------- -------- Balance, September 30, 1998 ...... -- -- 48,158 48 97,728 (3,419) (46,862) 47,495 Issuance of Common Stock in public offering net of issuance costs of $680 .......... 1,333 1 88,865 88,866 Issuance of Common Stock for cash, notes, or services, including for exercise of options and warrants ............ 1,544 2 6,412 1,678 8,092 Stock compensation in connection with issuance of stock options by Impulse! Buy Network and WebSpective 2,057 (1,917) 140 Software, Inc. .................. Amortization of stock compensation .................... 635 635 Repayment of shareholder loans ... 526 526 Foreign currency translation ..... (132) (132) Unrealized gain on short term investments ..................... 735 735 Adjustment to conform WebSpective's year end .......... 1,840 1,840 Net loss ......................... (24,750) (24,750) ------- ------ ------ --- -------- ------- -------- -------- Balance, June 30, 1999 (Unaudited) ..................... -- $ -- 51,035 $51 $195,062 $(1,894) $(69,772) $123,447 ======= ====== ====== === ======== ======= ======== ========
The accompanying notes are an integral part of these supplementary consolidated financial statements. F-5 INKTOMI CORPORATION SUPPLEMENTARY CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
For the For the For the Year Ended Nine Months Nine Months September 30, 1998 Ended June 30, 1998 Ended June 30, 1999 ------------------- -------------------- -------------------- (unaudited) (unaudited) Cash flows from operating activities: Net loss.................................................... $ (30,874) $ (19,368) $ (24,750) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................... 3,955 2,425 8,252 Provision for doubtful accounts......................... 551 214 736 Stock based compensation................................ 980 232 2,314 Gain on equipment disposal.............................. 19 1 18 Changes in operating assets and liabilities Accounts receivable.................................. (4,600) (1,535) (9,908) Prepaid expenses and other assets.................... (194) (355) (2,839) Accounts payable..................................... 2,484 2,165 1,995 Deferred revenue..................................... 1,021 1,496 4,982 Accrued liabilities and other........................ 6,190 2,685 1,726 --------- --------- ---------- Net cash used in operating activities.............. (20,468) (12,040) (17,474) Cash flows from investing activities: Purchases of short-term investments......................... (32,834) (18,810) (108,140) Proceeds from the sale of short-term investments............ 13,091 1,751 45,920 Purchase of property and equipment.......................... (7,301) (4,543) (17,574) Proceeds from sale of equipment............................. 928 928 -- --------- --------- ---------- Net cash used in investing activities.............. (26,116) (20,674) (79,794) Cash flows from financing activities: Proceeds from notes payable................................. 2,956 2,457 7,065 Repayments on notes payable................................. (2,338) (990) (2,293) Payments on obligations under capital leases................ (353) (214) (1,538) Proceeds from stockholder loans............................. -- -- 526 Proceeds from issuance of Redeemable Convertible Preferred Stock, net of issuance costs.............................. 8,337 8,337 48 Proceeds from issuance of Preferred Stock, net of issuance costs..................................................... 16,186 13,887 (5) Proceeds from exercise of stock options and warrants......... 4,962 5,016 3,121 Repurchase and retirement of Common Stock.................... (10) (1) (1) Purchase of Common Stock held in Treasury, net of issuance costs..................................................... (4) -- (7) Proceeds from issuance of Common Stock....................... 42,026 39,967 91,959 --------- --------- ---------- Net cash provided by financing activities.......... 71,762 68,459 98,875 --------- --------- ---------- Effect of exchange rates on cash and cash equivalents.......... (49) -- (132) Increase in cash and cash equivalents.......................... 25,129 35,745 1,475 Adjustment to conform WebSpective's year end................... -- 735 1,109 Cash and cash equivalents at beginning of period............... 7,921 7,921 33,050 --------- --------- ---------- Cash and cash equivalents at end of period..................... $ 33,050 $ 44,401 $ 35,634 ========= ========= =========
The accompanying notes are an integral part of these supplementary consolidated financial statements F-6 INKTOMI CORPORATION NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS (Information as of June 30, 1999 and for the nine month period then ended is unaudited) (1) Significant Accounting Policies: Organization: Inktomi Corporation ("Inktomi" or the "Company") was incorporated in February 1996 to develop and market scalable software applications designed to significantly enhance the performance and intelligence of large-scale networks. From February 1996 to May 1996, Inktomi's operations consisted primarily of start-up activities, including research and development of Inktomi's core coupled cluster software architecture and data flow technology, personnel recruiting and capital raising. In May 1996, Inktomi released the first commercial application based on its core technology, a search engine that enables customers to provide a variety of Internet search services to end users. In December 1997, Inktomi began licensing Traffic Server, Inktomi's second application, a large-scale network cache designed to address capacity constraints in high-traffic network routes. In September 