Initial Public Offering (IPO): Registration Statement (General Form) — Form S-1 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: S-1 Limelight Networks, Inc. Form S-1 HTML 1.38M
2: EX-3.1 Articles of Incorporation/Organization or By-Laws 26 98K
3: EX-3.2 Articles of Incorporation/Organization or By-Laws 5 19K
4: EX-3.3 Articles of Incorporation/Organization or By-Laws 23 116K
5: EX-3.4 Articles of Incorporation/Organization or By-Laws 24 111K
6: EX-4.2 Instrument Defining the Rights of Security Holders 36 143K
7: EX-10.1 Material Contract 11 55K
8: EX-10.2 Material Contract 32 126K
9: EX-10.6 Material Contract 25 132K
10: EX-10.7 Material Contract 20 108K
11: EX-10.8 Material Contract 32 168K
12: EX-10.9 Material Contract 64 268K
13: EX-21.1 Subsidiaries HTML 7K
14: EX-23.1 Consent of Experts or Counsel 1 6K
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
Mark L. Reinstra, Esq.
Mario M. Rosati, Esq.
Alexander D. Phillips, Esq.
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road Palo Alto, CA94304-1050
(650) 493-9300
David Van
Engelhoven, Esq.
General Counsel
Limelight Networks, Inc.
2220 W.
14th Street Tempe, AZ85281
(602) 850-5000
Kevin P. Kennedy, Esq.
Simpson Thacher & Bartlett LLP
2550 Hanover Street Palo Alto, CA94304
(650) 251-5000
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the effective date of
this Registration Statement.
If any of the securities being registered on this Form are being
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, as amended (the
“Securities Act”), check the following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration number of the earlier effective registration
statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration number of the
earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following
box. o
CALCULATION OF REGISTRATION
FEE
Proposed
Maximum
Amount of
Title of Each
Class of
Aggregate
Registration
Securities to be
Registered
Offering
Price(1)
Fee
Common stock, par value
$0.001 per share
$
201,250,000
$
6,179
(1)
Estimated solely for the purpose of
computing the amount of the registration fee, in accordance with
Rule 457(o) promulgated under the Securities Act of 1933.
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act or until the Registration Statement shall
become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this prospectus is not complete and may be
changed. These securities may not be sold until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities nor does it seek an offer to buy these securities in
any jurisdiction where the offer or sale is not permitted.
This is an initial public offering of shares of common stock of
Limelight Networks, Inc.
Limelight Networks is
offering
of the shares to be sold in the offering. The selling
stockholders identified in this prospectus are offering an
additional shares.
Limelight Networks will not receive any of the proceeds from the
sale of the shares being sold by the selling stockholders.
Prior to this offering, there has been no public market for the
common stock. It is currently estimated that the initial public
offering price will be between $
and $ per share. Application
has been made for listing on the Nasdaq Global Market under the
symbol “LLNW.”
See “Risk Factors” on page 8 to read about
factors you should consider before buying shares of the common
stock.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
Per
Share
Total
Initial public offering price
$
$
Underwriting discount
Proceeds, before expenses, to
Limelight Networks
Proceeds, before expenses, to the
selling stockholders
To the extent that the underwriters sell more
than shares
of common stock, the underwriters have the option to purchase up
to an
additional shares
from Limelight Networks at the initial public offering price
less the underwriting discount.
The underwriters expect to deliver the shares against payment in
New York, New York
on ,
2007.
This summary highlights information contained elsewhere in
this prospectus. Before deciding whether to buy shares of our
common stock, you should read this summary and the more detailed
information in this prospectus, including our financial
statements and related notes and especially the discussion of
the risks of investing in our common stock under the heading,
“Risk Factors.”
Limelight
Networks, Inc.
Limelight Networks is a leading provider of high-performance
content delivery network services. We digitally deliver content
for traditional and emerging media companies, or content
providers, including businesses operating in the television,
music, radio, newspaper, magazine, movie, videogame and software
industries. Using Limelight’s content delivery network, or
CDN, content providers are able to provide their end-users with
a high-quality media experience for rich media content,
including video, music, games, software and social media.
As consumer demand for media content over the Internet has
increased, and as enabling technologies such as broadband access
to the Internet have proliferated, consumption of rich media
content has become increasingly important to Internet end-users
and therefore to the content providers that serve them.
eMarketer estimates that at the end of 2006, nearly 60% of all
Internet users regularly watched videos online, and
approximately 80% are expected to do so by the end of 2010. We
developed our services and architected our network specifically
to meet the unique demands content providers face in delivering
rich media content to large audiences of demanding Internet
end-users. Our comprehensive solution delivers content providers
a high-quality, highly scalable, highly reliable offering at a
low cost. As of February 2007, over 700 customers have chosen
Limelight Networks to deliver the high-quality media experiences
their consumers seek online.
