e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
(Mark One)
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the fiscal year ended
December 31, 2005
|
or
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the transition period
from to
|
Commission File number 0-27275
Akamai Technologies, Inc.
(Exact Name of
Registrant as Specified in Its Charter)
|
|
|
Delaware
|
|
04-3432319
|
(State or Other Jurisdiction
of
Incorporation or Organization)
|
|
(I.R.S. Employer
Identification No.)
|
8 Cambridge Center, Cambridge,
MA
(Address of Principal
Executive Offices)
|
|
02142
(Zip Code)
|
Registrants telephone number, including area
code: (617) 444-3000
Securities registered pursuant to Section 12(g) of the
Act: Common Stock, $.01 par value
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934. Yes o No þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer (as defined in Exchange Act
Rule 12b-2).
Large accelerated
filer þ Accelerated
Filer o Non-accelerated
filer o
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
Indicate by check mark whether the registrant is a shell company
(as defined in Exchange Act
Rule 12b-2). Yes o No þ
The aggregate market value of the voting and non-voting common
stock held by non-affiliates of the registrant was approximately
$1,638 million based on the last reported sale price of the
common stock on the Nasdaq National Market on June 30, 2005.
The number of shares outstanding of the registrants Common
Stock, par value $0.01 per share, as of March 10,
2006: 154,012,668 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement to
be filed with the Securities and Exchange Commission relative to
the registrants 2006 Annual Meeting of Stockholders to be
held on May 23, 2006 are incorporated by reference into
Items 10, 11, 12, 13 and 14 of Part III of this
annual report on
Form 10-K.
AKAMAI
TECHNOLOGIES, INC.
ANNUAL
REPORT ON
FORM 10-K
For the
Fiscal Year Ended December 31, 2005
TABLE OF
CONTENTS
i
PART I
This report contains forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995. These statements are subject to risks and
uncertainties and are based on the beliefs and assumptions of
our management based on information currently available to our
management. Use of words such as believes,
expects, anticipates,
intends, plans, estimates,
should, likely or similar expressions,
indicate a forward-looking statement. Certain of the information
contained in this annual report on
Form 10-K
consists of forward-looking statements. Important factors that
could cause actual results to differ materially from the
forward-looking statements include, but are not limited to,
those set forth under the heading Risk Factors.
Overview
Akamai provides services for accelerating and improving the
delivery of content and applications over the Internet. Our
solutions are designed to help businesses, government agencies
and other enterprises enhance their revenue streams and reduce
costs by maximizing the performance of their online businesses.
By advancing the performance and reliability of their websites,
our customers can improve visitor experiences and increase the
effectiveness of Web-based campaigns and operations. Through the
Akamai EdgePlatform, the technological platform of Akamais
business solutions, our customers are able to utilize
Akamais infrastructure and reduce expenses associated with
internal infrastructure build-ups.
We began selling our content delivery services in 1999 under the
trade name
FreeFlow®.
Later that year, we added streaming media delivery services to
our portfolio and introduced traffic management services that
allow customers to monitor traffic patterns on their websites
both on a continual basis and for specific events. In 2000, we
began offering a software solution that identifies the
geographic location and network origin from which end users
access our customers websites, enabling content providers
to customize content without compromising user privacy. In 2001,
we commenced commercial sales of our
EdgeSuite®
offering, a suite of services that allows for high-performance
and dynamic delivery of web content. In 2003, we began offering
on a commercial basis our
EdgeComputing®
service, which enables Web-based delivery of applications, such
as store/dealer locators, promotional contests, search
functionalities and user registration, over our network. In
2004, we packaged a number of services and specialized features
to tailor solutions to the needs of specific vertical market
segments, such as media and entertainment, software downloads
and online commerce. In particular, Akamais Media Delivery
services are aimed at addressing the rapid increase in use of
the Internet for delivery of music, sporting events and other
types of audio and video entertainment. In 2005, we began
commercial sales of our Web Application Accelerator service,
which is designed to improve the performance of Web- and
IP-based applications through a combination of dynamic caching,
compression of large packets, routing and connection
optimization. We also introduced two free, publicly-available
information tools: the Akamai Net Usage Index for Retail, which
measures Internet traffic to selected retail sites, and the
Akamai Net Usage Index for News, which tracks online consumption
of news at selected news sites and portals.
We were incorporated in Delaware in 1998 and have our corporate
headquarters at 8 Cambridge Center, Cambridge, Massachusetts.
Our Internet website address is www.akamai.com. We are not
including the information contained on our website as part of,
or incorporating it by reference into, this annual report on
Form 10-K.
We are registered as a reporting company under the Securities
Exchange Act of 1934, as amended, which we refer to as the
Exchange Act. Accordingly, we file or furnish with the
Securities and Exchange Commission, or the Commission, annual
reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K
as required by the Exchange Act and the rules and regulations of
the Commission. We refer to these reports as Periodic Reports.
The public may read and copy any Periodic Reports or other
materials we file with the Commission at the Commissions
Public Reference Room at 100 F Street, NE, Washington, DC 20549.
Information on the operation of the Public Reference Room is
available by calling
1-800-SEC-0330.
In addition, the Commission maintains an Internet website that
contains reports, proxy and information statements and other
information regarding issuers, such as Akamai, that file
electronically with the Commission. The address of this website
is http://www.sec.gov.
1
We make available, free of charge, on or through our Internet
website our periodic reports and amendments to those periodic
reports as soon as reasonably practicable after we
electronically file them with the Commission. The address of
this website is www.akamai.com.
New
Developments in 2005
On June 10, 2005, we acquired Speedera Networks, Inc., or
Speedera, in a merger transaction. Speedera provided distributed
content delivery services. This acquisition increased our
customer base, added additional services to our suite of
offerings and brought to our team talented employees in both the
United States and India to augment our research and development
and marketing groups. In the merger, we acquired all of the
outstanding common and preferred stock, including vested and
unvested stock options, of Speedera in exchange for
approximately 10.6 million shares of Akamai common stock
and options to purchase 1.7 million shares of Akamai common
stock.
On April 1, 2005, Paul Sagan became our Chief Executive
Officer, succeeding George Conrades who remains with Akamai as
our Executive Chairman.
On September 7, 2005, we redeemed all of the
$56.6 million in remaining principal amount of our 5.5%
convertible subordinated notes due 2007 under the terms of the
indenture governing notes. The redemption price was 101.571% of
the principal amount of the notes plus accrued interest to
September 7, 2005.
On November 3, 2005, we closed an underwritten public
offering of 12 million shares of our common stock, which
generated $202.1 million in net proceeds.
Meeting
the Challenges of the Internet
The Internet has matured into a key tool for companies, public
sector agencies and other entities to conduct business and reach
the public. The Internet, however, is a complex system of
networks that was not originally created to accommodate the
volume or sophistication of todays business communication
demands. As a result, information is frequently delayed or lost
on its way through the Internet due to many challenges,
including:
|
|
|
|
|
bandwidth constraints between an end user and the end
users network provider, such as an Internet Service
Provider, or ISP, cable provider or digital subscriber line
provider;
|
|
|
|
Internet traffic exceeding the capacity of routing equipment;
|
|
|
|
inefficient or nonfunctioning peering points, or points of
connection, between ISPs; and
|
|
|
|
traffic congestion at data centers.
|
In addition to the challenges inherent in the Internet,
companies and other entities face internal technology
challenges. Driven by competition, globalization and
cost-containment strategies, companies need an agile
Internet-facing infrastructure that cost-effectively meets
real-time strategic and business objectives. For example, as
public sector agencies migrate more and more of their processes
from in-person, mail, or phone services to Internet-based
applications, it has become essential that their websites be
more reliable and that they deliver their content and
applications more efficiently to their constituents. At the same
time, budget limitations may preclude public sector agencies
from developing their own infrastructure for Internet-facing
applications. Enterprises of all types are confronted with the
increasingly widespread use of broadband connectivity leading to
more users requesting more varied types of rich content. As a
result, there is greater stress on centralized infrastructures.
To address these challenges, Akamai has developed solutions that
are designed to help companies and government agencies increase
revenues and reduce costs by improving the performance,
reliability and security of their Internet-facing operations.
Superior Performance. Commercial enterprises
invest in websites to attract customers, transact business and
provide information about themselves. If, however, a
companys Internet site fails to provide visitors with a
fast and dependable experience, they will likely abandon that
site, potentially leading to lost revenues and damage to the
enterprises reputation. Akamais EdgePlatform is
designed to reduce or eliminate downtime and poor performance of
a customers Website and applications. Through a
combination of people, processes and technology, Akamai
2
offers solutions designed to achieve reliability, stability and
predictability without the need for our customers to spend a lot
of money to develop their own Internet-related infrastructure.
Instead, we have a presence in hundreds of networks around the
world so that content can be delivered from Akamai servers
located closer to website visitors from what we
call, the edge of the Internet. We are thus able to
reduce the impact of traffic congestion, bandwidth constraints
and capacity limitations. At the same time, our customers have
access to control features to enable them to provide content to
end users that is current and customized for visitors accessing
the site from different parts of the world.
Scalability. We believe that scalability is
one of the keys to reliability. Many Akamai customers experience
seasonal or erratic demand for access to their websites. More
generally, almost all websites experience demand peaks at
different points during the day. In both instances, it can be
difficult and expensive to plan for, and deploy solutions
against, such peaks and valleys. Linking thousands of servers in
hundreds of networks around the world, the Akamai EdgePlatform
is designed with the robustness and flexibility to handle
planned and unplanned traffic peaks without additional hardware
investment and configuration on the part of our customers. As a
result, we are able to provide an on demand solution to address
our customers capacity needs in the face of unpredictable
traffic spikes, which helps them avoid expensive investment in a
centralized infrastructure.
Security. Security may be the most significant
challenge facing use of the Internet for business and government
processes because security threats in the form
of attacks, viruses, worms and intrusions can
impact every measure of performance, including information
security, speed, reliability and customer confidence. Unlike
traditional security strategies that can impact performance
negatively, Akamais EdgePlatform is designed to allow for
proactive monitoring and rapid response to security incidents
and anomalies. We rely on both built-in defense mechanisms and
the ability to route traffic around potential security issues so
performance is not compromised. Perhaps most significantly, our
distributed network of thousands of servers is designed to
eliminate a single point of failure and can reduce the impact of
attacks.
Our
Solutions
With the EdgePlatform as our backbone, we offer services and
solutions for content and application delivery, application
performance services, on demand managed services and business
performance management services.
The
Akamai EdgePlatform
Akamais EdgePlatform is the foundation of our business
solutions. We believe Akamai has deployed the worlds
largest globally distributed computing platform, with thousands
of servers located in hundreds of networks around the world.
Leveraging this platform, we deliver our customers content
and computing applications across a system of widely distributed
networks of servers; the content and applications are then
processed at the most efficient places within the network.
Servers are deployed in networks ranging from large, backbone
network providers to medium and small ISPs to cable modem and
satellite providers to universities and other networks. We also
have more than 500 peering relationships that provide us with
direct paths to end user networks, reducing data loss, while
also giving us more options for delivery during network
congestion or failures.
To make this wide-reaching deployment effective, the
EdgePlatform includes specialized technologies, such as advanced
routing, load balancing, data collection and monitoring. Our
intelligent routing software is designed to ensure that website
visitors experience fast page loading, access to applications
and content assembly wherever they are on the Internet,
regardless of global or local traffic conditions. Dedicated
professionals staff our Network Operations Control Center on a
24/7 basis to monitor and react to Internet traffic patterns and
trends. We deploy frequent enhancements to our software globally
to introduce new service offerings and to ensure that our
network continues to run effectively. Technology updates are
replicated across the system. Customers are also able to control
the extent of their use of Akamai services to scale on demand,
using as much or as little capacity of the global platform as
they require, to support widely varying traffic and rapid
e-business
growth without expensive and complex infrastructure build-out.
3
Content
Delivery Services
Akamais EdgeSuite service and related content delivery
offerings have represented the core of our business since our
founding. Leveraging the EdgePlatform, our EdgeSuite service is
designed to enable enterprises to improve the end-user
experience, boost reliability and scalability and reduce the
cost of Internet-related infrastructure. By providing the
benefits of distributed performance to an enterprises
entire website, we are able to provide our customers with a more
efficient way to implement and maintain a global Internet
presence. While site owners maintain a source copy of their
content and applications, EdgeSuite provides global delivery,
load balancing and storage of these content and applications,
enabling businesses to focus valuable resources on strategic
matters, rather than technical infrastructure issues.
Customers of our EdgeSuite service also have access to advanced
service features such as:
|
|
|
|
|
Secure Content Distribution distribution
of secure Internet-related content using Secure Sockets Layer
transport, a protocol to secure transmittal of content over the
Internet, to ensure that content is distributed privately and
reliably between two communicating applications.
|
|
|
|
Site Failover delivery of default
content in the event that the primary, or source, version of the
website of an enterprise customer becomes unavailable.
|
|
|
|
Disaster Recovery a backup web presence
if an unforeseen event causes a website to crash.
|
|
|
|
Net Storage an efficient solution for
digital storage needs for all content types.
|
|
|
|
Content Targeting a feature that enables
content providers to deliver localized content, customized
store-fronts, targeted advertising and adaptive marketing.
|
|
|
|
Streaming Services delivery of streaming
live and recorded audio and video content to Internet users.
|
Akamai
Media Delivery
We believe that the demand for Internet access to media of all
typesmusic, movies, games, streaming news and quotes and
moreis growing rapidly; however, there are many challenges
to successfully monetizing media assets online. In particular,
media companies need cost-effective means to deliver large files
to millions of users in different formats compatible with
multiple end-user devices and platforms. The Akamai Media
Delivery service is designed to provide a solution to many of
the challenges of media delivery over the Internet by helping
media industry clients bypass traditional server and bandwidth
limitations to better handle peak traffic conditions and large
file sizes. We support all major streaming formats, and the
EdgePlatform provides capacity levels that individual
enterprises cannot cost-effectively replicate on their own.
Akamai
Electronic Software Delivery
Internet traffic conditions and high loads can dramatically
impact software download speed and reliability. Furthermore,
surges in traffic from product launches or distribution of
security updates can overwhelm traditional software delivery
infrastructure, impacting Web site performance and causing users
to be unable to download software. Our Electronic Software
Delivery service is designed to leverage the Akamai EdgePlatform
to provide capacity for large surges in traffic related to
software launches and other distributions with a goal of
improved customer experiences, increased use of electronic
delivery and successful product launches.
Application
Performance Services
Application performance services are designed to improve the
performance of highly dynamic content common on corporate
extranets and wide area networks. Traditionally, this market has
been addressed primarily by hardware and software products. We
believe our managed service approach offers a more
cost-effective and comprehensive solution in this area without
requiring customers to make significant infrastructure
investments. In addition to reducing infrastructure costs, our
customers can offer more effective and reliable portal
applications and other Web-based systems for communicating with
their customers, employees and business partners.
4
In 2005, Akamai began commercial sales of our Web Application
Accelerator service, which is designed to improve the
performance of Web- and IP-based applications through a
combination of dynamic caching, compression, routing and
connection optimization. Customers are using this service to run
applications such as online airline reservations systems, course
planning tools, customer order processing and human resources
applications. By tying such applications to the Akamai
EdgePlatform, customers can enjoy improved performance through
connection and route optimization techniques that avoid problem
spots on the Internet or otherwise accelerate delivery of
applications without having to undertake significant internal
infrastructure build-out.
In addition, our Global Traffic Management solution is designed
to provide application performance improvement for companies
with mirrored websites that require traffic management for
multiple application servers and databases. With Global Traffic
Management, enterprises and organizations with a geographically
distributed Web infrastructure can take advantage of real-time
Internet performance information to distribute incoming requests
to an optimal website.
On
Demand Managed Services
Akamais on demand managed services, including our
EdgeComputing and on demand application offerings, enable
enterprises to reduce the need for an internal infrastructure to
handle unpredictable levels of Internet traffic. With access to
the EdgePlatform, customers are able to rapidly launch and
deploy new applications worldwide, with on demand availability
and scalability on a cost-effective basis. For example, Akamai
On Demand Events provides an on demand platform for running
promotional websites through Macromedia
Flash®
promotions, site search, sweepstakes, polls, regional offers or
other innovative applications that create a positive brand
experience.
Akamais EdgeComputing service enables enterprises to
deliver Java (J2EE) Web applications that scale on demand and
are designed to perform faster and more reliably worldwide than
a customers own internal information technology, or IT,
infrastructure. At the same time, this reduces the demands on
our customers IT infrastructures and simplifies their
support requirements. By enabling Internet-based applications
that improve promotion and sales, customer service, and vendor
and partner management, our customers are better positioned to
compete more effectively and reduce business costs.
Business
Performance Management Services
Akamais offerings in this area include our network data
feeds and our Web analytics offering, which provide customers
with real time data about the performance of their content and
applications over the Internet and on the EdgePlatform. In
addition, our business performance management services help
customers better understand their Web operations through
relevant, timely information with tools that measure all aspects
of an applications performance. For example, a customer
could use website data feeds from Akamais customer portal
to assist in managing costs and budget. The core of these
offerings lies in our
EdgeControlSM
tools, which provide comprehensive reporting and management
capabilities.
EdgeControl tools can be integrated with existing enterprise
management systems, allowing our customers to manage their
distributed content and applications via a common interface.
EdgeControl also provides integration with third party network
management tools, including those offered by IBM,
Hewlett-Packard and BMC Software. Having created one of the
industrys first examples of a commercially proven utility
computing platform, Akamai now provides a global network of
servers that can be utilized by a customer on demand, allowing
our customers to manage usage, troubleshooting, monitoring and
reporting, based on their individual business requirements.
Custom
Solutions
In addition to our core commercial services, we are able to
leverage the expertise of our technology, networks and support
personnel to provide custom solutions to both commercial and
government customers. These solutions include replicating our
core technologies to facilitate content delivery behind the
firewall, combinations of our technology with that of other
providers to create unique solutions for specific customers and
support for mission-critical applications that rely on the
Internet and intranets. Additionally, numerous federal
government agencies look to Akamai for information about traffic
conditions and activity on the Internet and tailored solutions
to their content delivery needs.
5
Business
Segments and Geographic Information
We operate in one business segment: providing services for
accelerating delivery of content and applications over the
Internet. For the years ended December 31, 2005, 2004 and
2003 , approximately 21%, 19% and 16%, respectively, of revenues
was derived from our operations outside the United States, of
which 16%, 14% and 13% of overall revenues, respectively, was
derived from Europe. No single country outside of the United
States accounted for 10% or more of our revenues in any of such
years. Revenue from services accounted for 99%, 98% and 98% of
our total revenues for the years ended December 31, 2005,
2004 and 2003, respectively. For more segment and geographic
information, including revenue from customers, a measure of
profit or loss and total assets, see our consolidated financial
statements included in this annual report on
Form 10-K,
including Note 20 thereto.
Customers
Our customer base is centered on enterprises. As of
December 31, 2005, our customers included many of the
worlds leading corporations, including Airbus, Apple
Computer, Inc., Best Buy.com, Inc. FedEx Corporation,
LOreal, Microsoft Corporation, MTV Networks, Sony Ericsson
Mobile Communications, Victorias Secret and XM Satellite
Radio. We also actively sell to government agencies. As of
December 31, 2005, our public sector customers included the
Federal Emergency Management Agency, U.S. Centers for
Disease Control and Prevention, the U.S. Department of
Defense, U.S. Department of Labor, the U.S. Food and
Drug Administration and the U.S. Geological Surveys
Earthquake Hazards Program. No customer accounted for 10% or
more of total revenues for the year ended December 31,
2005. For the years ended December 31, 2004 and 2003,
Microsoft Corporation accounted for 10% and 15% of total
revenues, respectively. Less than 10% of our total revenues in
each of 2003, 2004 and 2005 was derived from contracts or
subcontracts terminable at the election of the federal
government, and we do not expect such contracts to account for
more than 10% of our total revenues in 2006.
Sales,
Service and Marketing
Our sales and service professionals are located in 9 offices in
the United States with additional locations in Europe and Asia.
We market and sell our services and solutions domestically and
internationally through our direct sales and services
organization and through more than 40 active resellers including
Electronic Data Systems Corporation, IBM, InterNap Network
Services Corporation, MCI and Telefonica Group. In addition to
entering into agreements with reseller partners, we have several
other types of sales- and marketing-focused alliances, with
entities such as system integrators, application service
providers, sales agents and referral partners. By aligning with
these companies, we are better able to market our services and
encourage increased adoption of our technology throughout the
industry.
Our sales and service organization includes employees in direct
and channel sales, professional services, account management and
technical consulting. As of December 31, 2005, we had
approximately 286 employees in our sales and support
organization, including 89 direct sales representatives whose
performance is measured on the basis of achievement of quota
objectives. Our ability to achieve revenue growth in the future
will depend in large part on whether we successfully recruit,
train and retain sufficient sales, technical and global services
personnel, and how well we establish and maintain relationships
with our strategic partners. We believe that the complexity of
our services will continue to require a number of highly trained
global sales and services personnel.
To support our sales efforts and promote the Akamai brand, we
conduct comprehensive marketing programs. Our marketing
strategies include an active public relations campaign, print
advertisements, on-line advertisements, trade shows, strategic
partnerships and on-going customer communication programs. As of
December 31, 2005, we had 57 employees in our global
marketing organization.
Research
and Development
Our research and development personnel are continuously
undertaking efforts to enhance and improve our existing
services, strengthen our network and create new services in
response to our customers needs and market demand. As of
December 31, 2005, we had approximately 204 research and
development engineers, many of whom hold advanced degrees in
their field. Our research and development expenses were
$18.1 million, $12.1 million and $13.0 million
for the years ended December 31, 2005, 2004 and 2003,
respectively. In addition, for each of the years
6
ended December 31, 2005, 2004 and 2003, we capitalized
$8.5 million, $7.5 million and $7.5 million,
respectively, net of impairments, of external consulting and
payroll and payroll-related costs related to the development of
internal-use software used to deliver our services and operate
our network.
Competition
The market for our services is intensely competitive and
characterized by rapidly changing technology, evolving industry
standards and frequent new product and service installations. We
expect competition for our services to increase both from
existing competitors and new market entrants. We compete
primarily on the basis of:
|
|
|
|
|
performance of services;
|
|
|
|
return on investment in terms of cost savings and new revenue
opportunities for our customers;
|
|
|
|
reduced infrastructure complexity;
|
|
|
|
scalability;
|
|
|
|
ease of implementation and use of service;
|
|
|
|
customer support; and
|
|
|
|
price.
|
We compete primarily with companies offering products and
services that address Internet performance problems, including
companies that provide Internet content delivery and hosting
services, streaming content delivery services and
equipment-based solutions to Internet performance problems, such
as load balancers and server switches. Some of these companies
resell our services. In addition, potential customers may decide
to purchase or develop their own hardware, software and other
technology solutions rather than rely on an external managed
services provider like Akamai.
Proprietary
Rights and Licensing
Our success and ability to compete are dependent on our ability
to develop and maintain the proprietary aspects of our
technology and operate without infringing on the proprietary
rights of others. We rely on a combination of patent, trademark,
trade secret and copyright laws and contractual restrictions to
protect the proprietary aspects of our technology. We currently
have numerous issued United States and foreign-country patents
covering our content delivery technology, and we have numerous
additional patent applications pending. Our issued patents
extend to various dates between approximately 2015 and 2020. In
October 1998, we entered into a license agreement with the
Massachusetts Institute of Technology, or MIT, under which we
were granted a royalty-free, worldwide right to use and
sublicense the intellectual property rights of MIT under various
patent applications and copyrights relating to Internet content
delivery technology. Two of these patent applications have now
been issued. These patents will expire in 2018. We seek to limit
disclosure of our intellectual property by requiring employees
and consultants with access to our proprietary information to
execute confidentiality agreements with us and by restricting
access to our source code.
Employees
As of December 31, 2005, we had a total of
784 full-time and part-time employees. Our future success
will depend in part on our ability to attract, retain and
motivate highly qualified technical and management personnel for
whom competition is intense. Our employees are not represented
by any collective bargaining unit. We believe our relations with
our employees are good.
The following are certain of the important factors that could
cause our actual operating results to differ materially from
those indicated or suggested by forward-looking statements made
in this annual report on
Form 10-K
or presented elsewhere by management from time to time.
7
The
markets in which we operate are highly competitive, and we may
be unable to compete successfully against new entrants with
innovative approaches and established companies with greater
resources.
We compete in markets that are intensely competitive, highly
fragmented and rapidly changing. We have experienced and expect
to continue to experience increased competition. Many of our
current competitors, as well as a number of our potential
competitors, have longer operating histories, greater name
recognition, broader customer relationships and industry
alliances and substantially greater financial, technical and
marketing resources than we do. Other competitors may attract
customers by offering less-sophisticated versions of services
than we provide at lower prices than those we charge. Our
competitors may be able to respond more quickly than we can to
new or emerging technologies and changes in customer
requirements. Some of our current or potential competitors may
bundle their offerings with other services, software or hardware
in a manner that may discourage website owners from purchasing
any service we offer. Increased competition could result in
price and revenue reductions, loss of customers and loss of
market share, which could materially and adversely affect our
business, financial condition and results of operations.
In addition, potential customers may decide to purchase or
develop their own hardware, software and other technology
solutions rather than rely on an external provider like Akamai.
As a result, our competitors include hardware manufacturers,
software companies and other entities that offer
Internet-related solutions that are not service-based
competitors. It is an important component of our growth strategy
to educate enterprises and government agencies about our
services and convince them to entrust their content and
applications to an external service provider, and Akamai in
particular. If we are unsuccessful in such efforts, our
business, financial condition and results of operations could
suffer.
If we
are unable to sell our services at acceptable prices relative to
our costs, our business and financial results are likely to
suffer.
Prices we have been charging for some of our services have
declined in recent years. We expect that this decline may
continue in the future as a result of, among other things,
existing and new competition in the markets we serve.
Consequently, our historical revenue rates may not be indicative
of future revenues based on comparable traffic volumes. If we
are unable to sell our services at acceptable prices relative to
our costs or if we are unsuccessful with our strategy of selling
additional services and features to our existing content
delivery customers, our revenues and gross margins will
decrease, and our business and financial results will suffer.
Failure
to increase our revenues and keep our expenses consistent with
revenues could prevent us from maintaining profitability at
recent levels or at all.
The year ended December 31, 2004 was the first fiscal year
during which we achieved profitability as measured in accordance
with accounting principles generally accepted in the United
States of America. We have large fixed expenses, and we expect
to continue to incur significant bandwidth, sales and marketing,
product development, administrative and other expenses.