1998, Inktomi initiated its third application through its acquisition of C\\2\\B Technologies Inc. ("C\\2\\B"), a developer of online shopping technology. The Company issued 3,782,628 shares of its Common Stock in exchange for all of the outstanding shares of C\\2\\B. C\\2\\B recognized no revenues since inception, raised $5.9 million through various stock issuances, and recorded losses of $1.7 million and $5.0 million for the years ended September 30, 1997 and 1998 respectively. The transaction was accounted for as a pooling of interests. In April 1999, Inktomi acquired Impulse! Buy Network, Inc. ("Impulse! Buy"), a developer of online merchandising software, to supplement the functionality of the shopping engine. Under the terms of the merger agreement, Inktomi acquired all outstanding shares of capital stock and assumed all outstanding warrants, stock options and stock purchase rights of Impulse! Buy in exchange for 899,967 shares of Inktomi Common Stock. The transaction was accounted for as a pooling of interests. Impulse! Buy revenues since inception, were not significant. Impulse! Buy raised $4.3 million through various stock issuances in 1997 and 1998 and had net losses of $2.2 million in the year ended September 30, 1998. On October 1, 1999, Inktomi acquired WebSpective Software, Inc. ("WebSpective"), a developer of online operations management solutions software for commerce-critical web sites. WebSpective's software and related services allow users to effectively manage multi-server, multi-location web environments. Under the terms of the merger agreement, Inktomi acquired all shares of capital stock and assumed all outstanding warrants, stock options and stock purchase rights of WebSpective in exchange for 827,524 shares of Inktomi Common Stock. The transaction was accounted for as a pooling of interests. The Company will record acquisition costs of approximately $3.8 million in the quarter ending December 31, 1999 as a result of the acquisition, primarily for investment banking fees, accounting, legal and other expenses. WebSpective revenues since inception were $2.3 million. WebSpective raised $12.4 million through various stock issuances since its inception in March 1997, and had net losses of $6.4 million and $3.6 million in the period ended December 31, 1998 and the nine month period ended June 30, 1999 (unaudited), respectively. Prior to the merger with Inktomi, WebSpective used a fiscal year ending December 31. On October 1, 1999, the reporting periods of Inktomi and WebSpective will be conformed, and results of operations will be combined. As a result of conforming the reporting periods of Inktomi and WebSpective, the operating results of WebSpective's three month period ended December 31, 1998 are included in the restated financial statements for both the fiscal year ended September 30, 1998, and the nine month period ended June 30, 1999. Net loss for this period of approximately $1.8 million is reflected as an adjustment to conform WebSpective's year end in these supplementary financial statements. These financial statements present the supplementary consolidated financial statements of the Company and WebSpective. F-7 INKTOMI CORPORATION NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information as of June 30, 1999 and for the nine month period then ended is unaudited) Stock Splits: In May 1998, Inktomi's Board of Directors and stockholders approved a 2:3 reverse stock split of the Company's Common Stock. In December 1998, Inktomi's Board of Directors approved a two-for-one stock split (in the form of a 100% stock dividend) of the Company's Common Stock. Historical weighted average shares outstanding and loss per share amounts have been restated to reflect both stock splits and the pooling of interests with C\\2\\B, Impulse! Buy, and WebSpective. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Inktomi Limited, a United Kingdom subsidiary formed in October 1997. All intercompany balances and transactions have been eliminated in the supplementary consolidated financial statements. Cash and Cash Equivalents: Cash and cash equivalents are stated at cost, which approximates fair value. The Company includes in cash equivalents all highly liquid investments which mature within three months of their purchase date. Cash equivalents consist primarily of high grade commercial paper, other debt instruments and money market funds. Short-Term Investments: Short-term investments are comprised primarily of debt and equity securities and are classified as available-for-sale investments. The carrying value of debt security investments is adjusted to fair value with a resulting adjustment to stockholders' equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, both of which are included in interest income. Equity securities are carried at cost until evidence exists to support their realizable fair value. Realized gains and losses are recorded using the specific identification method. All investments have maturity dates of less than one year. Property and Equipment: Property and equipment is stated at cost and is depreciated using the straight-line method over the estimated useful lives of the related assets, generally three years. Any gains or losses on the disposal of property and equipment are recorded in the period of disposition. Assets held under capital lease and leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or remaining lease term. Major additions and improvements are capitalized, while replacements, maintenance and repairs that do not improve or extend the life of the assets are charged to expense. F-8 INKTOMI CORPORATION NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information