Content providers seeking to deliver rich media content to
end-users via the Internet have two primary alternatives:
deliver content using basic Internet connectivity or utilize a
CDN. The basic Internet, which is a complex network of networks,
is effective for delivering many types of content but can be
ineffective for delivering rich media content with satisfactory
performance. Internet protocols are designed to reliably
transport data packets, but the packets can be lost or delayed
in transit. When data packets are lost or delayed during the
delivery of rich media content, the result is noticeable to
users because playback is interrupted. This interruption causes
songs to skip, videos to freeze and downloads to be slower than
acceptable for demanding consumers. This lack of performance and
its dramatic effect on user experience make the delivery of rich
media content via the basic Internet extremely challenging.
In response to this challenge, some content providers have
chosen to invest significant capital to build the infrastructure
of servers, storage and networks necessary to bypass, as much as
possible, the public Internet. The substantial capital outlay
and the development of the expertise and other technical
resources required to manage such a complex infrastructure can
be time-consuming and prohibitively expensive for all but the
largest companies. As a result, many companies have chosen to
rely on one or more CDNs for the delivery of their content. Most
early CDNs were built and configured to deliver the objects
typically found in basic web sites such as photos or graphics,
but were not configured for the large files and large content
libraries associated with today’s rich media.
Benefits of our
Solution to Customers
We have designed our CDN solution specifically to handle the
demanding requirements of delivering rich media content over the
Internet. Our solution enables content providers to provide
their end-users with high-quality experiences across any digital
media type, content library size or audience
scale without expending the capital and developing the expertise
needed to build and manage their own networks. Our CDN solution
delivers the following benefits to our customers:
High Quality
User Experience
We enable users to receive their requested content such as
movies, television shows, games, songs and software downloads in
a timely manner and to enjoy a high-quality media experience. We
accomplish this, in part, by delivering content from servers
that can be closer to users than a content provider’s own
servers, and by delivering more than half of our content volume
directly to a user’s access network, bypassing much of the
congestion typically experienced in the public Internet. We also
operate a dedicated high-speed (10 gigabits per second) backbone
that enables us to move content quickly between locations on our
network.
High
Scalability Across Media Type, Library Size, and Audience
Size
Our current global delivery capability exceeds 1 terabit per
second. This capacity allows us to support traffic spikes
associated with special one-time or unexpected events. Our
highly scalable infrastructure also enables us to maintain our
performance levels as our customers’ audiences grow, media
file sizes increase and content libraries expand.
High
Reliability
Our distributed CDN architecture, managed by our proprietary
software, seamlessly and automatically responds in real time to
network and data center outages. Each of our content delivery
network locations connects to multiple Internet backbone and
broadband Internet service provider networks, and has multiple
redundant servers, enabling us to continue serving content even
if a particular network connection or server fails.
Comprehensive
Solution
We can begin delivery services for a new customer within days of
a customer’s placement of an order. We also support both
download and streaming delivery in a broad variety of formats,
including Adobe Flash, MP3 audio, QuickTime, RealNetworks
RealPlayer and Windows Media. In addition, our value-added
services include a web-based customer portal that provides
management information reports and a download manager that
simplifies the downloading process for the end-user. Lastly, we
offer custom services to address customers’ non-standard
delivery needs.
Low Content
Delivery Costs
Our content delivery services enable customers to avoid the
substantial upfront and ongoing capital requirements of
upgrading and maintaining their data centers and networks in
order to deliver media content themselves. Customers benefit
from the lower cost associated with the delivery of content
using our infrastructure, which is designed specifically for
delivering rich media content, and the expertise we have
acquired from serving over 700 customers.
Our
Strategy
Our strategic goal is to be the provider of choice in the
delivery of rich media content. Key elements of our strategy
include:
•
Continuing to focus on customers with rich media content, a
market which we believe represents a stable and growing business
opportunity;
•
Expanding content delivery network infrastructure to address
significant growth opportunities and increase our market
penetration in key international markets, including Europe and
the Asia Pacific region;
Continuing to innovate in order to enhance our content delivery
capabilities;
•
Expanding content delivery network capacity to further
advantages associated with the scale of our network;
•
Enhancing our sales and distribution channels to broaden our
customer relationships and deepen our penetration of existing
customer accounts; and
•
Expanding our partner relationships to further complement our
service offerings.