Therefore, we will need to generate higher revenues to maintain
profitability at recent levels or at all. There are numerous
factors that could, alone or in combination with other factors,
impede our ability to increase revenues
and/or
moderate expenses, including:
|
|
|
|
|
failure to increase sales of our core services;
|
|
|
|
significant increases in bandwidth costs or other operating
expenses;
|
|
|
|
inability to maintain our prices;
|
|
|
|
any failure of our current and planned services and software to
operate as expected;
|
|
|
|
loss of any significant customers or loss of customers at a rate
greater than we increase our number of customers or our sales to
existing customers;
|
|
|
|
unauthorized use or access to content delivered over our network
or network failures;
|
|
|
|
failure of a significant number of customers to pay our fees on
a timely basis or at all or failure to continue to purchase our
services in accordance with their contractual
commitments; and
|
8
|
|
|
|
|
inability to attract high-quality customers to purchase and
implement our current and planned services.
|
Future
changes in financial accounting standards may adversely affect
our reported results of operations.
A change in accounting standards can have a significant effect
on our reported results. New accounting pronouncements and
interpretations of accounting pronouncements have occurred and
may occur in the future. These new accounting pronouncements may
adversely affect our reported financial results. For example,
beginning in 2006, under Statement of Financial Accounting
Standards No. 123R, or SFAS No. 123R, we will be
required to account for our stock-based awards as a compensation
expense and our net income and net income per share will be
significantly reduced. Previously, we have recorded compensation
expense only in connection with option grants that have an
exercise price below fair market value. For option grants that
have an exercise price at fair market value, we calculated
compensation expense and disclosed their impact on net income
(loss) and net income (loss) per share, as well as the impact of
all stock-based compensation expense in a footnote to the
consolidated financial statements. SFAS No. 123R
requires us to adopt the new accounting provisions beginning in
our first quarter of 2006, and will require us to expense
stock-based awards, including shares issued under our employee
stock purchase plan, stock options, restricted stock and stock
appreciation rights, as compensation cost. As a result, our
earnings per share is likely to be significantly lower even if
our revenues increase.
If we
are unable to develop new services and enhancements to existing
services, and if we fail to predict and respond to emerging
technological trends and customers changing needs, our
operating results may suffer.
The market for our services is characterized by rapidly changing
technology, evolving industry standards and new product and
service introductions. Our operating results depend on our
ability to develop and introduce new services into existing and
emerging markets. The process of developing new technologies is
complex and uncertain; we must commit significant resources to
developing new services or enhancements to our existing services
before knowing whether our investments will result in services
the market will accept. Furthermore, we may not execute
successfully our technology initiatives because of errors in
planning or timing, technical hurdles that we fail to overcome
in a timely fashion, misunderstandings about market demand or a
lack of appropriate resources. Failures in execution or market
acceptance of new services we introduce could result in
competitors providing those solutions before we do and,
consequently, loss of market share, revenues and earnings.
Any
unplanned interruption in the functioning of our network or
services could lead to significant costs and disruptions that
could reduce our revenues and harm our business, financial
results and reputation.
Our business is dependent on providing our customers with fast,
efficient and reliable distribution of application and content
delivery services over the Internet. For our core services, we
currently provide a standard guarantee that our networks will
deliver Internet content 24 hours a day, 7 days a
week, 365 days a year. If we do not meet this standard, our
customer does not pay for all or a part of its services on that
day. Our network or services could be disrupted by numerous
events, including natural disasters, failure or refusal of our
third-party network providers to provide the necessary capacity,
power losses, and intentional disruptions of our services, such
as disruptions caused by software viruses or attacks by
unauthorized users. Although we have taken steps to prevent such
disruptions, there can be no assurance that attacks by
unauthorized users will not be attempted in the future, that our
enhanced security measures will be effective or that a
successful attack would not be damaging. Any widespread
interruption of the functioning our network or services would
reduce our revenues and could harm our business, financial
results and reputation.
As
part of our business strategy, we have entered into and may
enter into or seek to enter into business combinations and
acquisitions that may be difficult to integrate, disrupt our
business, dilute stockholder value or divert management
attention.
In June 2005, we completed our acquisition of Speedera. We may
seek to enter into additional business combinations or
acquisitions in the future. Acquisitions are typically
accompanied by a number of risks, including the difficulty of
integrating the operations and personnel of the acquired
companies, the potential disruption of our ongoing business, the
potential distraction of management, expenses related to the
acquisition and potential
9
unknown liabilities associated with acquired businesses. Any
inability to integrate completed acquisitions in an efficient
and timely manner could have an adverse impact on our results of
operation. If we are not successful in completing acquisitions
that we may pursue in the future, we may be required to
reevaluate our business strategy, and we may incur substantial
expenses and devote significant management time and resources
without a productive result. In addition, with future
acquisitions, we could use substantial portions of our available
cash or, as in the Speedera acquisition, make dilutive issuances
of securities. Future acquisitions or attempted acquisitions
could also have an adverse effect on our ability to remain
profitable.
Because
our services are complex and are deployed in complex
environments, they may have errors or defects that could
seriously harm our business.
Our services are highly complex and are designed to be deployed
in and across numerous large and complex networks. From time to
time, we have needed to correct errors and defects in our
software. In the future, there may be additional errors and
defects in our software that may adversely affect our services.
We may not have in place adequate quality assurance procedures
to ensure that we detect errors in our software in a timely
manner. If we are unable to efficiently fix errors or other
problems that may be identified, or if there are unidentified
errors that allow persons to improperly access our services, we
could experience loss of revenues and market share, damage to
our reputation, increased expenses and legal actions by our
customers.
We may
have insufficient transmission and server capacity, which could
result in interruptions in our services and loss of
revenues.
Our operations are dependent in part upon transmission capacity
provided by third-party telecommunications network providers. In
addition, our distributed network must be sufficiently robust to
handle all of our customers traffic. We believe that we
have access to adequate capacity to provide our services;
however, there can be no assurance that we are adequately
prepared for unexpected increases in bandwidth demands by our
customers. In addition, the bandwidth we have contracted to
purchase may become unavailable for a variety of reasons
including due to payment disputes or network providers going out
of business. Any failure of these network providers to provide
the capacity we require, due to financial or other reasons, may
result in a reduction in, or interruption of, service to our
customers. If we do not have access to third-party transmission
capacity, we could lose customers. If we are unable to obtain
transmission capacity on terms commercially acceptable to us or
at all, our business and financial results could suffer. We may
not be able to deploy on a timely basis enough servers to meet
the needs of our customer base or effectively manage the
functioning of those servers. In addition, damage or destruction
of, or other denial of access to, a facility where our servers
are housed could result in a reduction in, or interruption of,
service to our customers.
If the
estimates we make, and the assumptions on which we rely, in
preparing our financial statements prove inaccurate, our actual
results may be adversely affected.
Our financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires
us to make estimates and judgments about, among other things,
taxes, revenue recognition, capitalization of internal-use
software, contingent obligations, doubtful accounts and
restructuring charges. These estimates and judgments affect the
reported amounts of our assets, liabilities, revenues and
expenses, the amounts of charges accrued by us, such as those
made in connection with our restructuring charges, and related
disclosure of contingent assets and liabilities. We base our
estimates on historical experience and on various other
assumptions that we believe to be reasonable under the
circumstances. If our estimates or the assumptions underlying
them are not correct, we may need to accrue additional charges
that could adversely affect our results of operations, which in
turn could adversely affect our stock price.
If we
are unable to retain our key employees and hire qualified sales
and technical personnel, our ability to compete could be
harmed.
Our future success depends upon the continued services of our
executive officers and other key technology, sales, marketing
and support personnel who have critical industry experience and
relationships that they rely on in
10
implementing our business plan. There is increasing competition
for talented individuals in the areas in which our primary
offices are located. This affects both our ability to retain key
employees and hire new ones. None of our officers or key
employees is bound by an employment agreement for any specific
term. The loss of the services of any of our key employees could
delay the development and introduction of, and negatively impact
our ability to sell, our services.
If our
license agreement with MIT terminates, our business could be
adversely affected.
We have licensed technology from MIT covered by various patents,
patent applications and copyrights relating to Internet content
delivery technology. Some of our core technology is based in
part on the technology covered by these patents, patent
applications and copyrights. Our license is effective for the
life of the patents and patent applications; however, under
limited circumstances, such as a cessation of our operations due
to our insolvency or our material breach of the terms of the
license agreement, MIT has the right to terminate our license. A
termination of our license agreement with MIT could have a
material adverse effect on our business.
We may
need to defend our intellectual property and processes against
patent or copyright infringement claims, which would cause us to
incur substantial costs.
Other companies or individuals, including our competitors, may
hold or obtain patents or other proprietary rights that would
prevent, limit or interfere with our ability to make, use or
sell our services or develop new services, which could make it
more difficult for us to increase revenues and improve
profitability. Companies holding Internet-related patents or
other intellectual property rights are increasingly bringing
suits alleging infringement of such rights. Any litigation or
claims, whether or not valid, could result in substantial costs
and diversion of resources and require us to do one or more of
the following:
|
|
|
|
|
cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
|
|
|
|
pay substantial damages;
|
|
|
|
obtain a license from the holder of the infringed intellectual
property right, which license may not be available on reasonable
terms or at all; or
|
|
|
|
redesign products or services.
|
If we are forced to take any of these actions, our business may
be seriously harmed. In the event of a successful claim of
infringement against us and our failure or inability to obtain a
license to the infringed technology, our business and operating
results could be materially adversely affected.
Our
business will be adversely affected if we are unable to protect
our intellectual property rights from unauthorized use or
infringement by third parties.
We rely on a combination of patent, copyright, trademark and
trade secret laws and restrictions on disclosure to protect our
intellectual property rights. We have brought numerous lawsuits
against entities that we believe are infringing on our
intellectual property rights. These legal protections afford
only limited protection. Monitoring unauthorized use of our
services is difficult and we cannot be certain that the steps we
have taken will prevent unauthorized use of our technology,
particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States.
Although we have licensed from other parties proprietary
technology covered by patents, we cannot be certain that any
such patents will not be challenged, invalidated or
circumvented. Furthermore, we cannot be certain that any pending
or future patent applications will be granted, that any future
patent will not be challenged, invalidated or circumvented, or
that rights granted under any patent that may be issued will
provide competitive advantages to us.
We
face risks associated with international operations that could
harm our business.
We have operations in several foreign countries and may continue
to expand our sales and support organizations internationally.
Such expansion could require us to make significant
expenditures. We are increasingly
11
subject to a number of risks associated with international
business activities that may increase our costs, lengthen our
sales cycle and require significant management attention. These
risks include:
|
|
|
|
|
increased expenses associated with marketing services in foreign
countries;
|
|
|
|
currency exchange rate fluctuations;
|
|
|
|
unexpected changes in regulatory requirements resulting in
unanticipated costs and delays;
|
|
|
|
interpretations of laws or regulations that would subject us to
regulatory supervision or, in the alternative, require us to
exit a country which could have a negative impact on the quality
of our services or our results of operations;
|
|
|
|
longer accounts receivable payment cycles and difficulties in
collecting accounts receivable; and
|
|
|
|
potentially adverse tax consequences.
|
Any
failure to meet our debt obligations would damage our
business.
We have long-term debt. As of December 31, 2005, our total
long-term debt was $200.0 million. If we are unable to
remain profitable or if we use more cash than we generate in the
future, our level of indebtedness could adversely affect our
future operations by increasing our vulnerability to adverse
changes in general economic and industry conditions and by
limiting or prohibiting our ability to obtain additional
financing for future capital expenditures, acquisitions and
general corporate and other purposes. In addition, if we are
unable to make interest or principal payments when due, we would
be in default under the terms of our notes, which would result
in all principal and interest becoming due and payable which, in
turn, would seriously harm our business.
If we
are required to seek additional funding, such funding may not be
available on acceptable terms or at all.
If our revenues decrease or grow more slowly than we anticipate,
if our operating expenses increase more than we expect or cannot
be reduced in the event of lower revenues, or if we seek to
acquire significant businesses or technologies, we may need to
obtain funding from outside sources. If we are unable to obtain
this funding, our business would be materially and adversely
affected. In addition, even if we were to find outside funding
sources, we might be required to issue securities with greater
rights than the securities we have outstanding today. We might
also be required to take other actions that could lessen the
value of our common stock, including borrowing money on terms
that are not favorable to us. In addition, we may not be able to
raise any additional capital.
Internet-related
and other laws could adversely affect our
business.
Laws and regulations that apply to communications and commerce
over the Internet are becoming more prevalent. In particular,
the growth and development of the market for online commerce has
prompted calls for more stringent tax, consumer protection and
privacy laws, both in the United States and abroad, that may
impose additional burdens on companies conducting business
online or providing Internet-related services such as ours. This
could negatively affect both our business directly as well as
the businesses of our customers, which could reduce their demand
for our services. Tax laws that might apply to our servers,
which are located in many different jurisdictions, could require
us to pay additional taxes that would adversely affect our
continued profitability. We have recorded certain tax reserves
to address potential exposures involving our sales and use and
franchise tax positions. These potential tax liabilities result
from the varying application of statutes, rules, regulations and
interpretations by different jurisdictions. Our reserves,
however, may not be adequate to reflect our total actual
liability. Internet-related laws remain largely unsettled, even
in areas where there has been some legislative action. The
adoption or modification of laws or regulations relating to the
Internet or our operations, or interpretations of existing law,
could adversely affect our business.
12
Provisions
of our charter documents, our stockholder rights plan and
Delaware law may have anti-takeover effects that could prevent a
change in control even if the change in control would be
beneficial to our stockholders.
Provisions of our amended and restated certificate of
incorporation, amended and restated by-laws and Delaware law
could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders. In
addition, our Board of Directors has adopted a shareholder
rights plan the provisions of which could make it more difficult
for a potential acquirer of Akamai to consummate an acquisition
transaction without the approval of our Board of Directors.
A
class action lawsuit has been filed against us and an adverse
resolution of such action could have a material adverse effect
on our financial condition and results of operation in the
period in which the lawsuit is resolved.
We are named as a defendant in a purported class action lawsuit
filed in 2001 alleging that the underwriters of our initial
public offering received undisclosed compensation in connection
with our initial public offering of common stock in violation of
the Securities Act and the Securities Exchange Act of 1934, as
amended, which we refer to as the Exchange Act. Any conclusion
of these matters in a manner adverse to us could have a material
adverse affect on our financial position and results of
operations.
We may
become involved in other litigation that may adversely affect
us.
In the ordinary course of business, we may become involved in
litigation, administrative proceedings and governmental
proceedings. Such matters can be time-consuming, divert
managements attention and resources and cause us to incur
significant expenses. Furthermore, there can be no assurance
that the results of any of these actions will not have a
material adverse effect on our business, results of operations
or financial condition.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Our headquarters are located in approximately
110,000 square feet of leased office space in Cambridge,
Massachusetts. Of this space, we have subleased approximately
12,000 square feet to another company. Our primary west
coast office is located in approximately 18,000 square feet
of leased office space in San Mateo, California. We
maintain offices in several other locations in the United
States, including in or near each of Los Angeles, California;
Atlanta, Georgia; Chicago, Illinois; New York, New York; Dallas,
Texas; Reston, Virginia and Seattle, Washington. We also
maintain offices in Europe and Asia in or near the following
cities: Bangalore, India; Beijing, China; Munich, Germany;
Paris, France; London, England; Tokyo, Japan; Singapore; Madrid,
Spain; and Sydney, Australia. All of our facilities are leased.
We believe our facilities are sufficient to meet our needs for
the foreseeable future and, if needed, additional space will be
available at a reasonable cost.
|
|
Item 3.
|
Legal
Proceedings
|
We are subject to legal proceedings, claims and litigation
arising in the ordinary course of business. We do not expect the
ultimate costs to resolve these matters to have a material
adverse effect on our consolidated financial position, results
of operations or cash flows. In addition to ordinary-course
litigation, we are a party to the lawsuit described below.
Between July 2, 2001 and November 7, 2001, purported
class action lawsuits seeking monetary damages were filed in the
United States District Court for the Southern District of New
York against us as well as against the underwriters of our
October 28, 1999 initial public offering of common stock.
The complaints were filed allegedly on behalf of persons who
purchased our common stock during different time periods, all
beginning on October 28, 1999 and ending on various dates.
The complaints are similar and allege violations of the
Securities Act of 1933 and the Exchange Act primarily based on
the allegation that the underwriters received undisclosed
compensation in
13
connection with our initial public offering. On April 19,
2002, a single consolidated amended complaint was filed,
reiterating in one pleading the allegations contained in the
previously filed separate actions. The consolidated amended
complaint defines the alleged class period as October 28,
1999 through December 6, 2000. A Special Litigation
Committee of Akamais Board of Directors authorized
management to negotiate a settlement of the pending claims
substantially consistent with a Memorandum of Understanding that
was negotiated among class plaintiffs, all issuer defendants and
their insurers. The parties negotiated a settlement that is
subject to approval by the Court. On February 15, 2005, the
Court issued an Opinion and Order preliminarily approving the
settlement, provided that the defendants and plaintiffs agree to
a modification narrowing the scope of the bar order set forth in
the original settlement agreement. The parties agreed to a
modification narrowing the scope of the bar order and, on
August 31, 2005, the Court issued an order preliminarily
approving the settlement. We believe that we have meritorious
defenses to the claims made in the complaint and, if the
settlement is not finalized and approved, we intend to contest
the lawsuit vigorously. An adverse resolution of the action
could have a material adverse effect on our financial condition
and results of operations in the period in which the lawsuit is
resolved. We are not presently able to estimate potential
losses, if any, related to this lawsuit.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
PART II
|
|
Item 5.
|
Market
For Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our common stock, par value $0.01 per share, trades under
the symbol AKAM on The NASDAQ National Market. The
following table sets forth, for the periods indicated, the high
and low sale price per share of the common stock on The NASDAQ
National Market:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal 2004:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
16.97
|
|
|
$
|
10.74
|
|
Second Quarter
|
|
$
|
18.47
|
|
|
$
|
11.65
|
|
Third Quarter
|
|
$
|
17.95
|
|
|
$
|
11.90
|
|
Fourth Quarter
|
|
$
|
16.50
|
|
|
$
|
11.15
|
|
Fiscal 2005:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
13.32
|
|
|
$
|
10.64
|
|
Second Quarter
|
|
$
|
14.80
|
|
|
$
|
11.14
|
|
Third Quarter
|
|
$
|
16.00
|
|
|
$
|
13.02
|
|
Fourth Quarter
|
|
$
|
22.25
|
|
|
$
|
15.20
|
|
As of March 1, 2006, there were 722 holders of record
of our common stock.
We have never paid or declared any cash dividends on shares of
our common stock or other securities and do not anticipate
paying any cash dividends in the foreseeable future. We
currently intend to retain all future earnings, if any, for use
in the operation of our business. We did not repurchase any
equity securities in 2005 nor did we sell any equity securities
that were not registered under the Securities Act of 1933, as
amended.
|
|
Item 6.
|
Selected
Consolidated Financial Data
|
The following selected consolidated financial data should be
read in conjunction with our consolidated financial statements
and related notes and with Managements Discussion
and Analysis of Financial Condition and Results of
Operations and other financial data included elsewhere in
this Annual Report on
Form 10-K.
The consolidated statement of operations data and balance sheet
data for all periods presented is derived from audited
consolidated financial statements included elsewhere in this
Annual Report on
Form 10-K
or in Annual Reports on
14
Form 10-K
for prior years on file with the Securities and Exchange
Commission. In 2002, the Company modified the presentation of
the consolidated statement of operations to include in cost of
revenues equity-related compensation expense, based on the
functional role of the related employee, and depreciation and
amortization on its network equipment.
We acquired several businesses in 2000 that we recorded under
the purchase method of accounting. We allocated $3 billion
of the cost of these acquisitions to goodwill and other
intangible assets. As a result, loss from operations for the
year ended December 31, 2001 includes $255.8 million
for the amortization of goodwill and other intangible assets
related to these acquisitions. In 2001, loss from operations
includes a $1.9 billion impairment of goodwill. On
January 1, 2002, in accordance with Statement of Financial
Accounting Standards, or SFAS, No. 142, Goodwill and
Other Intangible Assets, we discontinued the amortization
of goodwill and reclassified our assembled workforce of
$1.0 million to goodwill. Loss from continuing operations
for the years ended December 31, 2002 and 2001 includes
restructuring charges of $45.8 million and
$40.5 million, respectively, for actual and estimated
termination and modification costs related to non-cancelable
facility leases and employee severance.
Loss from continuing operations for the year ended
December 31, 2003 includes a restructuring credit of
$8.5 million for the reversal of previously accrued
restructuring liabilities and loss on early extinguishment of
debt of $2.1 million. Income from continuing operations for
the years ended December 31, 2005 and 2004 includes a loss
on early extinguishment of debt of $1.4 million and
$6.8 million, respectively.
In 2005, we acquired a business accounted for under the purchase
method of accounting. We allocated $139.5 million of the
cost of this acquisition to goodwill and other intangible
assets. Income from continuing operations for the year ended
December 31, 2005 includes $5.1 million for the
amortization of other intangible assets related to this
acquisition.
In 2005, we released our United States and foreign deferred tax
asset valuation allowance. Based upon our cumulative operating
results and an assessment of our expected future results, we
determined that is was more likely than not that our deferred
tax assets will be realized. During 2005, the total valuation
allowance release recorded as an income tax benefit in the
statement of operations was $285.8 million.
Additionally, in 2005, we completed an equity offering of
12,000,000 shares of our common stock at a price of
$16.855 per share for proceeds of $202.1 million, net
of offering expenses. We also redeemed all $56.6 million in
principal amount of our remaining outstanding
51/2
convertible subordinated notes for total cash payments of
$58.1 million in 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(In thousands, except per share
data)
|
|
|
Consolidated Statements of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
283,115
|
|
|
$
|
210,015
|
|
|
$
|
161,259
|
|
|
$
|
144,976
|
|
|
$
|
163,214
|
|
Total costs and operating expenses
|
|
|
209,740
|
|
|
|
161,048
|
|
|
|
172,370
|
|
|
|
327,580
|
|
|
|
2,577,108
|
|
Net income (loss)
|
|
|
327,998
|
|
|
|
34,364
|
|
|
|
(29,281
|
)
|
|
|
(204,437
|
)
|
|
|
(2,435,512
|
)
|
Net income (loss) per weighted
average share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.41
|
|
|
$
|
0.28
|
|
|
$
|
(0.25
|
)
|
|
$
|
(1.81
|
)
|
|
$
|
(23.59
|
)
|
Diluted
|
|
$
|
2.11
|
|
|
$
|
0.25
|
|
|
$
|
(0.25
|
)
|
|
$
|
(1.81
|
)
|
|
$
|
(23.59
|
)
|
Weighted average shares used in
per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
136,167
|
|
|
|
124,407
|
|
|
|
118,075
|
|
|
|
112,766
|
|
|
|
103,233
|
|
Diluted
|
|
|
156,944
|
|
|
|
146,595
|
|
|
|
118,075
|
|
|
|
112,766
|
|
|
|
103,233
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
marketable securities
|
|
$
|
309,574
|
|
|
$
|
103,763
|
|
|
$
|
198,707
|
|
|
$
|
111,765
|
|
|
$
|
181,514
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
Restricted marketable securities
|
|
|
4,555
|
|
|
|
4,654
|
|
|
|
4,648
|
|
|
|
13,405
|
|
|
|
28,997
|
|
Working capital
|
|
|
293,122
|
|
|
|
61,903
|
|
|
|
139,756
|
|
|
|
60,584
|
|
|
|
136,701
|
|
Total assets
|
|
|
891,499
|
|
|
|
182,743
|
|
|
|
278,941
|
|
|
|
229,863
|
|
|
|
421,478
|
|
Current portion of obligations
under capital leases and equipment loans
|
|
|
|
|
|
|
232
|
|
|
|
775
|
|
|
|
1,207
|
|
|
|
405
|
|
Current portion of accrued
restructuring
|
|
|
1,749
|
|
|
|
1,393
|
|
|
|
1,638
|
|
|
|
23,622
|
|
|
|
17,633
|
|
Current portion of
51/2% convertible
subordinated notes
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
Obligations under capital leases
and equipment loans, net of current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,006
|
|
|
|
113
|
|
Accrued restructuring, net of
current portion
|
|
|
1,844
|
|
|
|
2,259
|
|
|
|
3,641
|
|
|
|
13,994
|
|
|
|
10,010
|
|
Other liabilities
|
|
|
3,565
|
|
|
|
3,035
|
|
|
|
1,994
|
|
|
|
1,854
|
|
|
|
2,823
|
|
1% convertible senior notes
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
175,000
|
|
|
|
|
|
|
|
|
|
51/2% convertible
subordinated notes, net of current portion
|
|
|
|
|
|
|
56,614
|
|
|
|
211,000
|
|
|
|
300,000
|
|
|
|
300,000
|
|
Total stockholders equity
(deficit)
|
|
$
|
624,214
|
|
|
$
|
(125,931
|
)
|
|
$
|
(175,354
|
)
|
|
$
|
(168,090
|
)
|
|
$
|
17,234
|
|
16
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
We primarily derive income from the sale of services to
customers executing contracts with terms of one year or longer,
which we refer to as recurring revenue contracts or long-term
contracts. These contracts generally commit the customer to a
minimum monthly level of usage with additional charges
applicable for actual usage above the monthly minimum. Having a
consistent and predictable base level of income is important to
our financial success. Accordingly, to be successful, we must
maintain our base of recurring revenue contracts by eliminating
or reducing lost monthly recurring revenue due to customer
cancellations or terminations and build on that base by adding
new customers and increasing the number of services, features
and functions our customers purchase. At the same time, we must
ensure that our expenses do not increase faster than, or at the
same rate as, our revenues. Accomplishing these goals requires
that we compete effectively in the marketplace on the basis of
price, quality and the attractiveness of our services and
technology. This Managements Discussion and Analysis of
Financial Condition and Results of Operations should be read in
conjunction with our consolidated financial statements and notes
thereto which appear elsewhere in this Annual Report on
Form 10-K.
See Risk Factors elsewhere in this Annual Report on
Form 10-K
for a discussion of certain risks associated with our business.