as of June 30, 1999 and for the nine month period then ended is unaudited) Software Development Costs: Software development costs have been accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Under the standard, capitalization of software development costs begins upon the establishment of technological feasibility which, for the Company, is upon completion of a working model. To date, all such amounts have been insignificant, and accordingly, the Company has charged all software development costs and research and development costs to expenses. Income Taxes: Income taxes are accounted for in accordance with SFAS No. 109, Accounting for Income Taxes, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Impairment of Long-lived Assets: The Company evaluates the recoverability of its long-lived assets in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 121 requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. The Company will assess the impairment of long-lived assets when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Revenue Recognition: Inktomi generates search services revenues (included in portal services revenues) through a variety of contractual arrangements, which include per-query search fees, search service hosting fees, advertising revenue, license fees and/or maintenance fees. Per-query, hosting and maintenance fees revenues are recognized in the period earned, and advertising revenues are recognized in the period that the advertisement is displayed. A significant portion of the Company's search advertising revenues are from a search service that is maintained by the Company and marketed by Wired Digital, Inc. ("Wired"). Revenues from this agreement are recorded in full and amounts allocable to the partner for marketing costs are included in sales and marketing expenses. F-9 INKTOMI CORPORATION NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information as of June 30, 1999 and for the nine month period then ended is unaudited) A portion of the advertising on the Wired search site is exchanged for advertisements on the web sites of other companies. These revenues and marketing expenses are recorded at the fair value of services provided or received, whichever is more determinable in the circumstances. Revenue from barter transactions is recognized as income when advertisements are delivered on the Wired site, and expense from barter transactions is recognized when advertisements are delivered on the other companies' web sites. Barter revenues and expenses were approximately $1,810,000 for the year ended September 30, 1998. Inktomi did not record revenue and expenses from barter agreements in the unaudited nine-month period ended June 30, 1999. Network products revenues represent primarily license, maintenance, upgrade and distribution fees for the Company's Traffic Server product. License and distribution fees are typically recognized when the software is delivered and all significant obligations have been met. Maintenance and upgrade revenues are recognized ratably over the life of support and upgrade agreements. Computation of Historical Net Loss Per Share: Basic and diluted net loss per share is computed using the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares, which consist of stock options and warrants, have not been included in the computation of diluted net loss per share as their effect is anti-dilutive. Foreign Currencies The balance sheets of the Company's U.K. subsidiary are translated into U.S. dollars at period end rates of exchange. Revenues and expenses are translated at average rates for the period. The resulting translation adjustments are included in stockholders' equity. Exchange gains and losses arising from transactions denominated in a foreign currency other than the functional currency of the entity involved are included in other expense. Such exchange gains (losses) have been immaterial to date. Business Risk and Concentration of Credit Risk: The Company operates in the Internet industry, which is rapidly evolving and intensely competitive. Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of temporary cash investments (including money market accounts), short-term investments, and accounts receivable. The Company places its cash, cash equivalents, and short-term investments with major financial institutions and such deposits exceed federally insured limits. The Company does not require collateral, and maintains reserves for potential credit losses on customer accounts when deemed necessary. For the year ended September 30, 1998, four customers represented 35%, 16%, 14% and 12%, respectively, of accounts receivable and 10%, 0%, 21% and 8% of all revenue generated by the Company, at September 30, 1998. For the unaudited nine-month period ended June 30, 1999, one customer accounted for 12% of all revenue generated by the Company and a different customer accounted for 13% of accounts receivable at June 30, 1999, respectively. F-10 INKTOMI CORPORATION NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information as of June 30, 1999 and for the nine month period then ended is unaudited) Recently Issued Accounting Pronouncements: In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting comprehensive income and its components in a financial statement. Comprehensive income as defined includes all changes in equity (net assets) during a period from non-owner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments and unrealized gains (losses) on available-for-sale investments. The components of comprehensive income are as follows (in thousands):