Risks Affecting
Us
There are numerous risks and uncertainties that may affect our
financial and operating performance and our growth. You should
carefully consider all of the risks discussed in “Risk
Factors,” which begins on page 8, before investing in
our common stock. These risks include the following:
•
the limited operating history in our market, which makes
evaluating our business and future prospects difficult;
•
the possibility that we might not manage our future growth
effectively;
•
the consequences of a potential adverse resolution of the
lawsuit Akamai Technologies, Inc. and the Massachusetts
Institute of Technology have filed against us;
•
the highly competitive nature of the CDN market, and the adverse
consequences if we are unable to compete effectively; and
•
the possibility that rapidly evolving technologies or new
business models could cause demand for our CDN services to
decline or could cause these services to become obsolete.
Corporate
Information
We were formed as an Arizona limited liability company,
Limelight Networks, LLC, in June 2001 and converted into a
Delaware corporation, Limelight Networks, Inc., in August 2003.
Our principal executive offices are located at 2220 W.
14th Street, Tempe, Arizona85281, and our telephone number
is
(602) 850-5000.
Our website address is www.limelightnetworks.com. The
information on, or accessible through, our website is not part
of this prospectus. References in this prospectus to
“Limelight Networks,”“Limelight,”“we,”“us” and “our” refer to
Limelight Networks, Inc. and its subsidiaries and predecessor
entity.
Limelight Networks and the Limelight Networks logo are
trademarks of Limelight Networks, Inc. All other trademarks,
service marks and trade names appearing in this prospectus are
the property of their respective owners.
Common stock to be outstanding after this offering
shares
Use of proceeds
We expect to use the net proceeds from this offering to fund
capital expenditures for network and other equipment, as well as
for working capital and other general corporate purposes. In
addition, we intend to use approximately $23.8 million of
the net proceeds to repay the outstanding balance under our
credit facility. We also may use a portion of the net proceeds
to acquire complementary businesses, products, services or
technologies. We will not receive any proceeds from the sale of
shares in this offering by the selling stockholders. See
“Use of Proceeds.”
Proposed Nasdaq Global Market symbol
LLNW
The number of shares of common stock to be outstanding after
this offering is based on 44,514,964 shares outstanding as
of December 31, 2006 and excludes:
•
3,767,495 shares of common stock issuable upon exercise of
options outstanding as of December 31, 2006 at a weighted
average exercise price of $4.47 per share;
•
65,390 shares of common stock issuable upon exercise of a
warrant outstanding as of December 31, 2006 at an exercise
price of $0.22 per share;
•
602,836 shares of common stock reserved for future issuance
under our Amended and Restated 2003 Incentive Compensation Plan
as of December 31, 2006, plus an additional
950,000 shares that we reserved for issuance under this
plan in March 2007; and
•
shares
of common stock reserved for future issuance under our 2007
Equity Incentive Plan adopted
in ,
subject to future adjustment as more fully described in
“Management — Employee Benefit Plans.”
Unless otherwise noted, all information in this prospectus
assumes:
•
no exercise by the underwriters of their option to purchase up
to an
additional shares
of our common stock to cover over-allotments;
•
the conversion of each outstanding share of preferred stock into
one share of common stock upon the closing of this
offering; and
•
the filing of our amended and restated certificate of
incorporation prior to closing of this offering.
The following tables provide our summary consolidated financial
data. The summary consolidated statement of operations data for
each of the three years in the period ended December 31,2006 and the actual summary consolidated balance sheet data as
of December 31, 2006 have been derived from our audited
consolidated financial statements included elsewhere in this
prospectus. You should read this information together with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated
financial statements and related notes included elsewhere in
this prospectus. Our historical results are not necessarily
indicative of the results to be expected in any future period.
In 2006, approximately $7.6 million in stock-based
compensation expense was not deductible for tax purposes by us,
which resulted in the incurrence of income tax expense despite
our having generated a loss before income taxes in this period.
(3)
We define active customers as those that generated revenue for
us within 30 days of the period end.
(4)
Annual revenue per customer equals revenue for the year divided
by the number of active customers with respect to each period.
Our consolidated balance sheet data as of December 31, 2006
is presented:
•
on an actual basis;
•
on a pro forma basis to give effect to the conversion of all
outstanding shares of preferred stock into shares of common
stock; and
•
on a pro forma as adjusted basis to give effect to our receipt
of net proceeds from our sale
of shares
of common stock at an assumed initial public offering price of
$ per share, the mid-point of
the range on the cover of this prospectus, after deducting the
estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
Each $1.00 increase or decrease in the assumed initial public
offering price of $ per share
would increase or decrease, as applicable, our cash and cash
equivalents, working capital, total assets and total
stockholders’ equity by approximately
$ million, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting the
estimated underwriting discounts and commissions payable by us.