Our improved financial results in 2005 as compared to 2004 and
2003 reflect our efforts to increase our monthly recurring
revenues while reducing the expenses needed to support such
growth. The following sets forth, as a percentage of revenues,
consolidated statements of operations data for the years
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
20
|
|
|
|
22
|
|
|
|
38
|
|
Research and development
|
|
|
6
|
|
|
|
6
|
|
|
|
8
|
|
Sales and marketing
|
|
|
28
|
|
|
|
27
|
|
|
|
30
|
|
General and administrative
|
|
|
19
|
|
|
|
22
|
|
|
|
35
|
|
Amortization of other intangible
assets
|
|
|
2
|
|
|
|
|
|
|
|
1
|
|
Restructuring (benefits)
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and operating expenses
|
|
|
75
|
|
|
|
77
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
25
|
|
|
|
23
|
|
|
|
(7
|
)
|
Interest income
|
|
|
2
|
|
|
|
1
|
|
|
|
1
|
|
Interest expense
|
|
|
(2
|
)
|
|
|
(5
|
)
|
|
|
(12
|
)
|
Other (expense) income, net
|
|
|
|
|
|
|
1
|
|
|
|
|
|
(Loss) gain on investments, net
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Loss on early extinguishment of
debt
|
|
|
|
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before (benefit)
provision for income taxes
|
|
|
25
|
|
|
|
17
|
|
|
|
(18
|
)
|
(Benefit) provision for income
taxes
|
|
|
(91
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
116
|
%
|
|
|
16
|
%
|
|
|
(18
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We were profitable for fiscal years 2005 and 2004; however, we
cannot guarantee continued profitability for any period in the
future. We have observed the following trends and events that
are likely to have an impact on our financial condition and
results of operations in the foreseeable future:
|
|
|
|
|
During each quarter in 2005 and 2004, the dollar volume of new
recurring revenue contracts exceeded the dollar volume of the
contracts we lost through cancellations, terminations and non-
payment. A continuation of this trend would lead to increased
revenues in the future.
|
|
|
|
During 2005, no customer accounted for 10% or more of our total
revenues. We expect that customer concentration levels will
decline compared to prior years as our customer base continues
to grow.
|
17
|
|
|
|
|
During 2005, revenues derived from customers located outside the
United States were 21% of our total revenues. We expect that the
revenues from such customers as a percentage of our total
revenues in 2006 will be consistent with that of 2005.
|
|
|
|
During 2005, we continued to reduce our network bandwidth costs
per unit by entering into new supplier contracts with lower
pricing and amending existing contracts to take advantage of
price reductions offered by our existing suppliers. However, due
to increased traffic delivered over our network, our total
bandwidth costs increased during 2005. We believe that our
overall bandwidth costs will continue to increase as a result of
expected higher traffic levels, partially offset by continued
reductions in bandwidth costs per unit. If we do not experience
lower per unit bandwidth pricing and we are unsuccessful at
effectively routing traffic over our network through lower cost
providers, network bandwidth costs could increase in excess of
our expectations in 2006.
|
|
|
|
Depreciation expense related to our network equipment increased
in 2005 as compared to 2004. Due to additional equipment
purchases in 2005, expected additional purchases in 2006, as
well as equipment acquired with the acquisition of Speedera, we
believe that depreciation expense related to our network
equipment will continue to increase in 2006. We expect to
continue to enhance and add functionality to our service
offerings, which will increase the amount of capitalized
internal-use software costs. As a result, we believe that the
amortization of internal-use software development costs, which
we include in cost of revenues, will slightly increase in 2006.
|
|
|
|
Equity-based compensation expense increased during 2005 as
compared to 2004 in connection with the acquisition of Speedera
and the issuance of deferred stock units to members of our Board
of Directors in 2005. Statement of Financial Accounting
Standards, or SFAS, No. 123R, Share-Based Payment
(revised 2004), which will be applicable to us beginning
in the first quarter of 2006, will require us to record
compensation expense for employee equity awards at fair value at
the time of grant. We anticipate a further increase in our
non-cash equity-based compensation expense, likely resulting in
a significant decrease in our expected net income in the future,
because we have a significant number of unvested employee
options outstanding and plan to continue to grant equity-based
compensation in the future.
|
|
|
|
During 2005, we released substantially all of our United States
and foreign deferred tax asset valuation allowance. Based upon
our cumulative operating results and an assessment of our
expected future results, we determined that it was more likely
than not that our deferred tax assets will be realized. During
2005, the total valuation allowance release recorded as an
income tax benefit in our statement of operations was
$285.8 million. We expect our annualized effective tax rate
in the future to significantly increase. We expect that our
consolidated annualized effective tax rate in 2006 will be
approximately 40%.
|
Based on our analysis of these known trends and events, we
expect to continue to generate net income on a quarterly basis
during 2006; however, our future results will be affected by
many factors identified below and in the section of this report
entitled Risk Factors, including our ability to:
|
|
|
|
|
increase our revenue by adding customers through long-term
contracts and limiting customer cancellations and terminations;
|
|
|
|
maintain the prices we charge for our services;
|
|
|
|
prevent disruptions to our services and network due to accidents
or intentional attacks; and
|
|
|
|
maintain our network bandwidth costs and other operating
expenses consistent with our revenues.
|
As a result, there is no assurance that we will achieve our
expected financial objectives, including positive net income.
Application
of Critical Accounting Policies and Estimates
Overview
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally
18
accepted in the United States of America. These principles
require us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses,
cash flow and related disclosure of contingent assets and
liabilities. Our estimates include those related to revenue
recognition, accounts receivable reserves, capitalized
internal-use software costs, intangible assets and goodwill,
income and other taxes, useful lives of property and equipment,
restructuring accruals and contingent obligations. We base our
estimates on historical experience and on various other
assumptions that we believe to be reasonable under the
circumstances. Actual results may differ from these estimates.
For a complete description of our significant accounting
policies, see Note 2 to our consolidated financial
statements included in this annual report on
Form 10-K.
Definitions
We define our critical accounting policies as those
accounting principles generally accepted in the
United States of America that require us to make subjective
estimates about matters that are uncertain and are likely to
have a material impact on our financial condition and results of
operations as well as the specific manner in which we apply
those principles. Our estimates are based upon assumptions and
judgments about matters that are highly uncertain at the time
the accounting estimate is made and applied and require us to
continually assess a range of potential outcomes.
Review
of Critical Accounting Policies and Estimates
Revenue
Recognition:
We recognize service revenues in accordance with the Securities
and Exchange Commissions Staff Accounting
Bulletin No. 104, Revenue Recognition, and
the Financial Accounting Standards Boards, or FASB,
Emerging Issues Task Force Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables.
Revenue is recognized only when the price is fixed or
determinable, persuasive evidence of an arrangement exists, the
service is performed and collectibility of the resulting
receivable is reasonably assured.
At the inception of a customer contract for service, we make an
estimate as to that customers ability to pay for the
services provided. We base our estimate on a combination of
factors, including the successful completion of a credit check
or financial review, our payment history with the customer and
other forms of payment assurance. Upon the completion of these
steps, we recognize revenue monthly in accordance with our
revenue recognition policy. If we subsequently determine that
collection from the customer is not reasonably assured, we
record an allowance for doubtful accounts and bad debt expense
for all of that customers unpaid invoices and cease
recognizing revenue for continued services provided until cash
is received. Changes in our estimates and judgments about
whether collection is reasonably assured would change the timing
of revenue or amount of bad debt expense that we recognize.
We primarily derive income from the sale of services to
customers executing contracts with terms of one year or longer.
These contracts generally commit the customer to a minimum
monthly level of usage and provide the rate at which the
customer must pay for actual usage above the monthly minimum.
For these services, we recognize the monthly minimum as revenue
each month provided that an enforceable contract has been signed
by both parties, the service has been delivered to the customer,
the fee for the service is fixed or determinable and collection
is reasonably assured. Should a customers usage of our
service exceed the monthly minimum, we recognize revenue for
such excess usage in the period of the usage. We typically
charge the customer an installation fee when the services are
first activated. The installation fees are recorded as deferred
revenue and recognized as revenue ratably over the estimated
life of the customer arrangement. We also derive income from
services sold as discrete, non-recurring events or based solely
on usage. For these services, we recognize revenue after an
enforceable contract has been signed by both parties, the fee is
fixed or determinable, the event or usage has occurred and
collection is reasonably assured.
We periodically enter into multi-element service arrangements.
When we enter into such arrangements, each element is accounted
for separately over its respective service period, provided that
there is objective evidence of fair value for the separate
elements. For example, objective evidence of fair value would
include the price charged for the element when sold separately.
If the fair value of each element cannot be objectively
determined, the total value of the arrangement is recognized
ratably over the entire service period to the extent that all
services have begun to be provided at the outset of the period.
For most multi-element service arrangements to date, the fair
value
19
of each element has not been objectively determinable.
Therefore, all revenue under these arrangements has been
recognized ratably over the related service period.
We also license software under perpetual and term license
agreements. We apply the provisions of Statement of Position, or
SOP, 97-2, Software Revenue Recognition, as amended
by
SOP 98-9,
Modifications of
SOP 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions. As prescribed by this guidance, we apply the
residual method of accounting. The residual method requires that
the portion of the total arrangement fee attributable to
undelivered elements, as indicated by vendor specific objective
evidence of fair value, is deferred and subsequently recognized
when delivered. The difference between the total arrangement fee
and the amount deferred for the undelivered elements is
recognized as revenue related to the delivered elements, if all
other revenue recognition criteria of
SOP 97-2
are met.
We also sell our services through a reseller channel. Assuming
all other revenue recognition criteria are met, we recognize
revenue from reseller arrangements based on the resellers
contracted non-refundable minimum purchase commitments over the
term of the contract, plus amounts sold by the reseller to its
customers in excess of the minimum commitments. These excess
commitments are recognized as revenue in the period in which the
service is provided.
We recognize revenue from fixed-fee arrangements and software
arrangements that require significant customization or
modification using the
percentage-of-completion
method in accordance with Accounting Research Bulletin, or ARB,
No. 45, Long-Term Construction-Type Contracts,
and with the applicable guidance provided by
SOP 81-1,
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. We generally recognize
revenue under these arrangements based on the percentage of cost
incurred to date compared to the estimated total cost to
complete the project. In certain customer arrangements, we
recognize revenue based on the progress made towards achieving
milestones under the contract. The impact of any change in
estimate is recorded prospectively from the date of the change.
At the outset of a fixed-fee arrangement, if we are not able to
estimate the total
cost-to-complete,
nor able to measure progress towards the achievement of contract
milestones, we account for the arrangement using the
completed-contract method of accounting. Under this method, we
recognize revenue when the contract is complete and there are no
remaining costs or deliverables. In the event that the estimated
total cost on a fixed-fee contract indicates a loss, we will
record the loss immediately.
From time to time, we enter into contracts to sell our services
or license our technology to unrelated companies at or about the
same time we enter into contracts to purchase products or
services from the same companies. If we conclude that these
contracts were negotiated concurrently, we record as revenue
only the net cash received from the vendor, unless both the fair
values of our services delivered to the customer and of the
vendors product or service we receive can be established
objectively and realization of such value is believed to be
probable.
We may from time to time resell licenses or services of third
parties. We record revenue for these transactions when we have
risk of loss related to the amounts purchased from the third
party and we add value to the license or service, such as by
providing maintenance or support for such license or service. If
these conditions are present, we recognize revenue when all
other revenue recognition criteria are satisfied.
Deferred revenue includes amounts billed to customers for which
revenue has not been recognized. Deferred revenue primarily
consists of the unearned portion of monthly billed service fees;
deferred installation and activation
set-up fees;
amounts billed under extended payment terms; and maintenance and
support fees charged under license arrangements.
Accounts
Receivable and Related Reserves:
Trade accounts receivable are recorded at the invoiced amounts
and do not bear interest. In addition to trade accounts
receivable, our accounts receivable balance includes unbilled
accounts that represent revenue recorded for customers that is
typically billed within one month. We record reserves against
our accounts receivable balance. These reserves consist of
allowances for doubtful accounts, cash basis customers and
service credits. Increases and decreases in the allowance for
doubtful accounts are included as a component of general and
administrative expenses. The reserve for cash basis customers
increases as services are provided to customers where collection
is no longer assured. The reserve decreases and revenue is
recognized when and if cash payments are received. The
20
reserve for service credits increases as a result of specific
service credits that are expected to be issued to customers
during the ordinary course of business, as well as for billing
disputes. These credits result in a reduction to revenues.
Decreases to the reserve are the result of actual credits being
issued to customers, causing a corresponding reduction in
accounts receivable.
Estimates are used in determining these reserves and are based
upon our review of outstanding balances on a customer-specific,
account-by-account
basis. The allowance for doubtful accounts is based upon a
review of customer receivables from prior sales with collection
issues where we no longer believe that the customer has the
ability to pay for prior services provided. We perform on-going
credit evaluations of our customers. If such an evaluation
indicates that payment is no longer reasonably assured for
current services provided, any future services provided to that
customer will result in creation of a reserve until we receive
consistent payments. In addition, we reserve a portion of
revenues as a reserve for service credits. Reserves for service
credits are measured based on an analysis of revenue credits to
be issued after the month of billing and an estimate for future
credits. These credits typically relate to managements
estimate of the resolution of customer disputes and billing
adjustments. We do not have any off-balance sheet credit
exposure related to our customers.
Impairment
and Useful Lives of Long-Lived Assets:
We review our long-lived assets, such as fixed assets and
intangible assets, for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets
may not be recoverable. Events that would trigger an impairment
review include a change in the use of the asset or forecasted
negative cash flows related to the asset. When such a triggering
event occurs, we compare the carrying amount of the long-lived
asset to the undiscounted expected future cash flows related to
the asset. If the carrying amount is greater than the sum of the
undiscounted cash flows, we adjust the asset to its fair value
through an impairment charge included in loss from operations.
We determine fair value based upon a quoted market price or a
discounted cash flow analysis. The estimates required to apply
this accounting policy include forecasted usage of the
long-lived assets and the useful lives of these assets and
expected future cash flows. Changes in these estimates could
materially impact results from operations.
Restructuring
Liabilities Related to Facility Leases:
When we vacate a facility subject to a non-cancelable long-term
lease, we record a restructuring liability for either the
estimated costs to terminate the lease or the estimated costs
that will continue to be incurred under the lease for its
remaining term where there is no economic benefit to us. In the
latter case, we measure the amount of the restructuring
liability as the amount of contractual future lease payments
reduced by an estimate of sublease income. To date, we have
recorded a restructuring liability when our management approves
and commits us to a plan to terminate a lease, the plan
specifically identifies the actions to be taken, and the actions
are scheduled to begin soon after management approves the plan.
In accordance with SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities, we
record restructuring liabilities, discounted at the appropriate
rate, for a facility lease only when we have both vacated the
space and completed all actions needed to make the space readily
available for sublease.
As of December 31, 2005, we had $2.3 million in
accrued restructuring liabilities related to vacated facilities.
In 2003, we were able to renegotiate two of our previously
restructured facility leases to reduce rents payable under the
leases to current market rates, resulting in a reversal of
previously recorded restructuring liabilities of
$9.6 million. We expect that approximately
$1.4 million of the amount accrued as of December 31,
2005 will be paid within 12 months.
Loss
Contingencies:
We define a loss contingency as a condition involving
uncertainty as to a possible loss related to a previous event
that will not be resolved until one or more future events occur
or fail to occur. Our primary loss contingencies relate to
pending or threatened litigation. We record a liability for a
loss contingency when we believe that it is probable that a loss
has been incurred and the amount of the loss can be reasonably
estimated. When we believe the
21
likelihood of a loss is less than probable and more than remote,
we do not record a liability but we disclose material loss
contingencies in the notes to the consolidated financial
statements.
Tax
Reserves:
Our provision for income taxes is comprised of a current and a
deferred portion. The current income tax provision is calculated
as the estimated taxes payable or refundable on tax returns for
the current year. The deferred income tax provision is
calculated for the estimated future tax effects attributable to
temporary differences and carryforwards using expected tax rates
in effect in the years during which the differences are expected
to reverse.
We currently have significant deferred tax assets resulting from
net operating loss carryforwards, tax credit carryforwards and
deductible temporary differences. Management weighs the positive
and negative evidence to determine if it is more likely than not
that some or all of the deferred tax assets will be realized. In
the third quarter of 2005, management determined it was more
likely than not that most of the deferred tax assets would be
realized. This decision was based on our cumulative history of
book earnings over a
12-quarter
period and on projections of expected future taxable income. The
tax assets estimated to be realized in future periods have been
calculated by applying a blended federal and state tax rate of
39.65%, which is based upon the tax rates expected to be in
effect in the periods during which the attributes are expected
to be utilized. Changes in this blended rate in future periods
could have a material effect on both the tax provision in the
period of change as well as the net deferred tax asset carrying
value.
We have recorded tax reserves to address potential exposures
involving our sales and use and franchise tax positions. These
potential exposures result from the varying application of
statutes, rules, regulations and interpretations by different
jurisdictions. Our determination of the amount of these tax
reserves involves assumptions based on past experiences and
judgments about the interpretation of statutes, rules and
regulations by taxing jurisdictions. It is possible that the
cost of the ultimate resolution of these matters may be greater
or less than the amount that we estimated.
Accounting
for Stock Options
Historically, through December 31, 2005, we recognized
stock option costs pursuant to Accounting Principles Board
Opinion, or APB, No. 25, Accounting for Stock Issued
to Employees, and related interpretations. We have
disclosed the impact of expensing stock options pursuant to
SFAS No. 123, Accounting for Stock-Based
Compensation, in the notes to our consolidated financial
statements. Effective in 2006, we will adopt the provisions of
SFAS No. 123R, Share-Based Payment. Both
SFAS No. 123 and 123R require management to make
assumptions to determine the fair value of stock options,
including the expected life of the stock options and the
volatility of the underlying common stock. Changes to the
assumptions may have a significant impact on the fair value of
the stock options, which could have a material impact on our
financial statements. Additionally, in our pro forma disclosure,
we incorporate a forfeiture estimate as we recognize equity
expense. Should our actual forfeitures differ from our
estimates, this could have a material impact on our consolidated
financial statements.
Capitalized
Internal-Use Software Costs:
We capitalize the salaries and payroll-related costs of
employees and consultants who devote time to the development of
internal-use software projects. If a project constitutes an
enhancement to previously developed software, we assess whether
the enhancement is significant and creates additional
functionality to the software, thus qualifying the work incurred
for capitalization. Once the project is complete, we estimate
the useful life of the internal-use software, and we
periodically assess whether the software is impaired. Changes in
our estimates related to internal-use software would increase or
decrease operating expenses or amortization recorded during the
period.
Results
of Operations
Revenues. Total revenues increased 35%, or
$73.1 million, to $283.1 million for the year ended
December 31, 2005 as compared to $210.0 million for
the year ended December 31, 2004. Total revenues increased
30%, or $48.8 million, to $210.0 million for the year
ended December 31, 2004 as compared to $161.3 million
for the year ended December 31, 2003. The increase in total
revenues for 2005 as compared to 2004 was attributable to an
22
increase in service revenue of $74.7 million, partially
offset by a reduction in software and software-related revenue
of $1.6 million. The increase in total revenues for 2004 as
compared to 2003 was attributable to an increase in service
revenue of $49.4 million, partially offset by a reduction
in software and software-related revenue of $477,000 and related
party revenue of $137,000.
Service revenue, which consists of revenue from our content and
application delivery services, increased 36%, or
$74.7 million, to $281.5 million for the year ended
December 31, 2005 as compared to $206.8 million for
the year ended December 31, 2004. Service revenue was
$157.4 million for the year ended December 31, 2003.
The increases in service revenue were primarily attributable to
increases in the number of customers under recurring revenue
contracts, as well as increases in traffic and additional
services sold to new and existing customers and increases in the
average revenue per customer. These increases are attributable
to greater market acceptance of our services among new customers
and improvements in our ability to sell additional features to
our existing customers. Also contributing to the increases in
service revenue were revenues generated from the acquisition of
Speedera on June 10, 2005. As of December 31, 2005, we
had 1,910 customers under recurring revenue contracts as
compared to 1,310 as of December 31, 2004, and 1,126 as of
December 31, 2003.
For 2005 and 2004, 21% and 19%, respectively, of our total
revenues was derived from our operations located outside of the
United States, of which 16% and 14% of overall revenues,
respectively, was derived from operations in Europe. For 2003,
16% of our total revenues was derived from our operations
located outside of the United States, of which 13% of overall
revenues was derived from operations in Europe. No single
country accounted for 10% or more of revenues derived outside of
the United States during these periods. Resellers accounted for
24% of revenues in 2005, 27% in 2004 and 25% in 2003. For 2005,
no single customer accounted for 10% or more of total revenues.
For 2004 and 2003, Microsoft Corporation accounted for 10% and
15%, respectively, of total revenues.
Software and software-related revenue decreased 49%, or
$1.6 million, to $1.6 million for the year ended
December 31, 2005 as compared to $3.3 million for the
year ended December 31, 2004. Software and software-related
revenue was $3.7 million for the year ended
December 31, 2003. Software and software-related revenue
includes sales of customized software projects and technology
licensing. The decreases in software and software-related
revenue over the periods presented reflect a reduction in the
number of customized software projects that we undertook for
customers and a decrease in the number of software licenses
executed with customers. We do not expect software and
software-related revenue to increase as a percentage of revenues
in 2006.
We had no revenue from related parties during 2005 and 2004.
Service and software revenue from related parties was $137,000
for the year ended December 31, 2003. Related party revenue
in 2003 represented revenue from Akamai Australia, a joint
venture with ES Group Ventures Pty Ltd, relating to resale
commitments. In June 2003, this joint venture was terminated. We
do not expect to have any revenue from related parties in 2006.
Cost of Revenues. Cost of revenues includes
fees paid to network providers for bandwidth and co-location of
our network equipment. Cost of revenues also includes payroll
and related costs and equity-related compensation for network
operations personnel, cost of software licenses, depreciation of
network equipment used to deliver our services and amortization
of internal-use software.
Cost of revenues increased 21%, or $9.5 million, to
$55.7 million for the year ended December 31, 2005 as
compared to $46.2 million for the year ended
December 31, 2004. Cost of revenues decreased 24%, or
$14.7 million, to $46.2 million for the year ended
December 31, 2004 compared to $60.8 million for the
year ended December 31, 2003. The increase in cost of
revenues for 2005 as compared to 2004 was primarily due to an
increase in aggregate bandwidth costs due to higher traffic
levels and an increase in depreciation expense of network
equipment as we continue to invest in our infrastructure,
partially offset by reduced bandwidth costs per unit. The total
cost of revenues decreased in 2004 as compared to 2003 as a
result of a decline in depreciation expense of network equipment
as the impact of our network assets becoming fully depreciated
exceeded the depreciation from the investments we made in our
network infrastructure. The decline in deprecation expense in
2004 was partially offset by an increase in total bandwidth
costs due to an increase in the amount of traffic delivered.
Cost of revenues during 2005, 2004 and 2003 also included
credits of $1.2 million, $1.0 million and
$3.0 million, respectively, as a result of settlements and
renegotiations entered into in connection with billing
23
disputes related to bandwidth contracts. Credits of this nature
may occur in the future; however, the timing and amount of
future credits, if any, will vary.
Cost of revenues is comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Bandwidth, co-location and storage
fees
|
|
$
|
35.6
|
|
|
$
|
27.7
|
|
|
$
|
24.5
|
|
Payroll and related costs of
network operations personnel, including
equity-related
compensation
|
|
|
3.8
|
|
|
|
3.5
|
|
|
|
2.9
|
|
Cost of software licenses
|
|
|
0.7
|
|
|
|
1.0
|
|
|
|
0.4
|
|
Depreciation and impairment of
network equipment and amortization of internal-use software
|
|
|
15.6
|
|
|
|
14.0
|
|
|
|
33.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
55.7
|
|
|
$
|
46.2
|
|
|
$
|
60.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have long-term purchase commitments for bandwidth usage and
co-location with various networks and Internet service
providers. For the years ending December 31, 2006, 2007 and
2008, the minimum commitments related to bandwidth usage and
co-location services are approximately $6.0 million,
$1.1 million and $409,000, respectively.
We believe cost of revenues will increase in 2006. We expect to
deliver more traffic on our network, which would result in
higher expenses associated with the increased traffic; however,
such costs are likely to be partially offset by lower bandwidth
costs per unit. Additionally, we expect increases in
depreciation expense related to our network equipment and
amortization of internal-use software development costs, as well
as an increase in payroll and payroll-related costs, as we
continue to make investments in our network to service our
expanding customer base. Additionally, with the impact of
implementing SFAS No. 123R for the expensing of
employee stock awards at fair value beginning in the first
quarter of 2006, we expect significant increases in cost of
revenues attributable to equity-related compensation expense.
Research and Development. Research and
development expenses consist primarily of payroll and related
costs and equity-related compensation for research and
development personnel who design, develop, test and enhance our
services and our network. Research and development costs are
expensed as incurred, except certain software development costs
requiring capitalization. During the years ended
December 31, 2005, 2004 and 2003, we capitalized software
development costs of $8.5 million, $7.5 million and
$7.5 million, respectively, consisting of external
consulting and payroll and payroll-related costs related to the
development of internal-use software used to deliver our
services and operate our network. These capitalized internal-use
software costs are amortized to cost of revenues over their
estimated useful lives of two years.
Research and development expenses increased 49%, or
$5.9 million, to $18.1 million for the year ended
December 31, 2005 as compared to $12.1 million for the
year ended December 31, 2004. Research and development
expenses decreased 6%, or $839,000, to $12.1 million for
the year ended December 31, 2004 as compared to
$13.0 million for the year ended December 31, 2003.
The increase in 2005 as compared to 2004 was primarily due to an
increase in payroll and related costs due to an increase in
headcount. The decrease in 2004 as compared to 2003 was
primarily due to decreases in payroll and related costs,
including equity-related compensation, as a reflection of the
impact of workforce reductions in prior years and a reduction in
equity compensation as stock awards became fully vested. The
following table quantifies the net changes in research and
development expenses over periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in
|
|
|
|
Research and Development
|
|
|
|
Expenses
|
|
|
|
2005 to 2004
|
|
|
2004 to 2003
|
|
|
Payroll and related costs,
including
equity-related
compensation
|
|
$
|
5.9
|
|
|
$
|
(0.9
|
)
|
Capitalization of internal-use
software development costs and other
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease)
|
|
$
|
5.9
|
|
|
$
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
24
We believe that research and development expenses will increase
in 2006, as we continue to increase hiring of development
personnel and make investments in our core technology and
refinements to our other service offerings. Additionally, with
the impact of implementing SFAS No. 123R for the
expensing of employee stock awards at fair value beginning in
the first quarter of 2006, we expect significant increases in
research and development expense attributable to equity-related
compensation expense.