For the Year Ended For the Nine Months September 30, 1998 Ended June 30, 1999 -------------------- --------------------- (unaudited) Net loss...................................... $ (30,874) $ (24,750) Unrealized gain on available for sale investments............................. -- 735 Foreign currency translation losses........... (49) (132) --------- --------- Comprehensive net loss........................ $ (30,923) $ (24,147) ========= =========
During 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, effective for the fiscal year ended September 30, 1999. The Company is currently determining the disclosures that may be required under this pronouncement. In April 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 provides guidance for determining whether computer software is internal-use software and on accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public. It also provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. Inktomi believes that the adoption of SOP 98-1 will not have a material impact on its consolidated financial statements. SOP 98-1 will be effective for Inktomi's consolidated financial statements for the fiscal year beginning October 1, 1999. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is effective for transactions entered into after March 31, 2000 and requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction. The ineffective portion of all hedges will be recognized in earnings. Inktomi is currently assessing the impact of this new statement but does not expect any material effect on its consolidated financial position, liquidity or results of operation. In October 1998, Inktomi adopted SOP 97-2, Software Revenue Recognition, which was amended by SOP 98-4, Deferral of the Effective Date of Certain Provisions of SOP 97-2, and SOP 98-9, Software Revenue Recognition. The adoption of SOP 97-2, SOP 98-4 and SOP 98-9 did not have a significant impact on the Company's revenue recognition policies. Unaudited Interim Financial Information In the opinion of management, the unaudited interim financial statements for the nine month period ended June 30, 1999 have been prepared on the same basis as the annual financial statements and reflect all adjustments that are necessary for the fair presentation of results for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any interim period. F-11 INKTOMI CORPORATION NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information as of June 30, 1999 and for the nine month period then ended is unaudited) (2) Property and Equipment: Property and equipment consists of (in thousands):
September 30, 1998 June 30, 1999 ------------------- ------------- (unaudited) Computer equipment ............................................... $21,846 $ 36,323 Furniture and fixtures ........................................... 1,494 2,471 Leasehold improvements ........................................... 389 1,678 ------- -------- 23,729 40,472 Less accumulated depreciation and amortization .............. (5,633) (12,820) ------- -------- Property and equipment, net ................................ $18,096 $ 27,652 ======= ========
The Company recognized losses for the abandonment of leasehold improvements with net book values of $605,000 due to a corporate relocations in March 1999. Assets acquired under capitalized lease obligations are included in computer equipment and furniture and fixtures and totaled $6,953,000 (including equipment previously purchased), with related amortization of $350,000 as of September 30, 1998. (3) Income Taxes The principal items accounting for the difference between the income tax benefits computed using the United States statutory rate and the provision for income taxes are as follows (in thousands):
Nine Months Year Ended Ended September 30, 1998 June 30, 1999 ------------------ -------------- (unaudited) Federal tax benefit at statutory rate ............... $(10,497) $(8,415) State taxes, net of federal tax effect .............. (2,127) (1,611) Permanent items ..................................... (84) (60) Other ............................................... 234 133 Change in deferred tax asset valuation allowance .... 2,706 2,267 Research and experimentation credits ................ (469) (150) Unutilized net operating losses ..................... 10,237 7,836 -------- ------- $ -- $ -- ======== =======
Net deferred tax assets comprise (in thousands):
September 30, 1998 June 30, 1999 ------------------ ------------------ (unaudited) Net operating loss carryforwards .................... $ 16,601 $ 22,358 Research and experimentation credit carryforwards ... 1,318 1,526 Other liabilities and reserves ...................... 767 1,402 Property and equipment .............................. (666) (356) Acquired technology ................................. 173 45 Deferred revenue .................................... 524 2,138 Valuation allowance ................................. (18,717) (27,113) -------- -------- Net deferred tax assets .......................... $ -- $ -- ======== ========
F-12 INKTOMI CORPORATION ------------------- NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information as of June 30, 1999 and for the nine month period then ended is unaudited) Due to the uncertainty surrounding the realization of the favorable tax attributes in future tax returns, the Company has placed a valuation allowance against its otherwise recognizable net deferred tax assets. Should the Company achieve profitability, these deferred tax assets may be available to offset future income tax liabilities and expenses. At June 30, 1999 (unaudited), the Company had the following carryforwards available to reduce future taxable income and income taxes (in thousands):