Investing in our common stock involves a high degree of risk.
You should carefully consider the risks described below as well
as the other information contained in this prospectus, including
our consolidated financial statements and the related notes,
before deciding to purchase any shares of our common stock. The
occurrence of any of the following risks could harm our
business, prospects, financial condition or operating results.
In that case, the trading price of our common stock could
decline and you may lose part or all of your investment.
Risks Related to
Our Business
Our limited
operating history makes evaluating our business and future
prospects difficult, and may increase the risk of your
investment.
Our company has only been in existence since 2001. A significant
amount of our growth, in terms of employees, operations and
revenue, has occurred since 2004. For example, our revenue has
grown from $5.0 million in 2003 to $64.3 million in
2006. As a consequence, we have a limited operating history
which makes it difficult to evaluate our business and our future
prospects. We have encountered and will continue to encounter
risks and difficulties frequently experienced by growing
companies in rapidly changing industries, such as the risks
described in this prospectus. If we do not address these risks
successfully, our business will be harmed.
If we fail to
manage future growth effectively, we may not be able to market
and sell our services successfully.
We have recently expanded our operations significantly,
increasing our total number of employees from 29 at
December 31, 2004 to 158 at March 1, 2007, and we
anticipate that further significant expansion will be required.
Our future operating results depend to a large extent on our
ability to manage this expansion and growth successfully. Risks
that we face in undertaking this expansion include: training new
sales personnel to become productive and generate revenue;
forecasting revenue; controlling expenses and investments in
anticipation of expanded operations; implementing and enhancing
our CDN and administrative infrastructure, systems and
processes; addressing new markets; and expanding international
operations. A failure to manage our growth effectively could
materially and adversely affect our ability to market and sell
our products and services.
A lawsuit has
been filed against us and an adverse resolution of this lawsuit
could cause us to incur substantial costs and liability or force
us to cease providing our CDN services altogether.
In June 2006, Akamai Technologies, Inc., or Akamai, and the
Massachusetts Institute of Technology, or MIT, filed a lawsuit
against us in the U.S. District Court for the District of
Massachusetts alleging that we are infringing two patents
assigned to MIT and exclusively licensed by MIT to Akamai. In
September 2006, Akamai and MIT expanded their claims to assert
infringement of a third, recently issued patent. These two
matters have been consolidated by the Court. In addition to
monetary relief, including treble damages, interest, fees and
costs, the consolidated complaint seeks an order permanently
enjoining us from conducting our business in a manner that
infringes the relevant patents. A permanent injunction could
prevent us from operating our CDN altogether. The Court has
scheduled a claims construction hearing, known as a Markman
hearing, for May 2007. Although the Court has not set a trial
date, based on the schedule currently in place, we believe it is
likely that the case will go to trial in 2008.
Akamai and MIT have asserted two of the patents at issue in the
current litigation in two previous lawsuits against different
defendants. Both cases were filed in the same district court as
the current action, and assigned to the same judge currently
presiding over the lawsuit filed against us. In one
case, a portion of one of these patents was upheld but neither
lawsuit resulted in the defendant being able to obtain a license
from Akamai or MIT, nor did the lawsuits result in a settlement.
In addition, Akamai acquired the defendant prior to final
resolution of the lawsuit in one of these cases.
While we believe that the claims of infringement asserted
against us by Akamai and MIT in the present litigation are
without merit and intend to vigorously defend the action, we
cannot assure you that this lawsuit ultimately will be resolved
in our favor. An adverse ruling could seriously impact our
ability to conduct our business and to offer our products and
services to our customers. This, in turn, would harm our
revenue, market share, reputation, liquidity and overall
financial position. Whether or not we prevail in our litigation,
we expect that the litigation will continue to be expensive,
time-consuming and a distraction to our management in operating
our business.
We currently face
competition from established competitors and may face
competition from others in the future.
We compete in markets that are intensely competitive, rapidly
changing and characterized by vendors offering a wide range of
content delivery solutions. 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. Our primary competitors include
content delivery service providers such as Akamai, Level 3
Communications (which recently acquired Digital Island, SAVVIS
Communications’ content delivery network services business)
and Internap Network Services Corporation (which recently
acquired VitalStream). Also, as a result of the growth of the
content delivery market, a number of companies are currently
attempting to enter our market, either directly or indirectly,
some of which may become significant competitors in the future.
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 content providers from
purchasing the services that we offer. In addition, as we expand
internationally, we face different market characteristics and
competition with local content delivery service providers, many
of which are very well positioned within their local markets.