Sales and Marketing. Sales and marketing
expenses consist primarily of payroll and related costs,
equity-related compensation and commissions for personnel
engaged in marketing, sales and service support functions, as
well as advertising and promotional expenses.
Sales and marketing expenses increased 40%, or
$22.2 million, to $77.9 million for the year ended
December 31, 2005 as compared to $55.7 million for the
year ended December 31, 2004. Sales and marketing expenses
increased 17%, or $8.1 million, to $55.7 million for
the year ended December 31, 2004 as compared to
$47.6 million for the year ended December 31, 2003.
The increase in sales and marketing expenses during these
periods was primarily due to higher payroll and related costs,
particularly commissions, for sales and marketing personnel due
to revenue growth. Additionally, marketing and related costs
increased in 2005 due to higher advertising and promotional
costs as compared to 2004. The following table quantifies the
net increase in sales and marketing expenses for the periods
presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
Increase in
|
|
|
|
Sales and Marketing
|
|
|
|
Expenses
|
|
|
|
2005 to 2004
|
|
|
2004 to 2003
|
|
|
Payroll and related costs,
including
equity-related
compensation
|
|
$
|
17.1
|
|
|
$
|
5.6
|
|
Marketing and related costs
|
|
|
2.4
|
|
|
|
0.9
|
|
Other expense
|
|
|
2.7
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
Total net increase
|
|
$
|
22.2
|
|
|
$
|
8.1
|
|
|
|
|
|
|
|
|
|
|
We believe that sales and marketing expenses will continue to
increase in 2006 due to an expected increase in commissions on
higher forecasted sales, the expected increase in hiring of
sales and marketing personnel and additional expected increases
in marketing costs such as advertising. Additionally, with the
impact of implementing SFAS No. 123R for the expensing
of employee stock awards at fair value beginning in the first
quarter of 2006, we expect significant increases in sales and
marketing expenses attributable to equity-related compensation
expense.
General and Administrative. General and
administrative expenses consist primarily of the following
components:
|
|
|
|
|
payroll and related costs, including equity-related compensation
and related expenses for executive, finance, business
applications, network management, human resources and other
administrative personnel;
|
|
|
|
depreciation of property and equipment used by us internally;
|
|
|
|
fees for professional services;
|
|
|
|
non-income related taxes;
|
|
|
|
insurance costs;
|
|
|
|
the provision for doubtful accounts; and
|
|
|
|
rent and other facility-related expenditures for leased
properties.
|
General and administrative expenses increased 13%, or
$6.0 million, to $53.0 million for the year ended
December 31, 2005 as compared to $47.1 million for the
year ended December 31, 2004. General and administrative
expenses decreased 18%, or $10.2 million, to
$47.1 million for the year ended December 31, 2004 as
compared to $57.3 million for the year ended
December 31, 2003. The increase in general and
administrative expenses during 2005 was primarily due to an
increase in payroll and related costs as a result of headcount
growth, as well as an increase in the provision for doubtful
accounts. This increase was offset by a reduction in legal and
consulting costs associated with the dismissal of the lawsuits
between Akamai and Speedera as a result of our
25
acquisition of Speedera. The decrease in general and
administrative expenses during 2004 was primarily due to a
reduction in depreciation expense as a result of assets becoming
fully depreciated, a reduction in payroll and related costs,
including equity compensation, as a result of equity awards
becoming fully vested and reduced rent expense due to lease
restructurings in prior years. During 2005 and 2004, consulting
and advisory services increased significantly compared to those
in 2003 as a result of the costs associated with the evaluation
of our internal controls in order to allow management to report
on, and our independent auditors to attest to, our internal
control over financial reporting as required by Section 404
of the Sarbanes-Oxley Act of 2002. The following table
quantifies the net change in general and administrative expenses
for the periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in
|
|
|
|
General and Administrative
|
|
|
|
Expenses
|
|
|
|
2005 to 2004
|
|
|
2004 to 2003
|
|
|
Payroll and related costs,
including
equity-related
compensation
|
|
$
|
8.0
|
|
|
$
|
(8.0
|
)
|
Rent and facilities
|
|
|
0.3
|
|
|
|
(1.2
|
)
|
Depreciation and amortization
|
|
|
(1.1
|
)
|
|
|
(4.7
|
)
|
Provision for doubtful accounts
|
|
|
1.5
|
|
|
|
(1.0
|
)
|
Consulting and advisory services
|
|
|
(2.6
|
)
|
|
|
4.0
|
|
Other expenses
|
|
|
(0.1
|
)
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
Total net increase (decrease)
|
|
$
|
6.0
|
|
|
$
|
(10.2
|
)
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2005 and 2004, we
capitalized software development costs of $718,000 and $236,000,
respectively, consisting of external consulting fees and payroll
and payroll-related costs associated with the development of
internally-used software applications. Once the projects are
completed, such costs will be amortized and included in general
and administrative expenses.
We expect general and administrative expenses to increase in
2006 due to increased payroll and related costs attributable to
increased hiring, an increase in non-income tax expense and an
increase in rent and facilities costs as we expanded our leasing
of office space in 2005. These increases will be offset by an
expected reduction in legal costs. Additionally, with the impact
of implementing SFAS No. 123R for the expensing of
employee stock awards at fair value beginning in the first
quarter of 2006, we expect significant increases in general and
administrative expenses attributable to equity-related
compensation expense.
Amortization of Other Intangible
Assets. Amortization of other intangible assets
consists of the amortization of intangible assets acquired in
business combinations and amortization of acquired license
rights. Amortization of other intangible assets increased to
$5.1 million for the year ended December 31, 2005 as
compared to $48,000 for the year ended December 31, 2004.
Amortization of other intangible assets for the year ended
December 31, 2003 was $2.2 million. The increase in
amortization of other intangible assets in 2005 was due to the
amortization of intangible assets from the acquisition of
Speedera in June 2005. Intangible assets acquired in prior
acquisitions were fully amortized in the first quarter of 2003;
consequently, there was no corresponding amortization of such
assets in 2004. We expect to amortize approximately
$8.4 million, $7.4 million, $6.1 million,
$4.8 million and $4.1 million for fiscal years 2006,
2007, 2008, 2009 and 2010, respectively, in connection with the
Speedera acquisition.
Restructuring (Benefits) Charges. We did not
record any restructuring charges or benefits during 2005 or
2004. During the year ended December 31, 2003, we recorded
net restructuring benefits of $8.5 million as a result of
amendments to certain real estate leases. During the year ended
December 31, 2003, we amended or terminated
three long-term leases in connection with which we paid our
lessors a total of $16.1 million in cash and restricted
cash. As a result of these amendments to, or terminations of,
long-term leases, we reversed $9.6 million of previously
recorded restructuring liabilities, offset by a restructuring
charge of $1.1 million for costs relating to the
restructuring of a facility located in Europe. The reversals
represent the difference between the previously estimated
restructuring liabilities and the amounts payable under
negotiated agreements for certain leased properties with the
landlords thereof. We estimate the amount of restructuring
liabilities associated with real estate leases based on the most
recent available market data and discussions with our lessors
and real estate advisors.
26
We do not anticipate significant restructuring charges in the
future; however, we will continue to pursue modifications or
settlements on our long-term leases if we believe it to be in
our best interest.
Interest Income. Interest income includes
interest earned on invested cash balances and marketable
securities. Interest income increased 98%, or $2.1 million,
to $4.3 million for the year ended December 31, 2005
as compared to $2.2 million for the year ended
December 31, 2004. Interest income increased 66%, or
$856,000, to $2.2 million for the year ended
December 31, 2004 as compared to $1.3 million for the
year ended December 31, 2003. The increase in interest
income in 2005 and 2004 as compared to previous years was due to
an increase in our invested marketable securities period over
period as we generated more cash from operations and invested
the proceeds from the issuance of our 1% convertible senior
notes. In 2004 and 2005, we also experienced an increase in
interest rates earned on our investments. In November 2005, we
received proceeds of $202.1 million from our public equity
offering of 12.0 million shares of our common stock;
accordingly, we expect interest income to increase in 2006.
Interest Expense. Interest expense includes
interest paid on our debt obligations as well as amortization of
deferred financing costs. Interest expense decreased 48%, or
$4.9 million, to $5.3 million for the year ended
December 31, 2005 compared to $10.2 million for the
year ended December 31, 2004. Interest expense decreased
44%, or $8.1 million, to $10.2 million for the year
ended December 31, 2004 as compared to $18.3 million
for the year ended December 31, 2003. The decrease during
each of these periods was due to lower interest expense as a
result of redemptions and repurchases of our
51/2% convertible
subordinated notes at various times between December 2003 and
September 2005, offset by interest payable on our
1% convertible senior notes issued in December 2003 and
January 2004. During 2005 and 2004, we redeemed or repurchased
$56.6 million and $169.4 million, respectively, in
aggregate principal amount of our
51/2% convertible
subordinated notes. As a result of these transactions, we
believe that interest expense on our debt obligations, including
deferred financing amortization, will not exceed
$3.1 million in 2006.
Other (Expense) Income, net. Other net expense
represents foreign exchange gains and losses incurred during the
periods presented, as well as gains and losses on legal
settlements. Other net expense increased 148%, or
$1.6 million, to $507,000 for the year ended
December 31, 2005 as compared to other net income of
$1.1 million for the year ended December 31, 2004.
Other net income increased to $1.1 million for the year
ended December 31, 2004 as compared to other net expense of
$44,000 for the year ended December 31, 2003. Other net
expense for the year ended December 31, 2005 represented
$1.5 million of foreign exchange losses, offset by
$1.0 million of net gains on legal settlements. Other net
income of $1.1 million for the year ended December 31,
2004 represented approximately $518,000 of gains on legal
settlements and $543,000 of foreign exchange gains. For the year
ended December 31, 2003, other net expense of $44,000
consisted of foreign exchange losses. Other net (expense) income
may fluctuate in the future based upon the movement in foreign
exchange rates.
(Loss) Gain on Investments, net. During the
years ended December 31, 2005 and 2004, we recorded a net
loss on investments of $27,000 and $69,000, respectively, on the
sale of marketable securities. During 2003, we recorded a net
gain of $1.6 million, of which $1.7 million related to
the sale of equity investments in publicly-traded companies,
offset by losses of $55,000 on investments in privately-held
companies and sales of marketable securities. We do not expect
significant gains or losses on investments in 2006, as we no
longer hold any substantial investments in publicly or
privately-held companies.
Loss on Early Extinguishment of Debt. Loss on
early extinguishment of debt decreased to $1.4 million for
the year ended December 31, 2005 as compared to
$6.8 million for the year ended December 31, 2004.
Loss on early extinguishment of debt increased to
$6.8 million for the year ended December 31, 2004 as
compared to $2.1 million for the year ended
December 31, 2003. The decrease in loss on early
extinguishment of debt in 2005 is due to costs incurred in
connection with our redemption of $56.6 million in
principal amount of our
51/2% convertible
subordinated notes during 2005. This loss of $1.4 million
consists of $889,000 in premiums above par value paid to redeem
such notes and $481,000 of deferred financing costs associated
with redeeming the notes prior to their maturity. During 2004
and 2003, we repurchased $169.4 million and
$74.0 million, respectively, in principal amount of our
51/2% convertible
subordinated notes which resulted in a loss on early
extinguishment of debt of $6.8 million and
$2.1 million, respectively.
27
(Benefit) Provision for Income Taxes. Benefit
for income taxes increased to $257.6 million for the year
ended December 31, 2005 as compared to a provision for
income taxes of $772,000 during the year ended December 31,
2004. Provision for income taxes increased 23%, or $143,000, to
$772,000 for the year ended December 31, 2004 as compared
to $629,000 for the year ended December 31, 2003. During
2005, in connection with the release of our deferred tax asset
valuation allowance, we recorded an income tax benefit of
$285.8 million. The provision for income taxes for each of
2004 and 2003 was primarily related to our alternative minimum
tax payment obligations and income earned in foreign
jurisdictions where we were profitable.
As of June 30, 2005, our United States and foreign net
operating losses, or NOLs, and other deferred tax assets were
fully offset by a valuation allowance primarily because at the
time, pursuant to SFAS No. 109, Accounting for
Income Taxes, we did not have sufficient history of
taxable income to conclude that it was more likely than not that
we would be able to realize the tax benefits of those deferred
tax assets. Based upon our cumulative history of earnings over a
12-quarter
period and an assessment of our expected future results of
operations, during the third quarter of 2005, we determined that
it is more likely than not that we would be able to realize a
substantial portion of our United States and foreign NOL
carryforward tax assets prior to their expiration and other
deferred tax assets. As a result, during the third quarter of
2005, we released a total of $321.8 million of our United
States and foreign deferred tax asset valuation allowance. Of
the $321.8 million, $258.1 million of the valuation
release was recorded as an income tax benefit in our statement
of operations, $61.0 million of the valuation release was
attributable to stock option exercises, which was recorded as an
increase in additional paid-in capital on the balance sheet, and
approximately $2.7 million of the valuation release was
recorded as a reduction to acquired goodwill and intangible
assets.
As of September 30, 2005, we had a remaining valuation
allowance of $35.6 million. During the fourth quarter of
2005, the Company released the remainder of the valuation
allowance, except for $6.9 million that we will maintain
because the realization of certain deferred tax assets does not
meet the more likely than not criterion under
SFAS No. 109. This portion of the valuation allowance
primarily relates to certain state NOLs with a
five-year
carryover period that, as of December 31, 2005, we expect
will expire unused. The fourth-quarter valuation allowance
release is consistent with the requirement under APB No. 28
Interim Financial Reporting, that we use an
annualized effective tax rate for each interim period during the
year, including current year interim periods, after a valuation
allowance release has occurred. The total valuation allowance
release recorded as an income tax benefit in our consolidated
statement of operations for 2005 was $285.8 million.
Our effective tax rate for the year ended December 31, 2005
remained relatively low before considering the deferred tax
valuation allowance release as discussed above; however, our
annualized effective tax rate in future periods after 2005 is
expected to significantly increase. We expect that our
consolidated annualized effective tax rate in 2006 will be
approximately 40%.
Because of the availability of the NOLs discussed above, a
significant portion of our future provision for income taxes is
expected to be a non-cash expense; consequently, the amount of
cash paid with respect to income taxes is expected to be a
relatively small portion of the total annualized tax expense
during periods in which the NOLs are utilized. In determining
our net deferred tax assets and valuation allowances, and
projections of our future provision for income taxes, annualized
effective tax rates, and cash paid for income taxes, management
is required to make judgments and estimates about domestic and
foreign profitability, the timing and extent of the utilization
of NOL carryforwards, applicable tax rates, transfer pricing
methodologies and tax planning strategies. Judgments and
estimates related to our projections and assumptions are
inherently uncertain; therefore, actual results could differ
materially from our projections.
We have recorded certain tax reserves to address potential
exposures involving our sales and use and franchise tax
positions. These potential tax liabilities result from the
varying application of statutes, rules, regulations and
interpretations by different jurisdictions. Our estimate of the
value of these tax reserves reflects assumptions based on past
experiences and judgments about the interpretation of statutes,
rules and regulations by taxing jurisdictions. It is possible
that the ultimate resolution of these matters may be greater or
less than the amount that we have estimated.
28
Liquidity
and Capital Resources
To date, we have financed our operations primarily through the
following transactions:
|
|
|
|
|
private sales of capital stock and subordinated notes, which
were repaid in 1999;
|
|
|
|
an initial public offering of our common stock in October 1999
that provided $217.6 million after underwriters
discounts and commissions;
|
|
|
|
the sale in June 2000 of an aggregate of $300 million in
principal amount of our
51/2% convertible
subordinated notes, which were retired in full between December
2003 and September 2005, which generated net proceeds of
$290.2 million;
|
|
|
|
the sale in December 2003 and January 2004 of an aggregate
$200 million in principal amount of our 1% convertible
senior notes, which generated net proceeds of
$194.1 million;
|
|
|
|
the public offering of 12.0 million shares of our common
stock in November 2005, which generated net proceeds of
$202.1 million; and
|
|
|
|
cash generated by operations.
|
As of December 31, 2005, cash, cash equivalents and
marketable securities totaled $314.1 million, of which
$4.5 million is subject to restrictions limiting our
ability to withdraw or otherwise use such cash, cash equivalents
and marketable securities. See Letters of Credit
below.
Cash provided by operating activities increased
$31.6 million to $82.8 million for the year ended
December 31, 2005 compared to $51.2 million for the
year ended December 31, 2004. Cash provided by operating
activities increased $69.2 million to $51.2 million
for the year ended December 31, 2004 compared to cash used
in operating activities of $18.0 million for the year ended
December 31, 2003. The increase in cash provided by
operating activities for each of 2005 and 2004 as compared to
previous years was primarily due to increased service revenue
and increases in deferred revenue. We expect that cash provided
by operating activities will continue to increase as a result of
an upward trend in cash collections related to higher revenues,
partially offset by an expected increase in operating expenses
that require cash outlays such as salaries in connection with
expected increases in headcount. The timing and amount of future
working capital changes and our ability to manage our days sales
outstanding will also affect the future amount of cash used in
or provided by operating activities.
Cash used in investing activities was $183.8 million for
the year ended December 31, 2005, compared to cash provided
by investing activities of $9.1 million for the year ended
December 31, 2004. Cash used in investing activities was
$33.1 million for the year ended December 31, 2003.
Cash used in investing activities for 2005 reflects net
purchases of marketable securities of $149.5 million
primarily related to the cash received from our equity financing
in November 2005. Additionally, cash used in investing
activities for 2005 includes capital expenditures of
$36.2 million, consisting of the capitalization of the
purchase of network infrastructure equipment and internal-use
software development costs related to our current and future
service offerings. These investments were offset by
$1.7 million of cash acquired through the Speedera
acquisition and a decrease of $202,000 in restricted investments
previously held for security deposits. Cash provided by
investing activities for 2004 reflects proceeds from net sales
and maturities of investments of $24.1 million, offset by
capital expenditures of $20.1 million. During 2004, cash
provided by investing activities also included a decrease of
$5.0 million in restricted cash to reflect our repurchase
of $5.0 million in principal amount of our
51/2% convertible
subordinated notes in early 2004 and a decrease of $96,000 in
restricted investments previously held for security deposits.
Cash used in investing activities for 2003 reflects net
purchases of investments of $19.3 million, an increase in
restricted cash to reflect a commitment to repurchase
$5.0 million in principal amount of our
51/2%
convertible subordinated notes in early 2004 and capital
expenditures of $8.9 million. For 2006, we expect total
capital expenditures, a component of cash used in investing
activities, to be approximately the same percentage of revenues
as 2005.
Cash provided by financing activities was $159.1 million
for the year ended December 31, 2005, compared to cash used
in financing activities of approximately $131.9 million for
the year ended December 31, 2004. Cash provided by
financing activities was $105.2 million for the year ended
December 31, 2003. Cash provided by financing activities in
2005 reflects net proceeds from our November 2005 equity
offering of $202.1 million and
29
proceeds from issuances of common stock under our equity
compensation plans of $14.5 million, offset by payments
made to redeem $56.6 million in principal amount of our
outstanding
51/2% convertible
subordinated notes and payments on capital lease obligations of
$818,000. Cash used in financing activities in 2004 reflects
payments for the repurchase of approximately $169.4 million
in principal amount of our
51/2%
convertible subordinated notes and payments on our capital
leases of $543,000, offset by net proceeds received from the
issuance of our 1% convertible senior notes of
$24.3 million and proceeds from issuances of common stock
under our equity compensation plans of $13.8 million. Cash
provided by financing activities in 2003 reflects net proceeds
from the issuance of our 1% convertible senior notes of
$169.8 million, proceeds from issuances of common stock
under our equity compensation plans of $8.6 million,
settlement of notes receivable for stock of $2.3 million,
offset by payments for the repurchase of $74.0 million in
principal amount of our
51/2% convertible
subordinated notes and payments on our capital leases of
$1.4 million.
Changes in cash, cash equivalents and marketable securities are
dependent upon changes in working capital items such as deferred
revenue, accounts payable, accounts receivable and various
accrued expenses, as well as changes in our capital and
financial structure, including debt repurchases and issuances,
stock option exercises, sales of equity investments and similar
events.
The following table represents the net inflows and outflows of
cash, cash equivalents and marketable securities for the periods
presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Cash, cash equivalents and
marketable securities balance as of December 31, 2004 and
2003, respectively
|
|
$
|
108.4
|
|
|
$
|
208.4
|
|
|
|
|
|
|
|
|
|
|
Changes in cash, cash equivalents
and marketable securities:
|
|
|
|
|
|
|
|
|
Receipts from customers
|
|
|
271.7
|
|
|
|
206.2
|
|
Payments to vendors
|
|
|
(135.1
|
)
|
|
|
(91.0
|
)
|
Payments for employee payroll
|
|
|
(90.4
|
)
|
|
|
(68.4
|
)
|
Debt repurchases
|
|
|
(58.1
|
)
|
|
|
(169.4
|
)
|
Debt proceeds
|
|
|
|
|
|
|
24.3
|
|
Debt interest and premium payments
|
|
|
(5.1
|
)
|
|
|
(18.1
|
)
|
Stock option exercises and
employee stock purchase plan issuances
|
|
|
14.5
|
|
|
|
13.8
|
|
Equity offering proceeds
|
|
|
202.1
|
|
|
|
|
|
Cash acquired in business
acquisition
|
|
|
3.9
|
|
|
|
|
|
Other
|
|
|
2.2
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease)
|
|
|
205.7
|
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
marketable securities balance as of December 31, 2005 and
2004, respectively
|
|
$
|
314.1
|
|
|
$
|
108.4
|
|
|
|
|
|
|
|
|
|
|
We believe, based on our current business plan, that our current
cash, cash equivalents and marketable securities of
$314.1 million and forecasted cash flows from operations
will be sufficient to meet our cash needs for working capital
and capital expenditures and restructuring expenses for at least
the next 24 months. If the assumptions underlying our
business plan regarding future revenue and expenses change or if
unexpected opportunities or needs arise, we may seek to raise
additional cash by selling equity or debt securities. If
additional funds are raised through the issuance of equity or
debt securities, these securities could have rights, preferences
and privileges senior to those accruing to holders of common
stock, and the terms of such debt could impose restrictions on
our operations. The sale of additional equity or convertible
debt securities would also result in additional dilution to our
stockholders. See Risk Factors elsewhere in this
Annual Report on
Form 10-K
for further discussion of potential dilution.
30
Contractual
Obligations, Contingent Liabilities and Commercial
Commitments
The following table presents our contractual obligations and
commercial commitments as of December 31, 2005 over the
next five years and thereafter (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Contractual
|
|
|
|
|
Less than
|
|
|
12 to 36
|
|
|
36 to 60
|
|
|
More than
|
|
Obligations
|
|
Total
|
|
|
12 Months
|
|
|
Months
|
|
|
Months
|
|
|
60 Months
|
|
|
1% convertible senior notes
|
|
$
|
200.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
200.0
|
|
Interest on convertible notes
outstanding assuming no early redemption or repurchases
|
|
|
56.0
|
|
|
|
2.0
|
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
46.0
|
|
Real estate operating leases
|
|
|
23.1
|
|
|
|
7.2
|
|
|
|
11.3
|
|
|
|
4.4
|
|
|
|
0.2
|
|
Bandwidth and co-location
agreements
|
|
|
7.5
|
|
|
|
6.0
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
Vendor equipment purchase
obligations
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open vendor purchase orders
|
|
|
3.1
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
290.2
|
|
|
$
|
18.8
|
|
|
$
|
16.8
|
|
|
$
|
8.4
|
|
|
$
|
246.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters
of Credit
As of December 31, 2005, we had outstanding
$4.5 million in irrevocable letters of credit issued by us
in favor of third-party beneficiaries, primarily related to
long-term facility leases. The letters of credit are
collateralized by restricted marketable securities, of which
$3.8 million are classified as long-term marketable
securities and $730,000 are classified as short-term marketable
securities on our consolidated balance sheet dated as of
December 31, 2005. The restrictions on these marketable
securities lapse as we fulfill our obligations or as such
obligations expire under the terms of the letters of credit.
These restrictions are expected to lapse through May 2011.
Off-Balance
Sheet Arrangements
We have entered into various indemnification arrangements with
third parties, including vendors, customers, landlords, our
officers and directors, stockholders of acquired companies,
joint venture partners and third parties to whom and from whom
we license technology. Generally, these indemnification
agreements require us to reimburse losses suffered by third
parties due to various events, such as lawsuits arising from
patent or copyright infringement or our negligence. These
indemnification obligations are considered off-balance sheet
arrangements in accordance with FASB Interpretation 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. To date, we have not encountered material costs as
a result of such obligations and have not accrued any
liabilities related to such indemnification obligations in our
financial statements. See Note 11 to our consolidated
financial statements included in this annual report on
Form 10-K
for further discussion of these indemnification agreements.
The conversion features of our 1% convertible senior notes
are equity-linked derivatives. As such, we recognize these
instruments as off-balance sheet arrangements. The conversion
features associated with these notes would be accounted for as
derivative instruments, except that they are indexed to our
common stock and classified in stockholders equity.
Therefore, these instruments meet the scope exception of
paragraph 11(a) of SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, and are
accordingly not accounted for as derivatives for purposes of
SFAS No. 133. See Note 12 to our consolidated
financial statements for more information.
Litigation
We are party to litigation which we consider routine and
incidental to our business. Management does not expect the
results of any of these actions to have a material adverse
effect on our business, results of operations or financial
condition. See Legal Proceedings elsewhere in this
annual report on
Form 10-K
for further discussion on litigation.
31
Recent
Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment. Effective on January 1,
2006, we adopted the provisions of SFAS No. 123R,
which requires all share-based payments to employees, including
grants of stock options, to be recognized in the income
statement based on their fair values as of the date of grant.
The adoption of this statement will result in the expensing of
the fair value of stock options granted to employees. Prior to
the adoption of SFAS 123R, we disclosed the impact of
expensing the fair value of stock options only in the notes to
the financial statements, which is no longer permitted. See
Equity-Related Compensation in Note 2 to our consolidated
financial statements.
SFAS No. 123R applies to new equity awards and to
equity awards modified, repurchased, or canceled after the
effective date of adoption. Additionally, compensation costs for
the portion of awards for which the requisite service has not
been rendered that are outstanding as of the effective date of
adoption shall be recognized as the requisite service is
rendered. The compensation cost for that portion of such awards
shall be based on the grant-date fair value of those awards as
calculated from the pro forma disclosures under
SFAS No. 123. Changes to the grant-date fair value of
equity awards granted before the effective date of this
statement are precluded. The compensation cost for those earlier
awards shall be attributed to periods beginning on or after the
effective date of our adoption of SFAS 123R using the
attribution method that was used under SFAS No. 123,
which was the straight-line method. Any unearned or deferred
compensation related to those earlier awards shall be written
off against the appropriate equity accounts. Additionally,
common stock purchased pursuant to stock options granted under
our employee stock purchase plan will be expensed based upon the
fair market value of the stock option.