June 30, 1999 ------------------------- Federal State ----------- ----------- (unaudited) Net operating loss carryforwards...................................................... $ 87,845 $ 43,646 Research and experimentation credit carryforwards..................................... $ 1,391 $ 750
The federal and state net operating loss carryforwards expire through 2019 and 2004, respectively, and the research and experimentation credits expire through 2004. For federal and state tax purposes, the Company's net operating loss and research and experimentation credit carryforwards could be subject to certain limitations on annual utilization if certain changes in ownership were to occur, as defined by federal and state tax laws. F-13 INKTOMI CORPORATION NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information as of June 30, 1999 and for the nine month period then ended is unaudited) (4) Notes Payable and Line of Credit (dollars in thousands):
September 30, 1998 June 30, 1999 ------------------- ------------- (unaudited) Bank line (1).......................................................... $ 352 $ 3,500 Equipment notes (2).................................................... 3,389 7,193 Bank term note (3)..................................................... 1,167 611 Other bank note (4).................................................... 490 -- Notes payable (5)...................................................... 2,521 1,563 Other notes payable (6)................................................ 380 204 ------- ------- 8,299 13,071 Less current portion................................................... (3,921) (5,117) ------- ------- Notes payable, less current portion.................................... $ 4,378 $ 7,954 ======= =======
__________ (1) The Company has a $2,500 revolving bank line of credit collateralized by substantially all assets. Amounts borrowed under the line require monthly payments at prime (8.5% at September 30, 1998 and June 30, 1999. Borrowings under the facility are repayable in 36 equal monthly installments plus interest at 0.25% over prime (8.75% at September 30, 1998 and 8.0% at June 30, 1999). The master bank credit agreement requires the Company to comply with certain financial covenants related to working capital, tangible net worth and debt service and liquidity coverage. Pursuant to the agreement, the Company may not distribute cash dividends. As of September 30, 1998, the Company was in compliance with the covenants. The Company has a subordinated loan with a financing company in which the Company has the ability to borrow up to $3,000, in minimum installments of $500 each through March 2000 (as of June 30, 1999, the entire $3,000 had been borrowed under the terms of the loan agreement). This loan was assumed as a part of the WebSpective acquisition. The repayment schedule for each installment consists of nine monthly payments of interest only, followed by 27 monthly payments of principal and interest. The loan is subordinate in right of payment of interest and principal to the equipment line, bears interest at 3.5% over prime (1.25% at June 30, 1999), and is collateralized by substantially all the assets of the Company. (2) The equipment notes include five loans. The first loan for $1,750 has monthly payments of interest only until May 1998 and then is payable in equal monthly payments of $49 plus interest at 0.5% over prime (9.0% at September 30, 1998 and 8.25% at June 30, 1999) through April 2001. The second loan for $2,000 has monthly payments of $56 plus interest at 0.25% over prime (8.75% at September 30, 1998 and 8.0% at June 30, 1999) and matures in June 2001. The third loan for $4,722 has monthly payments of $139 plus interest at 0.25% over prime (8.0% at June 30, 1999) and matures in June 2002. The fourth loan for $185 has equal monthly payments of $5 plus interest at 1% over prime (9.5% at September 30, 1998 and 8.75% at June 30, 1999) through July 2001. The fifth loan for $101 has monthly payments of $3 plus interest at 1% over prime (9.5% at September 30, 1998 and 8.75% at June 30, 1999) through July 2001. The fourth and fifth loans were assumed as part of the WebSpective acquisition. The notes have collateralization and covenant requirements consistent with the bank line of credit as described above. (3) The bank term note of $2,000 is payable in equal monthly payments of $56 plus interest at 0.5% over prime (9.0% at September 30, 1998 and 8.25% at June 30, 1999) through June 2000. The note has collateralization and covenant requirements consistent with the bank line of credit as described above. (4) The other bank note consists of a term note obtained by C\\2\\B Technologies Inc., an Inktomi subsidiary. The maturity of this note was accelerated with the change of control of C\\2\\B Technologies, Inc. in September 1998. The 8.5% note was paid in full in November 1998. (5) The notes payable are payable in equal monthly payments of $103 and $5 which includes interest of 5.7% and 5.6% through September 2000 and November 2000, respectively. The notes are collateralized by all equipment purchased with the proceeds from the notes. (6) Other notes payable are payable in equal monthly payments totaling $20 through March 2000, with a final balloon payment of $60. The notes payments include interest of 18.0%. The notes are collateralized by all equipment purchased with the proceeds from the notes. Scheduled maturities of long-term debt at September 30, 1998 are as follows:
Years ending: September 30, 1999.................................................................................. $ 3,921 September 30, 2000.................................................................................. 3,430 September 30, 2001.................................................................................. 948 ------- $ 8,299 =======