We adopted SFAS No. 123R on a modified prospective
basis beginning January 1, 2006. Accordingly, the results
of operations for future periods will not be comparable to our
historical results of operations. The adoption of
SFAS No. 123R will have a material impact on our
results of operations, increasing cost of revenues, research and
development, sales and marketing and general and administrative
expenses. We currently estimate that adoption of the statement
will reduce diluted earnings per share by approximately $0.14 in
2006; however, the amount may change based upon the number and
value of additional stock option grants and forfeiture rates. We
have utilized the Black-Scholes option pricing model to
determine the value of our stock options. For more information
on the impact of expensing stock options for the three years
ended December 31, 2005, 2004 and 2003, see Equity-Related
Compensation in Note 2 to our consolidated financial
statements.
SFAS No. 123R also changes the reporting of
tax-related amounts within the statement of cash flows. The
gross amount of any windfall tax benefits resulting from
stock-based compensation will be reported as cash flows from
financing activities. Under the indirect method of presentation
of the statement of cash flows, any shortfalls resulting from
the write-off of deferred tax assets will be reported in net
income and classified within the change of deferred income taxes
in the operating section of the statement of cash flows.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Our exposure to market risk for changes in interest rates
relates primarily to our debt and investment portfolio. In our
investment portfolio we do not use derivative financial
instruments. We place our investments with high quality issuers
and, by policy, limit the amount of risk by investing primarily
in money market funds, United States Treasury obligations,
high-quality corporate and municipal obligations and
certificates of deposit.
Our 1% convertible senior notes are subject to changes in
market value. Under certain conditions, the holders of our
1% convertible senior notes may require us to redeem the
notes on or after December 15, 2010. In December 2005, one
of the conversion terms for the holders to redeem the
1% convertible senior notes was met; however, no notes have
been converted as of March 15, 2006. As of
December 31, 2005, the aggregate outstanding principal
amount and the fair value of the 1% convertible senior
notes were $200.0 million and $274.5 million,
respectively.
We have operations in Europe and Asia. As a result, we are
exposed to fluctuations in foreign exchange rates. Additionally,
we may continue to expand our operations globally and sell to
customers in foreign locations, which may increase our exposure
to foreign exchange fluctuations. We do not have any foreign
hedge contracts.
32
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Index to
Consolidated Financial Statements and Schedule
|
|
|
|
|
|
|
Page
|
|
|
|
|
34
|
|
|
|
|
35
|
|
|
|
|
36
|
|
|
|
|
37
|
|
|
|
|
38
|
|
|
|
|
39
|
|
Schedule:
|
|
|
|
|
|
|
|
S-1
|
|
33
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Akamai
Technologies, Inc.:
We have completed integrated audits of Akamai Technologies,
Inc.s 2005 and 2004 consolidated financial statements and
of its internal control over financial reporting as of
December 31, 2005, and an audit of its 2003 consolidated
financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.
Consolidated
financial statements and financial statement
schedule
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Akamai Technologies, Inc. and its
subsidiaries at December 31, 2005 and 2004, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2005 in conformity
with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit of financial statements 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 audits provide a reasonable
basis for our opinion.
Internal
control over financial reporting
Also, in our opinion, managements assessment, included in
Managements Report on Internal Control Over Financial
Reporting appearing on page 71 of this
Form 10-K,
that the Company maintained effective internal control over
financial reporting as of December 31, 2005 based on
criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO), is fairly stated, in all material respects, based on
those criteria. Furthermore, in our opinion, the Company
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2005, based on
criteria established in Internal
Control Integrated Framework issued by the
COSO. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express
opinions on managements assessment and on the
effectiveness of the Companys internal control over
financial reporting based on our audit. We conducted our audit
of internal control over financial reporting in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an
understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating
the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 16, 2006
34
AKAMAI
TECHNOLOGIES, INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands, except share
data)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
91,792
|
|
|
$
|
35,318
|
|
Marketable securities (including
restricted securities of $730 and $932 at December 31, 2005
and 2004, respectively)
|
|
|
200,616
|
|
|
|
35,312
|
|
Accounts receivable, net of
reserves of $7,994 and $5,422 at December 31, 2005 and
2004, respectively
|
|
|
52,162
|
|
|
|
30,333
|
|
Prepaid expenses and other current
assets
|
|
|
10,428
|
|
|
|
7,706
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
354,998
|
|
|
|
108,669
|
|
Property and equipment, net
|
|
|
44,885
|
|
|
|
25,242
|
|
Marketable securities (including
restricted securities of $3,825 and $3,722 at December 31,
2005 and 2004, respectively)
|
|
|
21,721
|
|
|
|
37,787
|
|
Goodwill
|
|
|
98,519
|
|
|
|
4,937
|
|
Other intangible assets, net
|
|
|
38,267
|
|
|
|
191
|
|
Deferred tax assets, net
|
|
|
328,308
|
|
|
|
|
|
Other assets
|
|
|
4,801
|
|
|
|
5,917
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
891,499
|
|
|
$
|
182,743
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Stockholders Equity
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
16,022
|
|
|
$
|
10,349
|
|
Accrued expenses
|
|
|
38,449
|
|
|
|
32,097
|
|
Deferred revenue
|
|
|
5,656
|
|
|
|
2,695
|
|
Current portion of obligations
under capital leases and vendor financing
|
|
|
|
|
|
|
232
|
|
Current portion of accrued
restructuring
|
|
|
1,749
|
|
|
|
1,393
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
61,876
|
|
|
|
46,766
|
|
Accrued restructuring, net of
current portion
|
|
|
1,844
|
|
|
|
2,259
|
|
Other liabilities
|
|
|
3,565
|
|
|
|
3,035
|
|
1% convertible senior notes
|
|
|
200,000
|
|
|
|
200,000
|
|
51/2% convertible
subordinated notes
|
|
|
|
|
|
|
56,614
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
267,285
|
|
|
|
308,674
|
|
|
|
|
|
|
|
|
|
|
Commitments, contingencies and
guarantees (Note 11)
|
|
|
|
|
|
|
|
|
Stockholders equity
(deficit):
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par
value; 5,000,000 shares authorized; 700,000 shares
designated as Series A Junior Participating Preferred
Stock; no shares issued or outstanding at December 31, 2005
and 2004
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par
value; 700,000,000 shares authorized;
152,922,092 shares issued and outstanding at
December 31, 2005; 126,771,799 shares issued and
outstanding at December 31, 2004
|
|
|
1,529
|
|
|
|
1,268
|
|
Additional paid-in capital
|
|
|
3,880,985
|
|
|
|
3,451,578
|
|
Deferred stock compensation
|
|
|
(7,537
|
)
|
|
|
(937
|
)
|
Accumulated other comprehensive
income
|
|
|
471
|
|
|
|
1,392
|
|
Accumulated deficit
|
|
|
(3,251,234
|
)
|
|
|
(3,579,232
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
(deficit)
|
|
|
624,214
|
|
|
|
(125,931
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
891,499
|
|
|
$
|
182,743
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the
consolidated financial statements.
35
AKAMAI
TECHNOLOGIES, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(in thousands, except per share
data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
281,468
|
|
|
$
|
206,762
|
|
|
$
|
157,392
|
|
Software and software-related
|
|
|
1,647
|
|
|
|
3,253
|
|
|
|
3,730
|
|
Services and software from related
parties
|
|
|
|
|
|
|
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
283,115
|
|
|
|
210,015
|
|
|
|
161,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
55,655
|
|
|
|
46,150
|
|
|
|
60,844
|
|
Research and development
|
|
|
18,071
|
|
|
|
12,132
|
|
|
|
12,971
|
|
Sales and marketing
|
|
|
77,876
|
|
|
|
55,663
|
|
|
|
47,583
|
|
General and administrative
|
|
|
53,014
|
|
|
|
47,055
|
|
|
|
57,259
|
|
Amortization of other intangible
assets
|
|
|
5,124
|
|
|
|
48
|
|
|
|
2,234
|
|
Restructuring benefit
|
|
|
|
|
|
|
|
|
|
|
(8,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost and operating expenses
|
|
|
209,740
|
|
|
|
161,048
|
|
|
|
172,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
73,375
|
|
|
|
48,967
|
|
|
|
(11,111
|
)
|
Interest income
|
|
|
4,263
|
|
|
|
2,158
|
|
|
|
1,302
|
|
Interest expense
|
|
|
(5,330
|
)
|
|
|
(10,213
|
)
|
|
|
(18,324
|
)
|
Other (expense) income, net
|
|
|
(507
|
)
|
|
|
1,061
|
|
|
|
(44
|
)
|
(Loss) gain on investments, net
|
|
|
(27
|
)
|
|
|
(69
|
)
|
|
|
1,622
|
|
Loss on early extinguishment of
debt
|
|
|
(1,370
|
)
|
|
|
(6,768
|
)
|
|
|
(2,097
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for
income taxes
|
|
|
70,404
|
|
|
|
35,136
|
|
|
|
(28,652
|
)
|
(Benefit) provision for income
taxes
|
|
|
(257,594
|
)
|
|
|
772
|
|
|
|
629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
327,998
|
|
|
$
|
34,364
|
|
|
$
|
(29,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.41
|
|
|
$
|
0.28
|
|
|
$
|
(0.25
|
)
|
Diluted
|
|
$
|
2.11
|
|
|
$
|
0.25
|
|
|
$
|
(0.25
|
)
|
Shares used in per share
calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
136,167
|
|
|
|
124,407
|
|
|
|
118,075
|
|
Diluted
|
|
|
156,944
|
|
|
|
146,595
|
|
|
|
118,075
|
|
The accompanying notes are an integral part of the
consolidated financial statements.
36
AKAMAI
TECHNOLOGIES, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(in thousands)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
327,998
|
|
|
$
|
34,364
|
|
|
$
|
(29,281
|
)
|
Adjustments to reconcile net income
(loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
24,153
|
|
|
|
18,810
|
|
|
|
49,749
|
|
Amortization of deferred financing
costs
|
|
|
1,017
|
|
|
|
1,396
|
|
|
|
1,417
|
|
Equity-related compensation
|
|
|
3,849
|
|
|
|
1,292
|
|
|
|
9,813
|
|
Change in deferred tax assets, net,
including release of deferred tax asset valuation allowance
|
|
|
(258,669
|
)
|
|
|
408
|
|
|
|
351
|
|
Provision for doubtful accounts
|
|
|
1,147
|
|
|
|
(231
|
)
|
|
|
761
|
|
Interest income on notes receivable
for stock
|
|
|
|
|
|
|
|
|
|
|
(81
|
)
|
Non-cash portion of restructuring
charge
|
|
|
|
|
|
|
|
|
|
|
144
|
|
Non-cash portion of loss on early
extinguishment of debt
|
|
|
481
|
|
|
|
2,453
|
|
|
|
1,207
|
|
Foreign currency losses (gains), net
|
|
|
814
|
|
|
|
(377
|
)
|
|
|
(1,384
|
)
|
Losses (gains) on investments and
disposal of property and equipment, net
|
|
|
36
|
|
|
|
58
|
|
|
|
(1,295
|
)
|
Changes in assets and liabilities,
net of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(19,455
|
)
|
|
|
(8,516
|
)
|
|
|
(2,800
|
)
|
Prepaid expenses and other current
assets
|
|
|
1,483
|
|
|
|
3,053
|
|
|
|
(2,740
|
)
|
Accounts payable, accrued expenses
and other current liabilities
|
|
|
(1,032
|
)
|
|
|
(130
|
)
|
|
|
(12,230
|
)
|
Deferred revenue
|
|
|
3,267
|
|
|
|
(329
|
)
|
|
|
604
|
|
Accrued restructuring
|
|
|
(1,816
|
)
|
|
|
(1,630
|
)
|
|
|
(32,337
|
)
|
Other non-current assets and
liabilities
|
|
|
(475
|
)
|
|
|
616
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
82,798
|
|
|
|
51,237
|
|
|
|
(18,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash acquired through business
acquisition
|
|
|
1,717
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(26,947
|
)
|
|
|
(12,342
|
)
|
|
|
(1,422
|
)
|
Capitalization of internal-use
software costs
|
|
|
(9,213
|
)
|
|
|
(7,759
|
)
|
|
|
(7,459
|
)
|
Purchases of investments
|
|
|
(215,633
|
)
|
|
|
(187,674
|
)
|
|
|
(218,020
|
)
|
Proceeds from sales and maturities
of investments
|
|
|
66,099
|
|
|
|
211,753
|
|
|
|
198,689
|
|
Proceeds from sales of property and
equipment
|
|
|
|
|
|
|
9
|
|
|
|
114
|
|
Decrease in restricted investments
held for security deposits
|
|
|
202
|
|
|
|
96
|
|
|
|
|
|
Decrease (increase) in restricted
cash held for note repurchases
|
|
|
|
|
|
|
5,000
|
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
investing activities
|
|
|
(183,775
|
)
|
|
|
9,083
|
|
|
|
(33,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of
1% convertible senior notes, net of financing costs
|
|
|
|
|
|
|
24,313
|
|
|
|
169,800
|
|
Payments on capital leases
|
|
|
(818
|
)
|
|
|
(543
|
)
|
|
|
(1,438
|
)
|
Repurchase of
51/2% convertible
subordinated notes
|
|
|
(56,614
|
)
|
|
|
(169,386
|
)
|
|
|
(74,000
|
)
|
Repayment of notes receivable for
stock
|
|
|
|
|
|
|
|
|
|
|
2,301
|
|
Proceeds from equity offering, net
of issuance costs
|
|
|
202,068
|
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of
common stock under stock option and employee stock purchase plans
|
|
|
14,462
|
|
|
|
13,754
|
|
|
|
8,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
159,098
|
|
|
|
(131,862
|
)
|
|
|
105,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate translation
on cash and cash equivalents
|
|
|
(1,647
|
)
|
|
|
1,208
|
|
|
|
3,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
56,474
|
|
|
|
(70,334
|
)
|
|
|
57,162
|
|
Cash and cash equivalents at
beginning of year
|
|
|
35,318
|
|
|
|
105,652
|
|
|
|
48,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
year
|
|
$
|
91,792
|
|
|
$
|
35,318
|
|
|
$
|
105,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
5,704
|
|
|
$
|
15,341
|
|
|
$
|
16,667
|
|
Cash paid for income taxes
|
|
|
1,494
|
|
|
|
|
|
|
|
|
|
Non-cash financing and investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of equipment through
capital leases
|
|
$
|
586
|
|
|
$
|
|
|
|
$
|
|
|
Common stock and vested common
stock options issued in connection with acquisition of a business
|
|
|
130,510
|
|
|
|
|
|
|
|
|
|
Issuances of common stock in
exchange for warrants
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Value of deferred compensation
recorded for issuance of deferred stock units and restricted
stock
|
|
|
930
|
|
|
|
601
|
|
|
|
638
|
|
The accompanying notes are an integral part of the
consolidated financial statements.
37
AKAMAI
TECHNOLOGIES, INC.
For the Years Ended December 31, 2005, 2004 and
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
Notes
|
|
|
Comprehensive
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in-
|
|
|
Stock
|
|
|
Receivable
|
|
|
Income
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
for Stock
|
|
|
(Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
Income (Loss)
|
|
|
|
(In thousands, except share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
117,660,254
|
|
|
$
|
1,177
|
|
|
$
|
3,428,434
|
|
|
$
|
(9,895
|
)
|
|
$
|
(3,473
|
)
|
|
$
|
(18
|
)
|
|
$
|
(3,584,315
|
)
|
|
$
|
(168,090
|
)
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,281
|
)
|
|
|
(29,281
|
)
|
|
$
|
(29,281
|
)
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,385
|
|
|
|
|
|
|
|
1,385
|
|
|
|
1,385
|
|
Unrealized losses on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
(42
|
)
|
|
|
(42
|
)
|
Reclassification of unrealized
investment losses to realized net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
54
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(27,884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon the
exercise of stock options and warrants
|
|
|
3,040,684
|
|
|
|
31
|
|
|
|
5,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,881
|
|
|
|
|
|
Issuance of common stock under
employee stock purchase plan
|
|
|
1,537,508
|
|
|
|
15
|
|
|
|
2,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,704
|
|
|
|
|
|
Interest on notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
(81
|
)
|
|
|
|
|
Settlements of notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,554
|
|
|
|
|
|
|
|
|
|
|
|
3,554
|
|
|
|
|
|
Deferred compensation for the grant
of stock options and the issuance of restricted common stock and
deferred stock units
|
|
|
4,231
|
|
|
|
|
|
|
|
858
|
|
|
|
(858
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase and cancellation of
restricted stock due to employee terminations
|
|
|
(88,160
|
)
|
|
|
(1
|
)
|
|
|
(826
|
)
|
|
|
642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(185
|
)
|
|
|
|
|
Acceleration of stock option and
restricted stock vesting and fair value of non-employee options
|
|
|
|
|
|
|
|
|
|
|
181
|
|
|
|
673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
854
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
122,154,517
|
|
|
|
1,222
|
|
|
|
3,437,186
|
|
|
|
(1,545
|
)
|
|
|
|
|
|
|
1,379
|
|
|
|
(3,613,596
|
)
|
|
|
(175,354
|
)
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,364
|
|
|
|
34,364
|
|
|
$
|
34,364
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
375
|
|
|
|
|
|
|
|
375
|
|
|
|
375
|
|
Unrealized losses on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(362
|
)
|
|
|
|
|
|
|
(362
|
)
|
|
|
(362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon the
exercise of stock options and warrants
|
|
|
3,019,198
|
|
|
|
30
|
|
|
|
8,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,002
|
|
|
|
|
|
Issuance of common stock under
employee stock purchase plan
|
|
|
1,598,947
|
|
|
|
16
|
|
|
|
4,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,752
|
|
|
|
|
|
Deferred compensation for the
issuance of deferred stock units
|
|
|
|
|
|
|
|
|
|
|
601
|
|
|
|
(601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase and cancellation of
restricted stock due to employee terminations
|
|
|
(863
|
)
|
|
|
|
|
|
|
(9
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acceleration of restricted stock
vesting and fair value of non-employee options
|
|
|
|
|
|
|
|
|
|
|
92
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
126,771,799
|
|
|
|
1,268
|
|
|
|
3,451,578
|
|
|
|
(937
|
)
|
|
|
|
|
|
|
1,392
|
|
|
|
(3,579,232
|
)
|
|
|
(125,931
|
)
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
327,998
|
|
|
|
327,998
|
|
|
$
|
327,998
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(855
|
)
|
|
|
|
|
|
|
(855
|
)
|
|
|
(855
|
)
|
Unrealized losses on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
(66
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
327,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon the
exercise of stock options and deferred stock units
|
|
|
3,086,158
|
|
|
|
31
|
|
|
|
9,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,846
|
|
|
|
|
|
Issuance of common stock under
employee stock purchase plan
|
|
|
475,776
|
|
|
|
5
|
|
|
|
4,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,616
|
|
|
|
|
|
Deferred compensation for the
issuance of deferred stock units
|
|
|
|
|
|
|
|
|
|
|
930
|
|
|
|
(930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase and cancellation of
restricted stock due to employee terminations
|
|
|
(250
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for the
acquisition of business
|
|
|
10,588,609
|
|
|
|
105
|
|
|
|
121,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,536
|
|
|
|
|
|
Stock options issued in connection
with purchase acquisition
|
|
|
|
|
|
|
|
|
|
|
18,239
|
|
|
|
(9,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,974
|
|
|
|
|
|
Acceleration of employee stock
option vesting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181
|
|
|
|
|
|
Issuance of common stock in equity
offering, net of offering costs
|
|
|
12,000,000
|
|
|
|
120
|
|
|
|
201,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202,068
|
|
|
|
|
|
Fair value of options issued to
non-employees for services rendered
|
|
|
|
|
|
|
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
257
|
|
|
|
|
|
Release of deferred tax asset
valuation allowance
|
|
|
|
|
|
|
|
|
|
|
72,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,179
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
152,922,092
|
|
|
$
|
1,529
|
|
|
$
|
3,880,985
|
|
|
$
|
(7,537
|
)
|
|
$
|
|
|
|
$
|
471
|
|
|
$
|
(3,251,234
|
)
|
|
$
|
624,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the
consolidated financial statements.
38
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Nature of
Business and Basis of Presentation:
|
Akamai Technologies, Inc. (Akamai or the
Company) provides services for accelerating and
improving the delivery of content and applications over the
Internet. Akamais globally distributed platform comprises
more than 18,000 servers in more than 950 networks in 69
countries. The Company was incorporated in Delaware in 1998 and
is headquartered in Cambridge, Massachusetts. Akamai currently
operates in one business segment: providing services for
accelerating delivery of content and applications over the
Internet.
The accompanying consolidated financial statements include the
accounts of Akamai and its wholly-owned subsidiaries.
Intercompany transactions and balances have been eliminated in
consolidation.
|
|
2.
|
Summary
of Significant Accounting Policies and Estimates:
|
Use of
Estimates
The Company prepares its consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America. These principles require management to
make estimates, judgments and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses,
together with amounts disclosed in the related notes to the
consolidated financial statements. Actual results and outcomes
may differ from managements estimates, judgments and
assumptions. Significant estimates used in these financial
statements include, but are not limited to, revenues, accounts
receivable and related reserves, restructuring reserves,
contingencies, useful lives and realizability of long-term
assets and goodwill, capitalized software, income and other
taxes and the fair value of share-based compensation. Estimates
are periodically reviewed in light of changes in circumstances,
facts and experience. The effects of material revisions in
estimates are reflected in the consolidated financial statements
prospectively from the date of the change in estimate.
Revenue
Recognition
The Company recognizes service revenues in accordance with the
Securities and Exchange Commissions Staff Accounting
Bulletin No. 104, Revenue Recognition, and
the Financial Accounting Standards Boards
(FASB) Emerging Issues Task Force Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables.
Revenue is recognized only when the price is fixed or
determinable, persuasive evidence of an arrangement exists, the
service is performed and collectibility of the resulting
receivable is reasonably assured.
At the inception of a customer contract for service, the Company
makes an estimate as to that customers ability to pay for
the services provided. The Company bases its estimate on a
combination of factors, including the successful completion of a
credit check or financial review, its payment history with the
customer and other forms of payment assurance. Upon the
completion of these steps, the Company recognizes revenue
monthly in accordance with its revenue recognition policy. If
the Company subsequently determines that collection from the
customer is not reasonably assured, the Company records an
allowance for doubtful accounts and bad debt expense for all of
that customers unpaid invoices and ceases recognizing
revenue for continued services provided until cash is received.
Changes in the Companys estimates and judgments about
whether collection is reasonably assured would change the timing
of revenue or amount of bad debt expense that the Company
recognizes.
Akamai primarily derives income from the sale of services to
customers executing contracts having terms of one year or
longer. These contracts generally commit the customer to a
minimum monthly level of usage and provide the rate at which the
customer must pay for actual usage above the monthly minimum.
For these services, Akamai recognizes the monthly minimum as
revenue each month provided that an enforceable contract has
been signed by both parties, the service has been delivered to
the customer, the fee for the service is fixed or determinable
and collection is reasonably assured. Should a customers
usage of Akamai services exceed the monthly minimum, Akamai
recognizes revenue for such excess in the period of the usage.
The Company typically charges the customer an installation fee
when the services are first activated. The installation fees are
recorded as deferred revenue and recognized as revenue ratably
over the estimated life of the customer arrangement. The Company
also derives
39
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
revenue from services sold as discrete, non-recurring events or
based solely on usage. For these services, the Company
recognizes revenue after an enforceable contract has been signed
by both parties, the fee is fixed or determinable, the event or
usage has occurred and collection is reasonably assured.
The Company periodically enters into multi-element service
arrangements. When the Company enters into such arrangements,
each element is accounted for separately over its respective
service period, provided that there is objective evidence of
fair value for the separate elements. For example, objective
evidence of fair value includes the price charged for the
element when sold separately. If the fair value of each element
cannot be objectively determined, the total value of the
arrangement is recognized ratably over the entire service period
to the extent that all services have begun to be provided at the
outset of the period. For most multi-element service
arrangements to date, the fair value of each element has not
been objectively determinable. Therefore, all revenue under
these arrangements has been recognized ratably over the related
service period to the extent that all services have begun to be
provided at the outset of the period.
The Company also licenses software under perpetual and term
license agreements. The Company applies the provisions of
Statement of Position (SOP) 97-2, Software
Revenue Recognition, as amended by
SOP 98-9,
Modifications of
SOP 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions. As prescribed by this guidance, the Company
applies the residual method of accounting. The residual method
requires that the portion of the total arrangement fee
attributable to undelivered elements, as indicated by vendor
specific objective evidence of fair value, is deferred and
subsequently recognized when delivered. The difference between
the total arrangement fee and the amount deferred for the
undelivered elements is recognized as revenue related to the
delivered elements, if all other revenue recognition criteria of
SOP 97-2
are met.
The Company also sells its services through a reseller channel.
Assuming all other revenue recognition criteria are met, the
Company recognizes revenue from reseller arrangements based on
the resellers contracted non-refundable minimum purchase
commitments over the term of the contract, plus amounts sold by
the reseller to its customers in excess of the minimum
commitments. These excess minimum commitments are recognized as
revenue in the period in which the service is provided.
Akamai recognizes revenue from fixed-fee arrangements and
software arrangements that require significant customization or
modification using the
percentage-of-completion
method in accordance with Accounting Research Bulletin
(ARB) No. 45, Long-Term Construction-Type
Contracts, and with the applicable guidance provided by
SOP 81-1,
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. The Company generally
recognizes revenue under these arrangements based on the
percentage of cost incurred to date compared to the estimated
total cost to complete the project. In certain customer
arrangements, the Company recognizes revenue based on the
progress made toward achieving milestones under the contract.
The impact of any change in estimate is recorded prospectively
from the date of the change. At the outset of a fixed-fee
arrangement, if the Company is not able to estimate the total
cost-to-complete,
nor able to measure progress towards the achievement of contract
milestones, the Company accounts for the arrangement using the
completed-contract method of accounting. Under this method, the
Company recognizes revenue when the contract is complete and
there are no remaining costs or deliverables. In the event that
the estimated total cost on a fixed-fee contract indicates a
loss, the Company will record the loss immediately.
From time to time, the Company enters into contracts to sell its
services or license its technology to enterprises at or about
the same time that it enters into contracts to purchase products
or services from the same enterprise. If the Company concludes
that these contracts were negotiated concurrently, the Company
records as revenue only the net cash received from the vendor,
unless the product or service received has a separate
identifiable benefit and the fair value to the Company of the
vendors product or service can be established objectively.
The Company may from time to time resell licenses or services of
third parties. The Company records revenue for these
transactions when the Company has risk of loss related to the
amounts purchased from the third party and the Company adds
value to the license or service, such as by providing
maintenance or support for such license or
40
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
service. If these conditions are present, the Company recognizes
revenue when all other revenue recognition criteria are
satisfied.
Deferred revenue includes amounts billed to customers for which
revenue has not been recognized. Deferred revenue primarily
consists of the unearned portion of monthly billed service fees;
prepayments made by customers for future periods; deferred
installation and activation
set-up fees;
amounts billed under extended payment terms; and maintenance and
support fees charged under license arrangements.
Cost
of Revenues
Cost of revenues consists primarily of fees paid to network
providers for bandwidth and for housing servers in third-party
network data centers, also known as co-location costs. Cost of
revenues also includes network operation employee costs, network
storage costs, cost of professional services, cost of licenses,
depreciation of network equipment used to deliver the
Companys services, amortization of network-related
internal-use software and costs for the production of live
on-line events. The Company enters into contracts for bandwidth
with third-party network providers with terms typically ranging
from several months to two years. These contracts generally
commit Akamai to pay minimum monthly fees plus additional fees
for bandwidth usage above the contracted level. In some
circumstances, Internet service providers (ISPs)
make available to Akamai rack space for the Companys
servers and access to their bandwidth at discounted or no cost.
In exchange, the ISP and its customers benefit by receiving
content through a local Akamai server resulting in better
content delivery. The Company does not consider these
relationships to represent the culmination of an earnings
process. Accordingly, the Company does not recognize as revenue
the value to the ISPs associated with the use of Akamais
servers nor does the Company recognize as expense the value of
the rack space and bandwidth received at discounted or no cost.
Equity-Related
Compensation
Akamai accounts for stock-based awards to employees using the
intrinsic value method as prescribed by Accounting Principles
Board Opinion (APB) No. 25, Accounting for
Stock Issued to Employees, and related interpretations.
Accordingly, no compensation expense is recorded for stock-based
awards issued to employees in fixed amounts and with fixed
exercise prices at least equal to the fair market value of the
Companys common stock at the date of grant. Akamai applies
the provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, as amended by
SFAS No. 148, through disclosure only for stock-based
awards issued to employees. All stock-based awards to
non-employees are accounted for at their fair value in
accordance with SFAS No. 123.
Equity-related compensation is comprised of the following for
all periods presented:
|
|
|
(a) |
|
amortization of deferred compensation resulting from the grant
of stock options or shares of restricted stock to employees at
exercise or sale prices deemed to be less than the fair value of
the common stock on the grant date, adjusted for cancellations
and forfeitures due to employee terminations; |
|
(b) |
|
the intrinsic value of stock options or restricted stock awards,
measured at the modification date, for the number of awards
where vesting has been accelerated for terminated employees; |
|
(c) |
|
the intrinsic value of stock options or restricted stock issued
as equity bonus awards; |
|
(d) |
|
the intrinsic value of deferred stock units; |
|
(e) |
|
the forgiveness of notes receivable issued in connection with
the sale of restricted common stock; |
|
|
|
|
(f)
|
the fair value of equity awards issued to non-employees; and
|
|
|
|
|
(g)
|
equity awards that require variable accounting.
|
41
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table illustrates the effect on net income (loss)
and net income (loss) per share had the Company accounted for
stock options issued to employees under the fair value
recognition provisions of SFAS No. 123 as amended by
SFAS No. 148 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Net income (loss), as reported
|
|
$
|
327,998
|
|
|
$
|
34,364
|
|
|
$
|
(29,281
|
)
|
Add: stock-based employee
compensation included in reported net income (loss) net of tax
effect
|
|
|
3,219
|
|
|
|
1,200
|
|
|
|
8,062
|
|
Deduct: stock-based employee
compensation expense determined under fair value method for all
awards net of tax effect
|
|
|
(31,288
|
)
|
|
|
(55,461
|
)
|
|
|
(47,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental stock option expense
per FAS No. 123
|
|
|
(28,069
|
)
|
|
|
(54,261
|
)
|
|
|
(38,993
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$
|
299,929
|
|
|
$
|
(19,897
|
)
|
|
$
|
(68,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per
weighted average share:
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
2.41
|
|
|
$
|
0.28
|
|
|
$
|
(0.25
|
)
|
Pro forma
|
|
$
|
2.20
|
|
|
$
|
(0.16
|
)
|
|
$
|
(0.58
|
)
|
Diluted net income (loss) per
weighted average share:
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
2.11
|
|
|
$
|
0.25
|
|
|
$
|
(0.25
|
)
|
Pro forma
|
|
$
|
1.93
|
|
|
$
|
(0.16
|
)
|
|
$
|
(0.58
|
)
|
The pro forma results above for the year ended December 31,
2004 reflect the cumulative effect of a change by the Company in
its estimate of expected rates of forfeitures of stock-based
awards to employees based upon a review of actual forfeitures
experienced in prior periods. The cumulative effect of this
change in estimate for the year ended December 31, 2004 was
to increase pro forma stock-based employee compensation expense
by approximately $12.3 million.
The fair value of each stock option award is estimated on the
grant date using the Black-Scholes option pricing model with the
following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Expected life (years)
|
|
|
5.0
|
|
|
|
5.0
|
|
|
|
5.0
|
|
Risk-free interest rate (%)
|
|
|
4.0
|
|
|
|
3.0
|
|
|
|
2.8
|
|
Volatility (%)
|
|
|
72.8
|
|
|
|
98.9
|
|
|
|
100.0
|
|
Dividend yield (%)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair
value of options granted at market value
|
|
$
|
8.86
|
|
|
$
|
10.90
|
|
|
$
|
3.75
|
|
42
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of shares purchased under the 1999 Employee Stock
Purchase Plan is estimated on the grant date using the
Black-Scholes option pricing model with the following weighted
average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Expected life (years)
|
|
|
0.5-2.0
|
|
|
|
0.5-2.0
|
|
|
|
0.5-2.0
|
|
Risk-free interest rate (%)
|
|
|
2.12
|
|
|
|
1.88
|
|
|
|
1.65
|
|
Volatility (%)
|
|
|
103.2
|
|
|
|
129.2
|
|
|
|
133.0
|
|
Dividend yield (%)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of
shares purchased
|
|
$
|
9.70
|
|
|
$
|
2.97
|
|
|
$
|
1.76
|
|
Research
and Development Costs
Research and development costs consist primarily of payroll and
related personnel costs for the design, deployment, testing,
operation and enhancement of the Companys services and
network. Costs incurred in the development of the Companys
services are expensed as incurred, except certain software
development costs eligible for capitalization. Costs associated
with the development of software to be marketed externally are
expensed prior to the establishment of technological feasibility
as defined by SFAS No. 86, Accounting for the
Cost of Computer Software to be Sold, Leased, or Otherwise
Marketed, and capitalized thereafter until the general
release of the software. To date, the Companys development
of software to be sold externally has been completed
concurrently with the establishment of technological feasibility
and, accordingly, all associated costs have been charged to
expense as incurred in the accompanying consolidated financial
statements.
Costs incurred during the application development stage of
internal-use software projects are capitalized in accordance
with
SOP 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. Capitalized costs include
external consulting and payroll and payroll-related costs for
employees in the Companys development and information
technology groups who are directly associated with, and who
devote time to, the Companys internal-use software
projects during the application development stage.
Capitalization begins when the planning stage is complete and
the Company commits resources to the software project.
Capitalization ceases when the software has been tested and is
ready for its intended use. Amortization of the asset commences
when the software is complete and placed in service. The Company
amortizes completed internal-use software to cost of revenues
over an estimated life of two years. Costs incurred during the
planning, training and post implementation stages of the
software development life-cycle are expensed as incurred. Costs
related to upgrades and enhancements of existing internal-use
software that increase the functionality of the software are
also capitalized.
Concentrations
of Credit Risk and Fair Value of Financial
Instruments
The amounts reflected in the consolidated balance sheets for
cash and cash equivalents, accounts receivable and accounts
payable approximate their fair value due to their short-term
maturities. The fair value and the aggregate outstanding
principal amount of the Companys 1% convertible
senior notes were $274.5 million and $200.0 million,
respectively, as of December 31, 2005. The Company
maintains the majority of its cash, cash equivalents and
marketable securities balances principally with domestic
financial institutions that the Company believes to be of high
credit standing. Concentrations of credit risk with respect to
accounts receivable are limited to certain customers to which
the Company makes substantial sales. The Companys customer
base consists of a large number of geographically dispersed
customers diversified across several industries. To reduce risk,
the Company routinely assesses the financial strength of its
customers. Based on such assessments, the Company believes that
its accounts receivable credit risk exposure is limited. For the
year ended December 31, 2005, no customers accounted for
more than 10% of total revenues. For the years ended
December 31, 2004 and 2003, one customer accounted for 10%
and 15%, respectively, of total revenues. As of
December 31, 2005, one customer had an account receivable
43
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
balance of 13% of total accounts receivable. As of
December 31, 2004, no customer had an accounts receivable
balance outstanding more than 10% of total accounts receivable.
The Company believes that concentration of credit risk related
to accounts receivable is not significant.
Taxes
The Companys provision for income taxes is comprised of a
current and a deferred portion. The current income tax provision
is calculated as the estimated taxes payable or refundable on
tax returns for the current year. The deferred income tax
provision is calculated for the estimated future tax effects
attributable to temporary differences and carryforwards using
expected tax rates in effect in the years during which the
differences are expected to reverse.
The Company currently has significant deferred tax assets,
resulting from net operating loss carryforwards, tax credit
carryforwards and deductible temporary differences. Management
periodically weighs the positive and negative evidence to
determine if it is more likely than not that some or all of the
deferred tax assets will be realized. In the third quarter of
2005, management determined it was more likely than not that
substantially all of the deferred tax assets would be realized
and accordingly released substantially all of its valuation
allowance. This decision was based on the Companys
cumulative history of earnings before taxes for financial
reporting purposes over a
12-quarter
period and on the projections of expected future taxable income.
The tax assets estimated to be realized in future periods have
been calculated by applying a blended federal and state tax rate
of 39.65%, which is based upon the tax rates expected to be in
effect, apportioned by jurisdiction, in the periods during which
the attributes are expected to be utilized. Changes in this
blended rate in future periods could have a material effect on
both the tax provision in the period of change as well as the
net deferred tax asset carrying value.
The Company has recorded certain tax reserves to address
potential exposures involving its sales and use and franchise
tax positions. These potential exposures result from the varying
application of statutes, rules, regulations and interpretations
by different jurisdictions. The Companys estimate of the
value of its tax reserves contains assumptions based on past
experiences and judgments about the interpretation of statutes,
rules and regulations by taxing jurisdictions. It is possible
that the costs of the ultimate resolution of these matters may
be greater or less than the amount that the Company estimated.
Foreign
Currency Translation
Akamai has determined that the functional currency of its
foreign subsidiaries is each respective subsidiarys local
currency. The assets and liabilities of these subsidiaries are
translated at the applicable exchange rate as of the balance
sheet date and revenues and expenses are translated at an
average rate over the period. Currency translation adjustments
are recorded as a component of other comprehensive loss. Gains
and losses on inter-company transactions are recorded in other
income (expense), net. For the years ended December 31,
2005, 2004 and 2003, the Company recorded foreign currency
(loss) gain of ($1.5) million, $543,000 and ($44,000),
respectively.
Cash,
Cash Equivalents and Marketable Securities
Cash and cash equivalents consist of cash held in bank deposit
accounts and short-term, highly liquid investments with original
maturities of three months or less at the date of purchase. Cash
equivalents are carried at amortized cost, which approximates
fair value.
Short-term marketable securities consist of high quality
corporate and government securities with original maturities of
more than three months at the date of purchase and less than one
year from the date of the balance sheet. Long-term marketable
securities consist of high quality corporate and government
securities with maturities of more than one year from the date
of the balance sheet. Short-term and long-term marketable
securities include investments that are restricted as to use. As
of December 31, 2005 and 2004, the Company had
$4.5 million and $3.9 million, respectively, of
restricted marketable securities generally representing security
for irrevocable letters of credit related to facility leases.
44
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company classifies all debt securities and equity securities
with readily determinable market values as available for
sale in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities. These investments are classified as marketable
securities on the consolidated balance sheet and are carried at
fair market value with unrealized gains and losses considered to
be temporary in nature reported as a separate component of other
comprehensive income (loss). Investments in the securities of
private companies are initially carried at cost. These
investments are included in other long-term assets on the
consolidated balance sheet. The Company reviews all investments
for reductions in fair value that are
other-than-temporary.
When such reductions occur, the cost of the investment is
adjusted to fair value through loss on investments on the
consolidated statement of operations. Gains and losses on
investments are calculated on the basis of specific
identification.
Accounts
Receivable and Related Reserves
Trade accounts receivable are recorded at the invoiced amounts
and do not bear interest. In addition to trade accounts
receivable, the Companys accounts receivable balance
includes unbilled accounts that represent revenues that are
typically billed within one month. The Company records reserves
against its accounts receivable balance. These reserves consist
of allowances for doubtful accounts, cash basis customers and
service credits. Increases and decreases in the allowance for
doubtful accounts are included as a component of general and
administrative expenses. The Companys reserve for cash
basis customers increases as services are provided to customers
where collection is no longer assured. The reserve decreases and
revenue is recognized when and if cash payments are received.
The Companys reserve for service credits increases as a
result of specific service credits that are expected to be
issued to customers during the ordinary course of business, as
well as for billing disputes. These credits result in a
reduction to revenues. Decreases to the reserve are the result
of actual credits being issued to customers, causing a
corresponding reduction in accounts receivable.
Estimates are used in determining these reserves and are based
upon the Companys review of outstanding balances on a
customer-specific,
account-by-account
basis. The allowance for doubtful accounts is based upon a
review of customer receivables from prior sales with collection
issues where the Company no longer believes that the customer
has the ability to pay for services provided. The Company
performs on-going credit evaluations of its customers. If such
an evaluation indicates that payment is no longer reasonably
assured for services provided, any future services provided to
that customer will result in the creation of a reserve until the
Company receives consistent payments. In addition, the Company
reserves a portion of revenues as a reserve for service credits.
Reserves for service credits are measured based on an analysis
of revenue credits to be issued after the month of billing and
an estimate for future credits. These credits typically relate
to managements estimate of the resolution of customer
disputes and billing adjustments. The Company does not have any
off-balance sheet credit exposure related to its customers.
Property
and Equipment
Property and equipment are recorded at cost, net of accumulated
depreciation and amortization. Property and equipment includes
purchases of items with a per unit value greater than $1,000 and
a useful life greater than one year. In certain instances, the
Company has capitalized equipment purchases, such as laptops,
which have a per unit value less than $1,000, as their useful
life is three years. Depreciation and amortization are computed
on a straight-line basis over the estimated useful lives of the
assets. Leasehold improvements are amortized over the shorter of
related lease terms or their estimated useful lives. Property
and equipment acquired under capital leases are depreciated over
the shorter of the related lease terms or the useful lives of
the assets. The Company periodically reviews the estimated
useful lives of property and equipment. Changes to the estimated
useful lives are recorded prospectively from the date of the
change. Upon retirement or sale, the cost of the assets disposed
of and the related accumulated depreciation are removed from the
accounts and any resulting gain or loss is included in income
(loss) from operations. Repairs and maintenance costs are
expensed as incurred.
45
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill
and Other Intangible Assets
The Company tests goodwill for impairments on an annual basis or
more frequently if events or changes in circumstances indicate
that the asset might be impaired. The Company performed an
impairment test of goodwill as of January 1, 2005 and 2006.
These tests did not result in an impairment to goodwill. Other
intangible assets consist of completed technologies, customer
relationships and non-compete agreements arising from the
acquisition of businesses and acquired license rights. Purchased
intangible assets, other than goodwill are amortized over their
estimated useful lives. Goodwill is carried at its historical
cost.
Valuation
of Other Long-Lived Assets
Long-lived assets are reviewed for impairment under the guidance
of SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. Under
SFAS No. 144, long-lived assets are reviewed for
impairment whenever events or changes in circumstances, such as
service discontinuance, technological obsolescence, a change in
the Companys market capitalization, facility closure or
work-force reductions indicate that the carrying amount of the
asset may not be recoverable. When such events occur, the
Company compares the carrying amount of the asset to the
undiscounted expected future cash flows related to the asset. If
this comparison indicates that an impairment is present, the
amount of the impairment is calculated as the difference between
the carrying amount and the fair value of the asset. If a
readily determinable market price does not exist, fair value is
estimated using discounted expected cash flows attributable to
the asset.
Restructuring
Charges
A restructuring liability related to employee terminations is
recorded by the Company when a one-time benefit arrangement is
communicated to an employee who is involuntarily terminated as
part of a company-wide reorganization and the amount of the
termination benefit is known, provided that the employee is not
required to render future services in order to receive the
termination benefit.
The Company previously recorded real-property related
restructuring expenses and liabilities when management approved
and committed the Company to a plan to exit a facility lease,
the plan specifically identified the actions to be taken and the
actions were scheduled to begin soon after management approved
the plan. Beginning in 2003, in accordance with
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, the Company records
restructuring liabilities, discounted at the appropriate rate,
for facility leases only when the space is both vacated and all
actions needed to make the space readily available for sublease
have been completed. The Company records restructuring
liabilities for estimated costs to terminate a facility lease
before the end of its contractual term or for estimated costs
that will continue to be incurred under the lease for its
remaining term when there is no economic benefit to the Company,
net of an estimate of sublease income.
Litigation
The Company is currently involved in certain legal proceedings.
The Company estimates the range of liability related to pending
litigation where the amount and range of loss can be estimated.
The Company records its best estimate of a loss when the loss is
considered probable. Where a liability is probable and there is
a range of estimated loss with no best estimate in the range,
the Company records the minimum estimated liability related to
the claim. As additional information becomes available, the
Company reassesses the potential liability related to the
Companys pending litigation and revises its estimate.
Advertising
Expense
The Company recognizes advertising expense as incurred. The
Company recognized total advertising expense of $879,000,
$130,000 and $208,000 for the years ended December 31,
2005, 2004 and 2003, respectively.
46
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Recent
Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment. Effective on January 1,
2006, the Company adopted the provisions of
SFAS No. 123R, which requires all share-based payments
to employees, including grants of stock options, to be
recognized in the income statement based on their fair values as
of the date of grant. The adoption of this statement will result
in the expensing of the fair value of stock options granted to
employees . Prior to the adoption of SFAS 123R, the Company
has elected to disclose the impact of expensing the fair value
of stock options only in the notes to its financial statements,
which is no longer permitted.
SFAS No. 123R applies to new equity awards and to
equity awards modified, repurchased, or canceled after the
effective date of adoption. Additionally, compensation costs for
the portion of awards for which the requisite service has not
been rendered that are outstanding as of the effective date of
adoption shall be recognized as the requisite service is
rendered. The compensation cost for that portion of such awards
shall be based on the grant-date fair value of those awards as
calculated from the pro forma disclosures under
SFAS No. 123. Changes to the grant-date fair value of
equity awards granted before the effective date of this
statement are precluded. The compensation cost for those earlier
awards shall be attributed to periods beginning on or after the
effective date of the Companys adoption of
SFAS No. 123R using the attribution method that was
used under SFAS No. 123, which was the straight-line
method. Any unearned or deferred compensation related to those
earlier awards shall be written off against the appropriate
equity accounts. Additionally, common stock purchased pursuant
to stock options granted under the Companys employee stock
purchase plan will be expensed based upon the fair market value
of the stock option.
The Company adopted the statement on a modified prospective
basis beginning January 1, 2006. Accordingly, the results
of operations for future periods will not be comparable to the
Companys historical results of operations. The adoption of
SFAS No. 123R will have a material impact on the
Companys results of operations, increasing cost of
revenues, research and development, sales and marketing and
general and administrative expenses.
SFAS No. 123R also changes the reporting of
tax-related amounts within the statement of cash flows. The
gross amount of any windfall tax benefits resulting from
stock-based compensation will be reported as cash flows from
financing activities. Under the indirect method of presentation
of the statement of cash flows, any shortfalls resulting from
the write-off of deferred tax assets will be reported in net
income and classified within the change of deferred income taxes
in the operating section of the statement of cash flows.
On June 10, 2005, the Company acquired all of the
outstanding common and preferred stock, including vested and
unvested stock options, of Speedera Networks, Inc.
(Speedera) in exchange for approximately
10.6 million shares of Akamai common stock and options to
purchase 1.7 million shares of Akamai common stock.
Speedera provided distributed content delivery services. The
purchase of Speedera is intended to enable Akamai to better
compete against larger managed services vendors and other
content delivery providers, by expanding its customer base and
providing customers with a broader suite of services.
The aggregate purchase price, net of cash received, was
approximately $142.2 million, which consisted of
$121.5 million in shares of common stock,
$18.2 million in fair value of the Companys stock
options and transaction costs of $2.5 million, which
primarily consisted of fees for financial advisory and legal
services. The fair
47
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
value of the Companys stock options issued to Speedera
employees was estimated using a Black-Scholes option-pricing
model with the following weighted-average assumptions:
|
|
|
|
|
Expected life (years)
|
|
|
4.5
|
|
Risk-free interest rate
|
|
|
3.8
|
%
|
Expected volatility
|
|
|
83.6
|
%
|
Dividend yield
|
|
|
|
|
The intrinsic value allocated to the unvested options issued in
the acquisition that had yet to be earned as of the acquisition
date was $9.3 million and has been recorded as deferred
compensation in the purchase price allocation.
The acquisition was accounted for using the purchase method of
accounting and the results of operations of the acquired
business since June 10, 2005, the date of acquisition, are
included in the consolidated financial statements of the Company
for the year ended December 31, 2005. The total purchase
consideration was allocated to the assets acquired and
liabilities assumed at their estimated fair values as of the
date of acquisition, as determined by management and, with
respect to identified intangible assets, by management with the
assistance of an appraisal provided by a third-party valuation
firm. The excess of the purchase price over the amounts
allocated to assets acquired and liabilities assumed has been
recorded as goodwill. The value of the goodwill from this
acquisition can be attributed to a number of business factors
including, but not limited to, potential sales opportunities of
providing Akamai services to Speedera customers; a trained
technical workforce in place in the United States and India; an
existing sales pipeline and a trained sales force; and cost
synergies. In accordance with current accounting standards,
goodwill associated with Speedera will not be amortized and will
be tested for impairment at least annually as required by
SFAS No. 142, Goodwill and Other Intangible
Assets (see Note 9).
The following table represents the allocation of the purchase
price:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Total consideration:
|
|
|
|
|
Common stock issued
|
|
$
|
121,536
|
|
Fair value of stock options
|
|
|
18,239
|
|
Transaction costs paid
|
|
|
2,459
|
|
|
|
|
|
|
Total purchase consideration
|
|
$
|
142,234
|
|
|
|
|
|
|
Allocation of the purchase
consideration
|
|
|
|
|
Current assets, including cash of
$3,914
|
|
$
|
10,587
|
|
Fixed assets
|
|
|
2,760
|
|
Long-term assets
|
|
|
157
|
|
Identifiable intangible assets
|
|
|
43,200
|
|
Goodwill
|
|
|
96,319
|
|
|
|
|
|
|
Total assets acquired
|
|
|
153,023
|
|
Fair value of liabilities assumed,
including deferred revenue of $450
|
|
|
(20,054
|
)
|
Deferred compensation
|
|
|
9,265
|
|
|
|
|
|
|
|
|
$
|
142,234
|
|
|
|
|
|
|
48
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following are identified intangible assets acquired and the
respective estimated periods over which the assets will be
amortized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
Amount
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
(In years)
|
|
|
Completed technologies
|
|
$
|
1,000
|
|
|
|
1-4
|
|
Customer relationships
|
|
|
40,900
|
|
|
|
8
|
|
Non-compete agreements
|
|
|
1,300
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
43,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The customer relationships were valued using the income
approach. The key assumptions used in valuing the customer
relationships are as follows: discount rate 18%, tax rate 40%
and estimated average economic life of 8 years. The
customer relationships are being amortized at the ratio that
current revenues generated from those customer relationships
bear to the total estimated revenues to be generated from those
relationships from the date of acquisition. The completed
technologies and non-compete agreements are being amortized
using the straight-line method over their respective remaining
lives. The values of the intangible assets acquired were
determined using projections of revenues and expenses
specifically attributed to the intangible assets. The income
streams were then discounted to present value using estimated
risk adjusted discount rates.
The relief-from-royalty method was used to value the completed
technologies. The relief-from-royalty method is used to estimate
the cost savings that accrue to the owner of an intangible asset
that would otherwise be required to pay royalties or license
fees on revenues earned through the use of the asset. The
royalty rate used is based on an analysis of empirical,
market-derived royalty rates for guideline intangible assets.
Typically, revenue is projected over the expected remaining
useful life of the intangible asset. The market-derived royalty
rate is then applied to estimate the royalty savings. The key
assumptions used in valuing the completed technologies are as
follows: royalty rate 5%, discount rate 18.0%, tax rate 40% and
estimated average economic life of one to four years.
The lost profits method was used to value the non-compete
agreements entered into by Akamai and three founders of
Speedera. The lost profits method recognizes that the current
value of an asset may be premised upon the expected receipt of
future economic benefits protected by clauses within an
agreement. These benefits are generally considered to be higher
income resulting from the avoidance of a loss in revenue that
would likely occur without an agreement. The key assumptions
used in valuing the non-compete agreements are as follows:
discount rate 18%, tax rate 40% and estimated average economic
life of three years.
The following table reflects unaudited pro forma results of
operations of the Company for the years ended December 31,
2005 and 2004 assuming that the Speedera acquisition had
occurred on January 1, 2005 and January 1, 2004,
respectively (in thousands, expect per share data):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
Revenues
|
|
$
|
302,220
|
|
|
$
|
237,523
|
|
Net income
|
|
$
|
326,031
|
|
|
$
|
22,954
|
|
Net income per weighted average
common share
|
|
$
|
2.23
|
|
|
$
|
0.17
|
|
Net income per weighted average
diluted share
|
|
$
|
1.97
|
|
|
$
|
0.16
|
|
|
|
4.
|
Net
Income (Loss) per Share:
|
Basic net income (loss) per share is computed using the weighted
average number of common shares outstanding during the year.