The carrying value of notes payable approximated fair value as the related interest rates approximate market rates. F-14 INKTOMI CORPORATION NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information as of June 30, 1999 and for the nine month period then ended is unaudited) (5) Accrued Liabilities: Accrued liabilities comprise (in thousands):
September 30, 1998 June 30, 1999 ------------------ ------------- (unaudited) Accrued payroll, vacation and bonuses .................................. $4,028 $3,697 Other accrued liabilities .............................................. 3,367 5,596 ------ ------ Total accrued liabilities ........................................... $7,395 $9,293 ====== ======
(6) Commitments: The Company has entered into noncancellable operating leases for office space and equipment and capital leases for equipment with original terms ranging from six to 60 months. The future minimum lease payments under these leases at June 30, 1999 are as follows (in thousands):
Operating Capital Leases Leases ------- ------ Three months ending September 30, 1999.................................. $ 1,892 $ 389 Years ending September 30,: 2000................................................................ 5,560 2,948 2001................................................................ 6,892 2,613 2002................................................................ 8,175 6 2003................................................................ 7,161 -- 2004................................................................ 7,155 -- Thereafter.......................................................... 47,396 -- ------- ------- Total minimum lease payments............................................ $ 84,231 $ 5,956 ======= Less amount representing interest....................................... (744) ------- Present value of minimum lease payments................................. 5,212 Less current portion.................................................... (2,643) ------- Capital lease obligations, less current portion......................... $ 2,569 =======
In October 1998, the Company signed a lease for new office space located in Foster City, California. This lease commenced in September 1999, for a duration of 11 years thereafter. During the term of the lease, Inktomi is to occupy a total of 177,147 square feet, incurring a minimum lease obligation of $79,928,000. In connection with this lease agreement, Inktomi paid a cash security deposit of $1,308,000 in October 1998 and provided a supplemental deposit in the form of a letter of credit in the amount of $4,844,000 in January 1999. (7) Stockholders' Equity: In June 1998, all 19.5 million shares of Preferred Stock were converted into 26.3 million shares of Common Stock of the Company. In June 1998, the stockholders of the Company approved an amendment to the Company's certificate of incorporation authorizing 10,000,000 shares of undesignated Preferred Stock of which the Board of Directors has the authority to issue and to determine the rights, preferences and privileges. In June 1998, the Company raised $46.9 million, net of issuance costs, from an initial public offering of 4,712,994 shares of Common Stock and other stock offerings including the issuance of common stock for cash, notes, services, and the exercises of common stock options and warrants. F-15 INKTOMI CORPORATION NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information as of June 30, 1999 and for the nine month period then ended is unaudited) In November 1998, the Company completed a secondary offering of its Common Stock in which it sold 1,332,536 shares raising $88.9 million, net of issuance costs and underwriters' discounts. (8) Deferred Compensation and Other: Deferred compensation and other includes (in thousands):
September 30, 1998 June 30, 1999 ------------------ ------------- (unaudited) Deferred compensation ................................................... $(2,496) $(3,625) Warrants issued and options granted to consultants ...................... 239 1,917 Shareholder loans ....................................................... (1,113) (740) Cumulative foreign exchange adjustment .................................. (49) (181) Unrealized losses on short-term investments ............................. -- 735 ------- ------- Total deferred compensation and other equity ......................... $(3,419) $(1,894) ======= =======
(9) Warrants: In 1997 and 1998, the Company issued warrants to a customer and financial providers to purchase Common Stock. In May 1999, a warrant holder elected to exercise its warrant to purchase 400,944 shares of Common Stock. As a result of a net exercise, the Company issued 392,117 shares of Common Stock to the warrant holder. At June 30, 1999 (unaudited) the following warrants were outstanding:
Common Stock Exercise Price Expiration Dates --------------- ----------------- ------------------------- Common Stock ......................................... 835,402 $ 137,841 April 2002 Common Stock ......................................... 6,668 $ 25,005 August 2001 Common Stock ......................................... 194,446 $2,925,024 June 2002 Common Stock ......................................... 8,939 $ 180,000 April 2002 Common Stock ......................................... 15,337 $ 500,288 June 2003