Diluted net income (loss) per share is computed using the
weighted average number of
49
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
common shares outstanding during the year, plus the dilutive
effect of potential common stock. Potential common stock
consists of stock options, deferred stock units, warrants,
unvested restricted common stock and convertible notes.
The following table sets forth the components used in the
computation of basic and diluted net income (loss) per common
share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
327,998
|
|
|
$
|
34,364
|
|
|
$
|
(29,281
|
)
|
Add back of interest expense on
1% convertible senior notes
|
|
|
2,841
|
|
|
|
2,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted net income
(loss)
|
|
$
|
330,839
|
|
|
$
|
37,215
|
|
|
$
|
(29,281
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income
(loss) per common share
|
|
|
136,167
|
|
|
|
124,407
|
|
|
|
118,075
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
7,691
|
|
|
|
9,162
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
12
|
|
|
|
|
|
Restricted common stock and
deferred stock units
|
|
|
141
|
|
|
|
109
|
|
|
|
|
|
1% convertible senior notes
|
|
|
12,945
|
|
|
|
12,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income
(loss) per common share
|
|
|
156,944
|
|
|
|
146,595
|
|
|
|
118,075
|
|
Basic net income (loss) per common
share
|
|
$
|
2.41
|
|
|
$
|
0.28
|
|
|
$
|
(0.25
|
)
|
Diluted net income (loss) per
common share
|
|
$
|
2.11
|
|
|
$
|
0.25
|
|
|
$
|
(0.25
|
)
|
The following potential common shares have been excluded from
the computation of diluted net income (loss) per share for the
periods presented because their effect would have been
antidilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Stock options
|
|
|
4,415
|
|
|
|
3,078
|
|
|
|
15,359
|
|
Deferred stock units
|
|
|
|
|
|
|
|
|
|
|
150
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
77
|
|
Unvested restricted common stock
|
|
|
|
|
|
|
|
|
|
|
467
|
|
51/2% convertible
subordinated notes
|
|
|
|
|
|
|
490
|
|
|
|
1,957
|
|
1% convertible senior notes
|
|
|
|
|
|
|
|
|
|
|
11,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,415
|
|
|
|
3,568
|
|
|
|
29,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to acquire 4.4 million, 3.1 million and
15.4 million shares of common stock as of December 31,
2005, 2004 and 2003, respectively, were excluded from the
calculation of diluted earnings per share because of their
antidilutive effect because the exercise prices for these stock
options were greater than the average market price of the
Companys common stock during the respective periods. The
effect of the Companys
51/2% convertible
subordinated notes on the calculation of diluted net income per
weighted average share for the year ended December 31, 2004
was calculated using the if converted method. The
convertible debt was excluded from the calculation of diluted
earnings per share in 2004 because of its antidilutive effect.
All potential common shares have been excluded from the 2003
calculation of diluted earnings per share as the Company had a
net loss for the year ended December 31, 2003.
50
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Accumulated
Other Comprehensive Income:
|
Comprehensive income for all periods is equal to net income
adjusted for unrealized gains and losses on investments and
foreign currency translation adjustments. Accumulated other
comprehensive income consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net unrealized loss on investments
|
|
$
|
(466
|
)
|
|
$
|
(400
|
)
|
Foreign currency translation
adjustments
|
|
|
937
|
|
|
|
1,792
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other
comprehensive income
|
|
$
|
471
|
|
|
$
|
1,392
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Marketable
Securities and Investments:
|
The following is a summary of marketable securities held by the
Company at December 31, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Certificates of deposit
|
|
$
|
3,627
|
|
|
$
|
|
|
|
$
|
5
|
|
|
$
|
3,622
|
|
Commercial paper
|
|
|
20,643
|
|
|
|
|
|
|
|
48
|
|
|
|
20,595
|
|
U.S. government agency
obligations
|
|
|
32,745
|
|
|
|
30
|
|
|
|
333
|
|
|
|
32,442
|
|
U.S. corporate debt securities
|
|
|
17,188
|
|
|
|
|
|
|
|
110
|
|
|
|
17,078
|
|
Municipal obligations
|
|
|
148,600
|
|
|
|
|
|
|
|
|
|
|
|
148,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
222,803
|
|
|
$
|
30
|
|
|
$
|
496
|
|
|
$
|
222,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of marketable securities held by the
Company at December 31, 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Certificates of deposit
|
|
$
|
4,975
|
|
|
$
|
|
|
|
$
|
7
|
|
|
$
|
4,968
|
|
Commercial paper
|
|
|
550
|
|
|
|
|
|
|
|
|
|
|
|
550
|
|
U.S. government agency
obligations
|
|
|
13,461
|
|
|
|
|
|
|
|
63
|
|
|
|
13,398
|
|
U.S. corporate debt securities
|
|
|
51,263
|
|
|
|
8
|
|
|
|
338
|
|
|
|
50,933
|
|
Municipal obligations
|
|
|
3,250
|
|
|
|
|
|
|
|
|
|
|
|
3,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
73,499
|
|
|
$
|
8
|
|
|
$
|
408
|
|
|
$
|
73,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities by contractual maturity were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Due in one year or less
|
|
$
|
204,441
|
|
|
$
|
39,034
|
|
Due after 1 year through
5 years
|
|
|
17,896
|
|
|
|
34,065
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
222,337
|
|
|
$
|
73,099
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005, $4.5 million of the
Companys marketable securities were classified as
restricted. These securities primarily represent security for
irrevocable letters of credit in favor of third-party
beneficiaries,
51
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
mostly related to facility leases. The letters of credit are
collateralized by restricted marketable securities, of which
$3.8 million are classified as long-term marketable
securities and $730,000 are classified as short-term marketable
securities on the consolidated balance sheets. The restrictions
on these marketable securities lapse as the Company fulfills its
obligations or such obligations expire under the terms of the
letters of credit. These restrictions are expected to lapse at
various times through May 2011.
For the year ended December 31, 2005, the Company recorded
net losses on investments of $27,000 on sales of marketable
securities. For the year ended December 31, 2004, the
Company recorded net losses on investments of $69,000 on sales
of marketable securities. For the year ended December 31,
2003, the Company recorded net gains on investments of
$1.6 million, which includes a gain of $1.7 million
related to sales of equity investments in publicly-traded
companies, offset by losses of $55,000 on sales of investments
in privately-held companies and sales of marketable securities.
Net accounts receivable consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Trade accounts receivable
|
|
$
|
51,019
|
|
|
$
|
31,175
|
|
Unbilled accounts
|
|
|
9,137
|
|
|
|
4,580
|
|
|
|
|
|
|
|
|
|
|
Total gross accounts receivable
|
|
|
60,156
|
|
|
|
35,755
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
(2,277
|
)
|
|
|
(928
|
)
|
Reserve for cash basis customers
|
|
|
(2,539
|
)
|
|
|
(2,375
|
)
|
Reserve for service credits
|
|
|
(3,178
|
)
|
|
|
(2,119
|
)
|
|
|
|
|
|
|
|
|
|
Total accounts receivable reserves
|
|
|
(7,994
|
)
|
|
|
(5,422
|
)
|
|
|
|
|
|
|
|
|
|
Total accounts receivable, net
|
|
$
|
52,162
|
|
|
$
|
30,333
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Property
and Equipment:
|
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Estimated Useful
|
|
|
|
2005
|
|
|
2004
|
|
|
Lives in Years
|
|
|
Computer and networking equipment
|
|
$
|
169,690
|
|
|
$
|
153,520
|
|
|
|
3
|
|
Purchased software
|
|
|
26,695
|
|
|
|
25,941
|
|
|
|
3
|
|
Furniture and fixtures
|
|
|
4,355
|
|
|
|
4,612
|
|
|
|
5
|
|
Office equipment
|
|
|
3,664
|
|
|
|
3,690
|
|
|
|
3
|
|
Leasehold improvements
|
|
|
5,569
|
|
|
|
4,832
|
|
|
|
5-7
|
|
Production equipment
|
|
|
2,839
|
|
|
|
1,928
|
|
|
|
3
|
|
Internal-use software
|
|
|
31,371
|
|
|
|
22,158
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244,183
|
|
|
|
216,681
|
|
|
|
|
|
Accumulated depreciation and
amortization
|
|
|
(199,298
|
)
|
|
|
(191,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,885
|
|
|
$
|
25,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense on property and equipment
and capitalized software costs for the years ended
December 31, 2005, 2004 and 2003 was $19.1 million,
$18.8 million and $47.5 million, respectively.
52
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the years ended December 31, 2005 and 2004, the
Company wrote off $11.4 million and $16.2 million,
respectively, of long lived asset costs, with accumulated
depreciation and amortization costs of $11.2 million and
$16.1 million, respectively. These write offs represent
purchased software and computer and networking equipment that
are no longer in use.
During the year ended December 31, 2003, as a result of
restructuring actions undertaken by the Company, the Company
wrote-down $272,000 of leasehold improvements and furniture and
fixtures. The Company recorded this impairment as a non-cash
restructuring charge (see Note 13). No impairments were
recorded during the years ended December 31, 2005 and 2004
as a result of restructuring activities.
During the years ended December 31, 2005 and 2004, the
Company capitalized $9.2 million and $7.8 million,
respectively, of external consulting and payroll and
payroll-related costs for the development and enhancement of
internal-use software applications. The internal-use software is
used by the Company primarily to operate, manage and monitor its
deployed network and deliver its services. The Company recorded
impairment charges of $39,000 and $56,000 for in-process
internal-use software previously capitalized for projects that
were cancelled during the years ended December 31, 2005 and
2004, respectively. These impairments are recorded in research
and development expense. The Company amortizes completed
internal-use software over an estimated life of two years.
The following table summarizes capitalized internal-use software
costs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Total costs capitalized
|
|
$
|
31,856
|
|
|
$
|
22,604
|
|
Less: impairments
|
|
|
(485
|
)
|
|
|
(446
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
31,371
|
|
|
|
22,158
|
|
Less: accumulated amortization
|
|
|
(18,598
|
)
|
|
|
(11,629
|
)
|
|
|
|
|
|
|
|
|
|
Net book value of capitalized
internal-use software
|
|
$
|
12,773
|
|
|
$
|
10,529
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
Goodwill
and Other Intangible Assets:
|
The Company acquired goodwill and other intangible assets
through business acquisitions during 2000 and 2005. The Company
also acquired license rights from the Massachusetts Institute of
Technology in 1999. During the year ended December 31,
2005, the Company recorded goodwill of $96.3 million and
acquired intangible assets of $43.2 million as a result of
the acquisition of Speedera. The changes in the carrying amount
of goodwill for the year ended December 31, 2005 were as
follows:
|
|
|
|
|
|
|
In thousands
|
|
|
Ending balance, December 31,
2004
|
|
$
|
4,937
|
|
Purchase price allocation
|
|
|
96,319
|
|
Deferred tax asset valuation
release
|
|
|
(2,737
|
)
|
|
|
|
|
|
Ending balance, December 31,
2005
|
|
$
|
98,519
|
|
|
|
|
|
|
The Company reviews goodwill and other intangible assets for
impairment whenever events or changes in circumstances indicate
that the carrying amount of these assets may exceed their fair
value. SFAS No. 142, Goodwill and Other
Intangible Assets, requires the Company to test goodwill
for impairment at least annually. The Company concluded that it
had one reporting unit and assigned the entire balance of
goodwill to this reporting unit as of January 1, 2005 and
2006 for purposes of performing an impairment test. The fair
value of the reporting unit was determined using the
Companys market capitalization as of January 1, 2005
and 2006. The fair value on January 1, 2005 and 2006
exceeded the net assets of the reporting unit, including
goodwill, as of both dates. Accordingly, the Company concluded
that no impairment existed as of these dates. Unless changes in
events or
53
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
circumstances indicate that an impairment test is required, the
Company will next test goodwill for impairment on
January 1, 2007.
Other intangible assets, which are subject to amortization,
consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Completed technology
|
|
$
|
1,000
|
|
|
$
|
(431
|
)
|
|
$
|
569
|
|
Customer relationships
|
|
|
40,900
|
|
|
|
(4,404
|
)
|
|
|
36,496
|
|
Non-compete agreements
|
|
|
1,300
|
|
|
|
(241
|
)
|
|
|
1,059
|
|
Acquired license rights
|
|
|
490
|
|
|
|
(347
|
)
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
43,690
|
|
|
$
|
(5,423
|
)
|
|
$
|
38,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Completed technology
|
|
$
|
26,769
|
|
|
$
|
(26,769
|
)
|
|
$
|
|
|
Trademarks and trade names
|
|
|
4,527
|
|
|
|
(4,527
|
)
|
|
|
|
|
Acquired license rights
|
|
|
490
|
|
|
|
(299
|
)
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,786
|
|
|
$
|
(31,595
|
)
|
|
$
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate expense related to amortization of other intangible
assets was $5.1 million, $48,000 and $2.2 million for
the years ended December 31, 2005, 2004 and 2003,
respectively. Amortization expense is expected to be
approximately $8.4 million, $7.4 million,
$6.1 million, $4.8 million and $4.1 million for
fiscal years 2006, 2007, 2008, 2009 and 2010, respectively.
Accrued expenses consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Payroll and other related benefits
|
|
$
|
14,374
|
|
|
$
|
8,797
|
|
Interest
|
|
|
83
|
|
|
|
1,640
|
|
Bandwidth and colocation
|
|
|
7,781
|
|
|
|
5,546
|
|
Property, use and other taxes
|
|
|
13,314
|
|
|
|
13,487
|
|
Legal professional fees
|
|
|
679
|
|
|
|
871
|
|
Other
|
|
|
2,218
|
|
|
|
1,756
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38,449
|
|
|
$
|
32,097
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
Commitments,
Contingencies and Guarantees:
|
Operating
Lease Commitments
The Company leases its facilities under non-cancelable operating
leases. These operating leases expire at various dates through
June 2013 and generally require the payment of real estate
taxes, insurance, maintenance and
54
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
operating costs. The minimum aggregate future obligations under
non-cancelable leases as of December 31, 2005 are as
follows (in thousands):
|
|
|
|
|
|
|
Operating
|
|
|
|
Leases
|
|
|
2006
|
|
$
|
7,169
|
|
2007
|
|
|
6,285
|
|
2008
|
|
|
4,999
|
|
2009
|
|
|
3,060
|
|
2010
|
|
|
1,340
|
|
Thereafter
|
|
|
198
|
|
|
|
|
|
|
Total
|
|
$
|
23,051
|
|
|
|
|
|
|
Rent expense for the years ended December 31, 2005, 2004
and 2003 was $5.7 million, $5.6 million and
$6.0 million, respectively. The Company has entered into a
sublease agreement with a tenant of its Cambridge, Massachusetts
property. The contracted amounts payable to the Company by this
sublease tenant are approximately $122,000, $208,000, $208,000
and $87,000 for the years ending December 31, 2006, 2007,
2008 and 2009, respectively.
The Company has issued letters of credit in the amount of
$4.5 million related to certain of its real estate leases.
These letters of credit are collateralized by marketable
securities that have been restricted as to use (see
Note 6). The letters of credit expire as the Company
fulfills its operating lease obligations. Certain of the
Companys facility leases include rent escalation clauses.
The Company normalizes rent expense on a straight-line basis
over the term of the lease for known changes in lease payments
over the life of the lease. In the event that the landlord
provided funding for lease improvements to leased facilities,
the Company would amortize such amount as part of rent expense
on a straight-line basis over the life of the lease.
Purchase
Commitments
The Company has long-term commitments for bandwidth usage and
co-location with various networks and ISPs. For the years ending
December 31, 2006, 2007 and 2008, the minimum commitments
are approximately $6.0 million, $1.1 million and
$409,000, respectively. The Company had aggregate equipment
purchase commitments of approximately $500,000 as of
December 31, 2005, which expire in August 2006.
Additionally, as of December 31, 2005, the Company had
entered into purchase orders with various vendors for aggregate
purchase commitments of $3.1 million which are expected to
be paid in 2006.
Litigation
Between July 2, 2001 and November 7, 2001, purported
class action lawsuits seeking monetary damages were filed in the
United States District Court for the Southern District of New
York against the Company as well as against the underwriters of
its October 28, 1999 initial public offering of common
stock. The complaints were filed allegedly on behalf of persons
who purchased the Companys common stock during different
time periods, all beginning on October 28, 1999 and
ending on various dates. The complaints are similar and allege
violations of the Securities Act of 1933 and the Securities
Exchange Act of 1934 primarily based on the allegation that the
underwriters received undisclosed compensation in connection
with the Companys initial public offering. On
April 19, 2002, a single consolidated amended complaint was
filed, reiterating in one pleading the allegations contained in
the previously filed separate actions. The consolidated amended
complaint defines the alleged class period as October 28,
1999 through December 6, 2000. A Special Litigation
Committee of Akamais Board of Directors authorized
management to negotiate a settlement of the pending claims
substantially consistent with a Memorandum of Understanding that
was negotiated among class plaintiffs, all issuer defendants and
their insurers.
55
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The parties negotiated a settlement which is subject to approval
by the Court. On February 15, 2005, the Court issued an
Opinion and Order preliminarily approving the settlement,
provided that the defendants and plaintiffs agree to a
modification narrowing the scope of the bar order set forth in
the original settlement agreement. The parties agreed to a
modification narrowing the scope of the bar order, and on
August 31, 2005, the Court issued an order preliminarily
approving the settlement. The Company believes that it has
meritorious defenses to the claims made in the complaint and, if
the settlement is not finalized and approved, it intends to
contest the lawsuit vigorously. An adverse resolution of the
action could have a material adverse effect on the
Companys financial condition and results of operations in
the period in which the lawsuit is resolved. The Company is not
presently able to estimate potential losses, if any, related to
this lawsuit.
The Company and Speedera were involved in lawsuits against each
other regarding patent infringement and false advertising and
trade secrets claims. Upon completion of the acquisition of
Speedera, all lawsuits between Akamai and Speedera were
dismissed.
The Company is party to various litigation matters which
management considers routine and incidental to its business.
Management does not expect the results of any of these actions
to have a material adverse effect on the Companys
business, results of operations or financial condition.
Guarantees
The Company has identified the guarantees described below as
disclosable in accordance with FASB Interpretation 45
(FIN 45), Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB
Interpretation No. 34. The Company evaluates
estimated losses for guarantees under SFAS 5,
Accounting for Contingencies, as Interpreted by
FIN 45. The Company considers such factors as the
degree of probability of an unfavorable outcome and the ability
to make a reasonable estimate of the amount of loss. To date,
the Company has not encountered material costs as a result of
such obligations and has not accrued any liabilities related to
such indemnification obligations in its financial statements.
As permitted under Delaware law, the Companys Certificate
of Incorporation provides that Akamai indemnify each of its
officers and directors during his or her lifetime for certain
events or occurrences that happen by reason of the fact that the
officer or director is or was or has agreed to serve as an
officer or director of the Company. The maximum potential amount
of future payments the Company could be required to make under
these indemnification agreements is unlimited; however, the
Company has a Director and Officer insurance policy that limits
its exposure and would enable the Company to recover a portion
of any future amounts paid.
The Company enters into standard indemnification agreements in
the ordinary course of business. Pursuant to these agreements,
the Company agrees to indemnify, hold harmless, and reimburse
the indemnified party for losses suffered or incurred by the
indemnified party, generally Akamais business partners or
customers, in connection with Akamais provision of its
services and software. Generally, these obligations are limited
to claims relating to infringement of a U.S. patent, or any
copyright or other intellectual property or the Companys
negligence, willful misconduct or violation of the law (provided
that there is not gross negligence or willful misconduct on the
part of the other party). Subject to applicable statutes of
limitation, the term of these indemnification agreements is
generally perpetual from the time of execution of the agreement.
The maximum potential amount of future payments the Company
could be required to make under these indemnification agreements
is unlimited; however, the Company carries insurance that covers
certain third party claims relating to its services and would
limit the Companys exposure.
The Company acquired all of the stock of three companies in
2000, as well as all of the stock of another company in 2005. As
part of those acquisitions, the Company assumed the liability
for undisclosed claims and losses previously incurred by such
companies. Subject to applicable statutes of limitations, these
obligations are generally perpetual from the time of execution
of the agreement. The maximum potential amount of future
56
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
payments the Company could be required to make in connection
with these obligations is unlimited. The Company does not expect
the costs of defending lawsuits or settling claims related to
these acquired companies to be material.
The Company leases space in certain buildings, including a
corporate headquarters building, under operating leases. The
Company has standard indemnification arrangements under those
leases that require it to indemnify the landlord against losses,
liabilities, and claims incurred in connection with the premises
covered by the Company leases, its use of the premises, property
damage or personal injury, and breach of the lease agreement, as
well as occurrences arising from the Companys negligence
or willful misconduct. The Company also subleases certain space
and agrees to indemnify the sublessee for losses caused by the
Companys employees on the premises. Subject to applicable
statutes of limitation, the term of these indemnification
agreements is generally perpetual from the time of execution of
the agreement. The maximum potential amount of future payments
the Company could be required to make under these
indemnification agreements is unlimited. The Company has never
incurred costs to defend lawsuits or settle claims related to
these indemnification agreements.
The Company entered into three joint ventures in 2001 and 2002,
which have since terminated. The terms of the joint venture
agreements generally provide that the Company indemnify the
joint venture partner against property damage or bodily injury
arising from the Companys negligence or willful
misconduct; third party claims of copyright infringement or
trade secret theft associated with the software or marks
licensed from the Company by the partner; and losses arising
from any breach by the Company of its representations and
warranties. Subject to applicable statutes of limitation, the
term of these indemnification agreements is generally perpetual
from the time of execution of the agreement. The maximum
potential amount of future payments the Company could be
required to make under these indemnification agreements is
unlimited. The Company has never incurred costs to defend
lawsuits or settle claims related to these indemnification
agreements.
The Company leases certain equipment under operating leases that
require it to indemnify the lessor against losses, liabilities
and claims in connection with the lease agreement, possession or
use of the leased equipment, and in some cases certain tax
issues. Subject to applicable statutes of limitation, the term
of these indemnification agreements is generally perpetual from
the time of execution of the agreement. The maximum potential
amount of future payments the Company could be required to make
under these indemnification agreements is unlimited. The Company
has never incurred costs to defend lawsuits or settle claims
related to these indemnification agreements.
The Company licenses technology to certain third parties under
license agreements that provide for Akamai to indemnify the
third parties against claims of patent and copyright
infringement. This indemnity does not apply in the case where
the licensed technology has been modified by the third party or
combined with other technology, hardware, or data that that the
Company has not approved. Subject to applicable statutes of
limitation, the term of these indemnification agreements is
generally perpetual from the time of execution of the agreement.
The maximum potential amount of future payments the Company
could be required to make under these indemnification agreements
is unlimited. The Company has never incurred costs to defend
lawsuits or settle claims related to these indemnification
agreements.
The Company licenses technology from third parties under
agreements that contain standard indemnification provisions that
require the Company to indemnify the third party against losses,
liabilities and claims arising from the Companys
unauthorized use or modification of the licensed technology.
Subject to applicable statutes of limitation, the term of these
indemnification agreements is generally perpetual from the time
of execution of the agreement. The maximum potential amount of
future payments the Company could be required to make under
these indemnification agreements is unlimited. The Company has
never incurred costs to defend lawsuits or settle claims related
to these indemnification agreements.
57
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
51/2% Convertible
Subordinated Notes
During the year ended December 31, 2005, the Company
redeemed an aggregate of $56.6 million in principal amount
of its remaining outstanding
51/2%
convertible subordinated notes due 2007 (the
51/2% convertible
subordinated notes) for total cash payments of
$58.1 million. The redemption price was $1,015.71 for each
$1,000 in principal amount repurchased. The Company charged the
outstanding deferred financing costs relating to these
repurchased notes and premium paid of $481,000 and $889,000,
respectively, for the year ended December 31, 2005, to loss
on early extinguishment of debt. For the years ended
December 31, 2005, 2004 and 2003, amortization of deferred
financing costs was approximately $175,000, $543,000 and
$1.4 million, respectively.
During the year ended December 31, 2004, in individually
negotiated transactions, the Company repurchased an aggregate of
$131.5 million in principal amount of its outstanding
51/2% convertible
subordinated notes for total cash payments of
$133.9 million. The purchase prices ranged between
$1,018.00 and $1,023.57 for each $1,000 in principal amount
repurchased. Additionally, in February 2004, the Company
commenced a tender offer to repurchase up to $101.0 million
in aggregate principal amount of its outstanding
51/2% convertible
subordinated notes at a purchase price between $1,000 and $1,005
for each $1,000 of principal amount tendered. In March 2004, the
Company amended the tender offer to increase the maximum price
at which it was willing to repurchase the
51/2% convertible
subordinated notes to $1,012.50 per $1,000 principal amount of
the notes. Pursuant to the tender offer, in March 2004, the
Company repurchased $37.9 million in aggregate principal
amount of the
51/2% convertible
subordinated notes for a total cash payment of
$38.3 million. The purchase price was $1,012.50 for each
$1,000 of principal amount tendered. For the year ended
December 31, 2004, the Company charged the outstanding
deferred financing costs relating to the repurchased notes and
the premium paid of $2.5 million and $2.8 million,
respectively, to loss on early extinguishment of debt.
Additionally, the Company incurred $1.5 million of advisory
services and offering expenses in connection with the tender
offer and repurchases, which is included in loss on early
extinguishment of debt.
In December 2003, the Company repurchased $74.0 million of
the outstanding
51/2% convertible
subordinated notes for cash. Additionally, the Company signed
agreements to repurchase an additional $15.0 million of the
51/2% convertible
subordinated notes as of December 31, 2003. These
repurchase transactions were completed early in January 2004. As
a result of the repurchase of such
51/2%
convertible subordinated notes, the Company charged the
remaining deferred financing costs for the repurchased
$74.0 million in principal amount of
51/2% convertible
subordinated notes, totaling $1.2 million for the year
ended December 31, 2003, to loss on early extinguishment of
debt. Additionally, the Company incurred $890,000 of advisory
services in connection with the repurchases, which is included
in loss from early extinguishment of debt.