At June 30, 1999 (unaudited), all warrants were exercisable. Subsequent to June 30, 1999, a warrant holder elected to exercise its warrant to purchase 15,337 shares of Common Stock. F-16 INKTOMI CORPORATION NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information as of June 30, 1999 and for the nine month period then ended is unaudited) (10) Stock Options: Pursuant to the Inktomi Corporation 1998 Stock Plan, its 1996 Equity Incentive Plan, the C\\2\\B Technologies Inc. 1997 Stock Plan (the "Plans"), as amended, the Impulse! Buy Network 1997 Stock Option Plan (the "Impulse Plan"), and the WebSpective 1997 Stock Option Plan (the "WebSpective Plan"), employees, directors and consultants of the Company may be granted options to purchase shares of Common Stock. At September 30, 1998, 2,000,000 shares of Common Stock were reserved under the 1998 plan and 111,023 shares were authorized under the Impulse Plan and 175,197 shares of Common Stock were reserved under the WebSpective Plan. At September 30, 1998, shares were no longer available for issuance from the 1996 and 1997 plans. Options granted under the Plans, the Impulse Plan and the WebSpective Plan include incentive stock options and nonqualified stock options. Stock options granted under the Plans the Impulse Plan and the WebSpective Plan generally vest over 36 to 50 months and are also immediately exercisable but subject to repurchase at cost in the event that the individual ceases to be an employee or provide services to the Company. Repurchase rights lapse on the original vesting schedule. Prior to the adoption of the Plans, the Impulse Plan and the WebSpective Plan, the Company granted nonqualified stock options to purchase Common Stock to certain employees and consultants. Options have a term of generally 10 years. A summary of the activity under the Plans, the Impulse Plan and the WebSpective Plan is set forth below (in thousands, except per share amounts):
Exercise Aggregate Weighted Price Per Exercise Average Shares Share Price Exercise Price ------------ -------------- ------------ -------------- - ------------------------------------------ Outstanding at October 1, 1997................................. 3,927 $0.06-$ 1.95 1,095 $ 0.28 Granted........................................................ 3,477 $1.34-$53.75 36,896 $10.61 Exercised...................................................... (1,566) $0.11-$10.50 (1,418) $ 0.91 Canceled....................................................... (373) $0.45-$18.00 (226) $ 0.61 ------ -------- Outstanding at September 30, 1998.............................. 5,465 $0.06-$53.75 36,347 $ 6.65 Granted (unaudited)............................................ 3,107 $0.80-$84.75 199,133 $64.10 Exercised (unaudited).......................................... (680) $0.17-$61.63 (2,210) $ 3.45 Canceled (unaudited)........................................... (189) $0.23-$ 4.03 (1,580) $ 8.40 ------ -------- Outstanding at June 30, 1999 (unaudited)....................... 7,703 $0.06-$84.75 $231,690 $30.08 ====== ========
At June 30, 1999, there were 1,709,274 shares which were subject to repurchase. F-17 INKTOMI CORPORATION NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information as of June 30, 1999 and for the nine month period then ended is unaudited) The following table summarizes information with respect to stock options outstanding at June 30, 1999 (unaudited):
Options Outstanding Options Exercisable --------------------------------------------------------------- --------------------------------- Weighted Average Weighted Number Weighted Number Remaining Average Exercisable Average Range of Outstanding Contractual Life Exercise At June 30, Exercise Exercise Prices at June 30, 1999 (Years) Price 1999 Price - ------------------------ ------------------ ---------------------- ----------------- --------------- --------------- $ 0.06- 5.25 3,163,913 7.38 $ 0.97 3,163,913 $ 0.97 $ 6.50-$31.00 1,824,396 9.09 $22.82 1,824,396 $22.82 $39.53-$84.75 2,715,373 9.76 $69.93 2,715,373 $69.93
In connection with the completion of the Company's initial public offering and the acquisitions of C\\2\\B, Impulse! Buy and WebSpective, certain options granted in 1997 and 1998 have been considered to be compensatory. Compensation associated with such options for the year ended September 30, 1998 amounted to $2,803,000. Of these amounts, $410,000 was charged to operations for the year ended September 30, 1998 and $3,012,000 will be charged to operations during the remaining period to 2002. The following information concerning the Plans, the Impulse Plan and the WebSpective Plan is provided in accordance with SFAS No. 123, Accounting for Stock-Based Compensation. The Company accounts for all Plans in accordance with Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations; accordingly, compensation expense is recorded for options awarded to employees and directors to the extent that the exercise prices are less than the Common Stock's fair market value on the date of grant, where the number of options and exercise price are fixed. The difference between the fair value of the Company's Common Stock and the exercise price of the stock option is recorded as deferred stock compensation, and is amortized to compensation expense over the vesting period of the underlying stock option. The fair value of each employee and director stock option grant has been estimated on the date of grant using the minimum value method for grants in the period February 2, 1996 (date of inception) to September 30, 1996, the year ended September 30, 1997. For the year ended September 30, 1998, the fair value has been estimated using the Black-Scholes Option Pricing Model. The weighted average fair values for the year ended September 30, 1998, was $10.50. The following assumptions were used in determining the fair value of options granted:
Net loss--Historical............................................................. September 30, 1998 ------------------ Risk-free interest rates......................................................... 5.30%-6.60% Expected life.................................................................... 5 years Dividends........................................................................ 0% Volatility....................................................................... 140%
The following comprises the pro forma information pursuant to the provisions of SFAS No. 123 (in thousands):
September 30, 1998 ------------------- Net loss--Historical.............................................................. $(30,874) Net loss--Pro Forma............................................................... $(32,416)
These pro forma amounts may not be representative of the effects on pro forma net loss for future years as options vest over several years and additional awards are generally made each year. F-18 INKTOMI CORPORATION NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information as of June 30, 1999 and for the nine month period then ended is unaudited) (11) Related Party Transaction: In April 1998, the Company provided a loan to a corporate officer to exercise Common Stock options. The loan totaled $666,000 and is repayable to the Company in April 2002, plus interest at a rate of 5.69%. The loan is collateralized by the underlying Common Stock purchased. At June 30, 1999, $178,000 of the principal loan balance remains outstanding. In August and October 1999, the Company provided loans to an employee totaling $2.2 million. The loans are repayable to the Company in August and October 2003 with interest at a rate of 5.96%. The loans are collateralized by the personal assets of the employee. The Company holds equity securities as short-term investments in certain customers at June 30, 1999. These customers attributed $1,361,000 of accounts receivable and $5,942,000 of revenue as of and for the nine month period ended June 30, 1999. (12) 401(k) Profit Sharing Plan: In May 1996, the Company established a 401(k) Profit Sharing Plan (the "401(k) Plan") which covers substantially all employees. Under the 401(k) Plan, employees are permitted to contribute up to 20% of gross compensation not to exceed the annual 402(g) limitation for any plan year. The Company may make discretionary contributions. The Company has made no contributions during the period ended September 30, 1998 and the unaudited nine month period ended June 30, 1999. (13) Earnings Per Share ("EPS"): The following is a reconciliation of the numerator and denominator used to determine basic and diluted EPS (in thousands, except per share amounts):
For the Year Ended For the Nine Months For the Nine Months September 30, 1998 Ended June 30, 1998 Ended June 30, 1999 -------------------- --------------------- -------------------- (unaudited) (unaudited) Numerator--Basic and Diluted EPS............................ Net loss ................................................ $(30,874) $(19,368) $(24,750) ======== ======== ======== Denominator--Basic and Diluted EPS Weighted average Common Stock outstanding ............... 39,626 36,971 49,971 ======== ======== ======== Basic and diluted loss per common share ................... $ (0.78) $ (0.52) $ (0.50) ======== ======== ======== Securities not included as they would be anti-dilutive .... 6,964 4,710 8,764 ======== ======== ========
F-19 INKTOMI CORPORATION NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Information as of June 30, 1999 and for the nine month period then ended is unaudited) (14) Supplemental Disclosure of Cash Flow Information (in thousands):
For the For the For the Year Ended Nine Months Nine Months September 30, 1998 Ended June 30, 1998 Ended June 30, 1999 ------------------- ------------------- ------------------- (unaudited) (unaudited) Accounts payable related to purchase of property and equipment................................................... $ 1,473 $ -- $ -- ======= ====== ====== Exercise of Common Stock options in exchange for note receivable.................................................. $ 666 $ -- $ -- ======= ====== ====== Stock options issued as compensation for services rendered... $ 36 $ -- $ -- ======= ====== ====== Capital lease obligations incurred for fixed assets.......... $ 63 $ 47 $ -- ======= ====== ====== Note payable issued in exchange for fixed assets............. $ 87 $ -- $ -- ======= ====== ====== Notes received from shareholders in exchange for Series B Preferred Stock............................................. $ 146 $ 146 $ 153 ======= ====== ====== Notes received from employees in connection with exercise of options to purchase Common Stock......................... $ 95 $ 95 $ -- ======= ====== ====== Cancellation of employee note in connection with repurchase of Common Shares held in Treasury........................... $ (8) $ -- $ -- ======= ====== ====== Assets acquired under capital lease.......................... $ 6,939 $1,705 $ -- ======= ====== ====== Common Stock issued in exchange for prepaid advertising $ 285 $ -- $ -- ======= ====== ====== Retirement of Common Stock held in Treasury.................. $ -- $ -- $ 12 ======= ====== ====== Cash paid for interest....................................... $ 26 $ 406 $1,359 ======= ====== ======
(15) Subsequent Events: In August 1999, the Company completed the sale of 2,447,275 shares of Common Stock to the public, raising $216.2 million, net of issuance costs and underwriters' discounts. F-20 -----END PRIVACY-ENHANCED MESSAGE-----