1% Convertible Senior Notes
In January 2004 and December 2003, Akamai issued
$200.0 million in aggregate principal amount of
1% convertible senior notes due December 15, 2033 for
aggregate net proceeds of $194.1 million, net of an initial
purchasers discount and offering expenses of
$5.9 million. The initial conversion price of the
1% convertible senior notes is $15.45 per share
(equivalent to 64.7249 shares of common stock per $1,000
principal amount of 1% convertible senior notes). The notes may
be converted at the option of the holder in the following
circumstances:
|
|
|
|
|
during any calendar quarter commencing after March 31,
2004, if the closing sale price of the common stock for at least
20 trading days in the period of 30 consecutive trading days
ending on the last trading day of the preceding calendar quarter
is more than 120% of the conversion price in effect on such last
trading day;
|
|
|
|
if the convertible notes are called for redemption;
|
|
|
|
if the Company makes specified distributions on its common stock
or engages in specified transactions; and
|
58
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
during the five trading day period immediately following any
ten-consecutive trading day period in which the trading price
per $1,000 principal amount of the convertible notes for each
day of such
ten-day
period is less than 95% of the product of the closing sale price
per share of the Companys common stock on that day
multiplied by the number of shares of its common stock issuable
upon conversion of $1,000 principal amount of the convertible
notes.
|
In December 2005, the conversion terms for the holders to redeem
the 1% convertible senior notes was met, however, no notes have
been converted as of March 15, 2006. The Company may redeem
the 1% convertible senior notes on or after
December 15, 2010 at the Companys option at 100% of
the principal amount together with accrued and unpaid interest.
Conversely, holders of the 1% convertible senior notes may
require the Company to repurchase the notes at par value on
certain specified dates beginning on December 15, 2010. In
the event of a change of control, the holders may require Akamai
to repurchase their 1% convertible senior notes at a repurchase
price of 100% of the principal amount plus accrued interest.
Interest on the 1% convertible senior notes began to accrue
as of the issue date and is payable semiannually on June 15 and
December 15 of each year. Deferred financing costs of
$5.9 million, including the initial purchasers
discount and other offering expenses, for the
1% convertible senior notes are being amortized over the
first seven years of the term of the notes to reflect the
put and call rights discussed above. Amortization of deferred
financing costs of the 1% convertible senior notes was
$841,000, $839,000 and $37,000 for the years ended
December 31, 2005, 2004 and 2003, respectively. The Company
records the amortization of deferred financing costs using the
interest method as interest expense in the consolidated
statement of operations.
|
|
13.
|
Restructurings
and Lease Terminations:
|
As of December 31, 2005, the Company had $3.6 million
of accrued restructuring liabilities. As part of the Speedera
acquisition, the Companys management committed to a plan
to exit certain activities of Speedera. In accordance with EITF
No. 95-3,
Recognition of Liabilities in Connection with a Purchase
Business Combination, the Company recorded a liability of
$1.8 million related to a workforce reduction of
approximately 30 employees from Speedera. This liability
primarily consisted of employee severance and outplacement
costs. The Company expects that this liability will be fully
paid by June 2008. For the period from June 10, 2005, the
date of acquisition, through December 31, 2005, $500,000 in
payments were charged against the severance accrual.
During the year ended December 31, 2003, the Company
recorded restructuring benefits of $8.5 million. As a
result of amendments to or terminations of long-term leases, the
Company reversed $9.6 million of previously recorded
restructuring liabilities, offset by a restructuring charge of
$1.1 million for costs relating to the restructuring of a
facility located in Europe. The reversals represent the
difference between the amount previously estimated for
restructuring liabilities and the amounts payable under
negotiated agreements for certain leased properties with
applicable landlords.
59
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the accrual and usage of the
restructuring charges (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Lived
|
|
|
|
|
|
|
|
|
|
Leases
|
|
|
Assets
|
|
|
Severance
|
|
|
Total
|
|
|
Ending balance, December 31,
2002
|
|
$
|
37.5
|
|
|
$
|
|
|
|
$
|
0.1
|
|
|
$
|
37.6
|
|
Total (benefit) charge
|
|
|
(8.6
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
(8.5
|
)
|
Cash payments
|
|
|
(23.7
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(23.8
|
)
|
Non-cash items
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31,
2003
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
5.2
|
|
Cash payments
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31,
2004
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
3.6
|
|
Accrual recorded in purchase
accounting
|
|
|
|
|
|
|
|
|
|
|
1.8
|
|
|
|
1.8
|
|
Cash payments
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31,
2005
|
|
|
2.3
|
|
|
|
|
|
|
|
1.3
|
|
|
|
3.6
|
|
Current portion of accrued
restructuring
|
|
|
1.4
|
|
|
|
|
|
|
|
0.4
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of accrued
restructuring
|
|
$
|
0.9
|
|
|
$
|
|
|
|
$
|
0.9
|
|
|
$
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All existing lease restructuring liabilities will be fully paid
through August 2007. The amount of restructuring liabilities
associated with facility leases has been estimated based on the
most recent available market data and discussions with the
Companys lessors and real estate advisors as to the
likelihood that the Company will be able to partially offset its
obligations with sublease income.
|
|
14.
|
Rights
Plan and Series A Junior Participating Preferred
Stock:
|
On September 10, 2002, the Board of Directors of the
Company declared a dividend of one preferred stock purchase
right for each outstanding share of the Companys common
stock held by stockholders of record at the close of business on
September 23, 2002. To implement the rights plan, the Board
of Directors designated 700,000 shares of the
Companys 5.0 million authorized shares of
undesignated preferred stock as Series A Junior
Participating Preferred Stock, par value $.01 per share.
Each right entitles the registered holder to purchase from the
Company one one-thousandth of a share of preferred stock at a
purchase price of $9.00 in cash, subject to adjustment. No
shares of Series A Junior Participating Preferred Stock are
outstanding as of December 31, 2005. In January 2004, the
Board of Directors of the Company approved an amendment to the
rights plan in which the purchase price of each right issued
under the plan increased from $9.00 per share to
$65.00 per share.
|
|
15.
|
Stockholders
Equity:
|
Common
Stock
Holders of the Companys common stock are entitled to one
vote per share. At December 31, 2005, the Company had
reserved approximately 22.5 million shares of common stock
for issuance under its Employee Stock Purchase Plan and upon the
exercise of options and deferred stock units under its other
stock plans.
Equity
Offering
In October 2005, the Company completed an equity offering of
12,000,000 shares of its common stock at a price of
$16.855 per share for proceeds of $202.1 million, net
of offering expenses.
60
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Notes Receivable
for Stock
In 1999, in connection with the issuance of restricted common
stock, the Company received full recourse notes from its former
Chief Financial Officer and former Vice President of Business
Development in the amounts of $2,620,000 and $624,000,
respectively. On December 31, 2001, the notes issued by the
former Chief Financial Officer and the former Vice President of
Business Development were each amended and replaced with new
full recourse notes in the amounts of $2,619,750 and $721,000,
respectively. These new notes bore a rate of interest of
3.97% per annum.
In July 2003, the Company forgave $1.0 million of the
$2.8 million, including accrued interest, due under the
note receivable that had been issued to the Company by the
former Chief Financial Officer. The remaining $1.8 million
due on the note was paid in full in July 2003. In December 2003,
the Company forgave $247,000 of the $778,000, including accrued
interest, due under the note receivable that had been issued to
the Company by the former Vice President of Business
Development. The remaining $531,000 due on the note was paid in
full in December 2003. The Company recorded the forgiveness of
both of these notes receivable of $1.2 million as
equity-related compensation during the year ended
December 31, 2003.
In 1998, the Board of Directors adopted the 1998 Stock Incentive
Plan (the 1998 Plan) for the issuance of incentive
and nonqualified stock options, restricted stock awards and
other types of equity awards. Options to purchase common stock
and other equity awards are granted at the discretion of the
Board of Directors or a committee thereof. In October 2005, the
Board of Directors delegated to the Companys Chief
Executive Officer the authority to grant equity incentives to
employees of the Company below the level of Vice President,
subject to certain specified limitations. In December 2001, the
Board of Directors adopted the 2001 Stock Incentive Plan (the
2001 Plan) for the issuance of nonqualified stock
options, restricted stock and other types of equity awards. The
total number of shares of common stock reserved for issuance
under the 1998 Plan and the 2001 Plan is 48,255,600 and
5,000,000 shares, respectively. Equity incentives may not
be issued to the Companys directors or executive officers
under the 2001 Plan.
Under the terms of the 1998 Plan, the exercise price of
incentive stock options granted must not be less than 100% (110%
in certain cases) of the fair market value of the common stock
on the date of grant, as determined by the Board of Directors.
Incentive stock options may not be issued under the 2001 Plan.
The exercise price of nonqualified stock options issued under
the 1998 Plan and the 2001 Plan may be less than the fair market
value of the common stock on the date of grant, as determined by
the Board of Directors, but in no case may the exercise price be
less than the statutory minimum. Stock option vesting typically
occurs over four years and is at the discretion of the Board of
Directors. The term of options granted may not exceed ten years,
or five years for incentive stock options granted to holders of
more than 10% of the voting stock of the Company.
Restricted stock awards may be issued under the 1998 Plan to
directors, officers, advisors and employees at prices determined
by the Board of Directors. Participants unvested shares
are subject to repurchase by the Company at the original
purchase price for between two and four years. Generally, 25% of
the shares vest between six months and one year of the date of
purchase and, thereafter, the remaining shares vest on a
quarterly basis through the fourth anniversary date of purchase.
The Company has assumed certain stock option plans and the
outstanding stock options of companies that it has acquired
(Assumed Plans). Stock options under the Assumed
Plans have been converted into the Companys stock options
and adjusted to reflect the appropriate conversion ratio as
specified by the applicable acquisition agreement, but are
otherwise administered in accordance with the terms of the
Assumed Plans. Stock options under the Assumed Plans generally
vest over four years and expire ten years from the date of
grant. No additional stock options will be granted under the
Assumed Plans.
61
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of restricted stock award activity under the 1998 Plan
for the years ended December 31, 2003, 2004 and 2005 is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Purchase Price
|
|
|
Restricted Stock Awards Under
1998 Plan
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2002
|
|
|
16,884,429
|
|
|
$
|
0.36
|
|
Issued
|
|
|
4,231
|
|
|
|
0.00
|
|
Repurchased and retired
|
|
|
(88,160
|
)
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2003
|
|
|
16,800,500
|
|
|
|
0.36
|
|
Repurchased and retired
|
|
|
(863
|
)
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2004
|
|
|
16,799,637
|
|
|
|
0.36
|
|
Repurchased and retired
|
|
|
(250
|
)
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2005
|
|
|
16,799,387
|
|
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
Vested restricted common stock at
December 31, 2005
|
|
|
16,799,387
|
|
|
|
0.36
|
|
A summary of stock option award activity under the 1998 and 2001
Plans for the years ended December 31, 2003, 2004 and 2005
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Share Price
|
|
|
Stock Option Awards Under 1998
and 2001 Plans
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2002
|
|
|
15,676,000
|
|
|
$
|
4.81
|
|
Granted
|
|
|
4,456,000
|
|
|
|
4.35
|
|
Exercised
|
|
|
(2,534,000
|
)
|
|
|
2.32
|
|
Forfeited
|
|
|
(2,239,000
|
)
|
|
|
7.61
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2003
|
|
|
15,359,000
|
|
|
|
4.68
|
|
Granted
|
|
|
3,009,000
|
|
|
|
14.51
|
|
Exercised
|
|
|
(3,012,000
|
)
|
|
|
2.99
|
|
Forfeited
|
|
|
(1,230,000
|
)
|
|
|
7.14
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2004
|
|
|
14,126,000
|
|
|
|
6.92
|
|
Granted and assumed in business
combination
|
|
|
6,345,000
|
|
|
|
10.67
|
|
Exercised
|
|
|
(3,029,000
|
)
|
|
|
3.28
|
|
Forfeited
|
|
|
(1,166,000
|
)
|
|
|
12.23
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2005
|
|
|
16,276,000
|
|
|
|
8.65
|
|
|
|
|
|
|
|
|
|
|
62
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of deferred stock units activity under the 1998 Plan
for the years ended December 31, 2003, 2004 and 2005 is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Share Price
|
|
|
Deferred Stock Unit Awards
Under 1998 Plan
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2002
|
|
|
|
|
|
$
|
0.00
|
|
Granted
|
|
|
150,000
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2003
|
|
|
150,000
|
|
|
|
0.00
|
|
Granted
|
|
|
39,000
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2004
|
|
|
189,000
|
|
|
|
0.00
|
|
Granted
|
|
|
71,000
|
|
|
|
0.00
|
|
Exercised
|
|
|
(57,000
|
)
|
|
|
0.00
|
|
Forfeited
|
|
|
(9,000
|
)
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2005
|
|
|
194,000
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Vested deferred stock units at
December 31, 2005
|
|
|
64,000
|
|
|
|
0.00
|
|
As of December 31, 2003, options to purchase
5,716,000 shares of common stock were exercisable at a
weighted average exercise price of $7.12 per share. As of
December 31, 2004, options to purchase
6,817,000 shares of common stock were exercisable at a
weighted average exercise price of $6.10 per share. As of
December 31, 2004, 50,000 deferred stock units were
exercisable. As of December 31, 2003, no deferred stock
units were exercisable.
The following table summarizes information about stock options
outstanding at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range of
|
|
Options
|
|
|
Contractual Life
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Exercise Prices
|
|
Outstanding
|
|
|
(in years)
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
$ 0.01-0.96
|
|
|
2,092,000
|
|
|
|
6.4
|
|
|
$
|
0.54
|
|
|
|
1,419,000
|
|
|
$
|
0.59
|
|
1.00-1.49
|
|
|
1,174,000
|
|
|
|
6.6
|
|
|
|
1.24
|
|
|
|
1,050,000
|
|
|
|
1.24
|
|
1.54-2.27
|
|
|
1,221,000
|
|
|
|
5.5
|
|
|
|
1.85
|
|
|
|
1,159,000
|
|
|
|
1.84
|
|
2.50-3.33
|
|
|
329,000
|
|
|
|
5.2
|
|
|
|
2.87
|
|
|
|
308,000
|
|
|
|
2.85
|
|
3.71-4.73
|
|
|
1,175,000
|
|
|
|
6.6
|
|
|
|
4.22
|
|
|
|
1,091,000
|
|
|
|
4.21
|
|
4.92-5.12
|
|
|
2,120,000
|
|
|
|
7.1
|
|
|
|
4.98
|
|
|
|
1,210,000
|
|
|
|
5.02
|
|
5.44-6.35
|
|
|
156,000
|
|
|
|
6.6
|
|
|
|
5.66
|
|
|
|
107,000
|
|
|
|
5.69
|
|
8.55-12.81
|
|
|
1,134,000
|
|
|
|
8.5
|
|
|
|
11.69
|
|
|
|
190,000
|
|
|
|
9.75
|
|
12.85-14.37
|
|
|
2,458,000
|
|
|
|
7.7
|
|
|
|
13.92
|
|
|
|
497,000
|
|
|
|
13.15
|
|
14.46-15.24
|
|
|
3,839,000
|
|
|
|
8.7
|
|
|
|
14.62
|
|
|
|
602,000
|
|
|
|
15.19
|
|
15.45-21.56
|
|
|
446,000
|
|
|
|
8.4
|
|
|
|
18.79
|
|
|
|
94,000
|
|
|
|
18.73
|
|
31.69-39.44
|
|
|
76,000
|
|
|
|
4.7
|
|
|
|
34.67
|
|
|
|
76,000
|
|
|
|
34.67
|
|
61.94-85.00
|
|
|
51,000
|
|
|
|
4.2
|
|
|
|
77.81
|
|
|
|
51,000
|
|
|
|
77.81
|
|
93.94
|
|
|
2,000
|
|
|
|
4.5
|
|
|
|
93.94
|
|
|
|
2,000
|
|
|
|
93.94
|
|
197.50
|
|
|
2,000
|
|
|
|
2.7
|
|
|
|
197.50
|
|
|
|
2,000
|
|
|
|
197.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,276,000
|
|
|
|
7.4
|
|
|
|
8.65
|
|
|
|
7,858,000
|
|
|
|
5.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Employee
Stock Purchase Plan
In August 1999, the Board of Directors adopted the 1999 Employee
Stock Purchase Plan (1999 ESPP). The Company
reserved 3,100,000 shares of common stock for issuance
under the 1999 ESPP. In May 2002, the stockholders of the
Company approved an amendment to the 1999 ESPP that allows for
an automatic increase in the number of shares of common stock
available under the 1999 ESPP each June 1 and
December 1 to restore the number of shares available for
issuance to 1.5 million shares, provided that the aggregate
number of shares issuable under the 1999 ESPP shall not exceed
20,000,000. In April 2005, the Companys Board of Directors
approved amendments to the 1999 ESPP as follows: the duration of
the offering periods was changed from 24 months to six
months; the number of times a participant could elect to change
his or her percentage was changed from 4 times to two times; the
definition of compensation was amended to clarify
that it includes cash bonuses and other cash incentive programs;
and a provision was added to clarify that upon termination of an
offering period, each eligible participant will be automatically
enrolled in the next offering period. These amendments became
effective in June 2005. The 1999 ESPP allows participating
employees to purchase shares of common stock at a 15% discount
from the fair market value of the stock as determined on
specific dates at
six-month
intervals. As of December 31, 2005, $627,000 had been
withheld from employees for future purchases under the 1999 ESPP.
Equity-Related
Compensation
For the years ended December 31, 2005, 2004 and 2003, the
Company recorded equity-related compensation of
$3.8 million, $1.3 million and $9.8 million,
respectively. These amounts are included in the consolidated
statements of operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Cost of revenues
|
|
$
|
|
|
|
$
|
4
|
|
|
$
|
358
|
|
Research and development
|
|
|
1,034
|
|
|
|
118
|
|
|
|
2,819
|
|
Sales and marketing
|
|
|
636
|
|
|
|
549
|
|
|
|
2,852
|
|
General and administrative
|
|
|
2,179
|
|
|
|
621
|
|
|
|
3,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,849
|
|
|
$
|
1,292
|
|
|
$
|
9,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity-related compensation is comprised of the amortization of
deferred compensation, equity award modifications, equity awards
to non-employees and employees and the forgiveness of notes
receivable issued in connection with the sale of restricted
common stock (see Note 15).
|
|
(a)
|
Deferred
Compensation:
|
Deferred compensation is recorded for the grant of stock awards
or shares of restricted stock to employees or non-employees at
exercise or sale prices deemed to be less than the fair market
value of the Companys common stock on the grant date.
Deferred compensation is adjusted to reflect cancellations and
forfeitures due to employee terminations. For the years ended
December 31, 2005, 2004 and 2003, equity-related
compensation includes $3.4 million, $1.1 million and
$7.9 million, respectively, of deferred compensation
amortization. Equity-related compensation for the years ended
December 31, 2005, 2004 and 2003 was affected by the
following:
Exchange
Offer
In April 2001, the Company communicated to its employees an
offer to exchange (the Exchange Offer) certain
eligible employee stock options previously granted to them in
return for restricted shares of Akamai common stock at an
exchange ratio of two stock options for one share of restricted
stock. In addition, certain stock options granted in February
2001 were eligible to be exchanged at a ratio of one stock
option for two shares of
64
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
restricted stock. As a result of the Exchange Offer, stock
options to purchase approximately 6.6 million shares of
Akamai common stock were exchanged for approximately
3.4 million shares of restricted stock. The Company
recorded $36.1 million as deferred compensation for the
intrinsic value of the restricted stock issued to employees who
accepted the Exchange Offer. The deferred compensation is being
amortized over the vesting period of the restricted stock. In
May 2004, these restricted shares became fully vested. For the
years ended December 31, 2004 and 2003, $335,000 and
$3.9 million, respectively, was amortized to equity-related
compensation. As of December 31, 2004, 1.4 million
shares had been forfeited and retired as a result of employee
terminations, resulting in a reduction in deferred compensation
of $14.4 million.
Restricted
Stock and Stock Option Awards
In June 2005, the Company recorded deferred compensation of
$9.3 million related to the intrinsic value allocated to
the unvested options issued in connection with the Speedera
acquisition that had yet to be earned as of the acquisition
date. The Company amortized $2.5 million of these awards to
equity-related compensation during the year ended
December 31, 2005.
In November 2002, the Company issued 275,000 shares of
restricted stock to officers in exchange for the cancellation of
previously issued stock options. The Company recorded deferred
compensation of $278,000 for the intrinsic value of the
restricted stock, which will be amortized over the vesting
period. As of December 31, 2004, these shares were fully
vested. During the years ended December 31, 2004 and 2003,
the Company amortized $64,000 and $136,000, respectively, to
equity-related compensation for these awards. During the year
ended December 31, 2004, as a result of the acceleration of
vesting of shares of restricted stock upon termination of an
employee, the Company recorded $52,000 relating to outstanding
stock-based compensation as equity-related compensation expense.
In 2001, deferred compensation was increased by
$15.1 million as a result of the issuance of
2.2 million shares of restricted common stock at a purchase
price of $0.01 per share and the grant of options to
purchase 53,000 shares of common stock at an exercise price
of $1.17 per share. The deferred compensation will be
amortized over the vesting periods of the equity awards. For the
years ended December 31, 2005, 2004 and 2003, $89,000,
$227,000 and $1.1 million, respectively, was amortized to
equity-related compensation for these awards. As of
December 31, 2005, approximately 855,000 shares had
been repurchased and retired by the Company as a result of
employee terminations, resulting in a reduction in deferred
compensation of approximately $3,000 and $185,000 for the years
ended December 31, 2005 and 2003, respectively. No shares
were repurchased in 2004.
Deferred
Stock Units
In May and July 2005, in lieu of cash and as part of the
approved director compensation package, the Company granted an
aggregate of 70,814 Deferred Stock Units (DSUs) to
non-employee members of its Board of Directors and to the
Companys Executive Chairman. The DSUs vest 50% on
May 24, 2006 with the remaining 50% vesting in equal
installments of 12.5% each quarter thereafter. During 2005, the
Company recorded deferred compensation of $930,000 for the
intrinsic value of these DSUs. The deferred compensation is
being recognized as compensation expense over the expected
two-year vesting period.
In June 2004, the Company granted an aggregate of 39,062 DSUs to
non-employee members of its Board of Directors. The DSUs vest
50% on May 25, 2005 with the remaining 50% vesting in equal
installments of 12.5% each quarter thereafter. During 2004, the
Company recorded deferred compensation of $601,000 for the
intrinsic value of these DSUs. The deferred compensation is
being recognized as compensation expense over the expected
two-year vesting period.
In August 2003, the Company granted 30,000 deferred stock units
(DSUs) under the Companys 1998 Stock Incentive
Plan, as amended, to each of the five non-employee members of
its Board of Directors. These DSUs vest in three equal annual
installments over the
three-year
period following the grant date. During 2003, the Company
65
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recorded deferred compensation of $615,000 for the intrinsic
value of the DSUs. The deferred compensation is being recognized
as compensation expense over the expected
three-year
vesting period.
Each of the DSUs granted represents the right to receive one
share of the Companys common stock upon vesting. The
holder may elect to defer receipt of all or a portion of the
vested shares of stock represented by the DSU for a period for
at least one year but not more than 10 years from the grant
date. For the years ended December 31, 2005, 2004 and 2003,
the Company amortized approximately $784,000, $360,000 and
$70,000, respectively, to equity-related compensation for these
awards.
|
|
(b)
|
Equity
Award Modifications:
|
Equity-related compensation includes the intrinsic value of
modified stock options or restricted stock awards that would
have expired as unexercisable had the associated vesting of the
awards not been accelerated upon the termination of the
employee. For the years ended December 31, 2005, 2004 and
2003, equity-related compensation includes approximately
$181,000, $52,000 and $107,000, respectively, for equity award
modifications.
|
|
(c)
|
Equity
Awards Issued to Non-Employees:
|
The Company has issued equity awards to advisors and other
non-employees. The Company recognizes the fair value of these
awards in equity-related compensation over the vesting period
for the awards pursuant to the requirements of
SFAS No. 123.
During 2005 and 2003, certain employees terminated their
employment with Akamai but continued to provide services to the
Company as consultants. Despite the employees change in
status, outstanding equity awards held by such individuals will
vest in accordance with the terms of their original agreements
or amendments thereto. The Company began measuring and
recognizing the fair value of the outstanding awards commencing
upon the change in the individuals employment status.
During the years ended December 31, 2005, 2004 and 2003,
the Company recorded $257,000, $92,000 and $503,000,
respectively, of compensation expense related to equity awards
held by these individuals. Additionally, during 2003, the
Company recorded $244,000 of compensation expense for modified
restricted stock awards that would have expired as unexercisable
had the associated vesting of the awards not been accelerated
upon the termination of the non-employees service contract.
Warrants
Prior to its initial public offering in October 1999, the
Company issued warrants to investors in connection with
borrowings. The Company also became obligated to honor warrants
that had been issued by acquired businesses.
During 2004 and 2003, warrant holders acquired 6,858 and
506,736 shares, respectively, of common stock through
warrant exercises. In lieu of the exercise price of these
warrants, the holders surrendered to Akamai additional warrants
to purchase 1,836 and 447,462 shares of common stock as
consideration during 2004 and 2003, respectively. These
transactions were in accordance with the terms of the original
warrant agreements. The Company recorded the exercise price of
these warrants to common stock and additional paid in capital at
par value of $0.01 per share. As of December 31, 2005 and
2004, no warrants were outstanding.
|
|
17.
|
Employee
Benefit Plan:
|
In January 1999, the Company established a savings plan for its
employees that is designed to be qualified under
Section 401(k) of the Internal Revenue Code. Eligible
employees are permitted to contribute to the 401(k) plan through
payroll deductions within statutory and plan limits.
Participants may select from a variety of investment options.
Investment options do not include Akamai common stock. For 2005,
the Company made matching contributions of
1/2
of the first 2% of employee contributions taken in 2005 and then
matched
1/4
of the next 4% of employee contributions. The maximum amount of
the Company match is $1,000 per employee per year. The
Companys contributions vest 25% per annum. The
Company contributed approximately $467,000 of cash to the
66
AKAMAI
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
savings plan for the year ended December 31, 2005. The
Company did not make any matching contributions to the 401(k)
plan for the years ended December 31, 2004 and 2003.
The components of income (loss) before (benefit) provision for
income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Domestic
|
|
$
|
64,216
|
|
|
$
|
31,729
|
|
|
$
|
(26,314
|
)
|
Foreign
|
|
|
6,188
|
|
|
|
3,407
|
|
|
|
(2,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before (benefit)
provision for income taxes
|
|
$
|
70,404
|
|
|
$
|
35,136
|
|
|
$
|
(28,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The (benefit) provision for income taxes consists of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Current tax (benefit) expense
|