Increased competition could result in price reductions and
revenue shortfalls, loss of customers, and loss of market share,
which could harm our business, financial condition and results
of operations.
We may lose
customers if they elect to develop content delivery solutions
internally.
Our customers and potential customers may decide to develop
their own content delivery solutions rather than outsource these
solutions to content delivery network, or CDN, services
providers like us. This is particularly true as our customers
increase their operations and begin expending greater resources
on delivering their content using third-party solutions. For
example, MusicMatch was our most significant customer in 2004
and one of our top 10 customers in 2005, but following its
acquisition by Yahoo! Inc., MusicMatch’s content delivery
requirements were in-sourced and it was not a customer of ours
at all in 2006. If we fail to offer CDN services that are
competitive to in-sourced solutions, we may lose additional
customers or fail to attract customers that may consider
pursuing this in-sourced approach, and our business and
financial results would suffer.
Rapidly evolving
technologies or new business models could cause demand for our
CDN services to decline or could cause these services to become
obsolete.
Customers or third parties may develop technological or business
model innovations that address content delivery requirements in
a manner that is, or is perceived to be, equivalent or superior
to our CDN services. If competitors introduce new products or
services that compete with or surpass the quality or the
price/performance of our services, we may be unable to renew our
agreements with existing customers or attract new customers at
the prices and levels that allow us to generate
attractive rates of return on our investment. For example, one
or more third parties might develop improvements to current
peer-to-peer
technology, which is a technology that relies upon the computing
power and bandwidth of its participants, such that this
technological approach is better able to deliver content in a
way that is competitive to our CDN services, or even that makes
CDN services obsolete. We may not anticipate such developments
and may be unable to adequately compete with these potential
solutions. In addition, our customers’ business models may
change in ways that we do not anticipate and these changes could
reduce or eliminate customers’ needs for CDN services. If
this occurred, we could lose customers or potential customers,
and our business and financial results would suffer. As a result
of these or similar potential developments, in the future it is
possible that competitive dynamics in our market may require us
to reduce our prices, which could harm our revenue, gross margin
and operating results.
If we are unable
to sell our services at acceptable prices relative to our costs,
our revenue and gross margins will decrease, and our business
and financial results will suffer.
Prices for content delivery services have fallen in recent years
and are likely to fall further in the future. Recently, we have
invested significant amounts in purchasing capital equipment to
increase the capacity of our content delivery services. For
example, in 2006 we made $40.6 million in capital
expenditures, primarily for computer equipment associated with
the build-out and expansion of our content delivery network. Our
investments in our infrastructure are based upon our assumptions
regarding future demand and also prices that we will be able to
charge for our services. These assumptions may prove to be
wrong. If the price that we are able to charge customers to
deliver their content falls to a greater extent than we
anticipate, if we over-estimate future demand for our services
or if our costs to deliver our services do not fall commensurate
with any future price declines, we may not be able to achieve
acceptable rates of return on our infrastructure investments and
our gross profit and results of operations may suffer
dramatically.
In addition, in 2007 and beyond, we expect to increase our
expenses, in absolute dollars, in substantially all areas of our
business, including sales and marketing, general and
administrative, and research and development. In 2007 and 2008,
as we further expand our content delivery network, we also
expect our capital expenditures to be generally consistent with
the high level of expenditures we made in this area in 2006. As
a consequence, we are dependent on significant future growth in
demand for our services to provide the necessary gross profit to
pay these additional expenses. If we fail to generate
significant additional demand for our services, our results of
operations will suffer and we may fail to achieve planned or
expected financial results. There are numerous factors that
could, alone or in combination with other factors, impede our
ability to increase revenue, moderate expenses or maintain gross
margins, including:
•
failure to increase sales of our core services;
•
significant increases in bandwidth and rack space costs or other
operating expenses;
•
inability to maintain our prices relative to our costs;
•
failure of our current and planned services and software to
operate as expected;
•
loss of any significant customers or loss of existing customers
at a rate greater than our increase in new customers or our
sales to existing customers;
•
failure to increase sales of our services to current customers
as a result of their ability to reduce their monthly usage of
our services to their minimum monthly contractual commitment;
•
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
•
inability to attract high-quality customers to purchase and
implement our current and planned services.
If we are unable
to develop new services and enhancements to existing services or
fail to predict and respond to emerging technological trends and
customers’ changing needs, our operating results may
suffer.
The market for our CDN 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. For example, we recently introduced our
Traffic Services Manager and Geo-Compliance paid service
options, and we do not yet know whether our customers will adopt
these offerings in sufficient numbers to justify our development
costs. 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, which could lead to loss of market
share, revenue and earnings.
We depend on a
limited number of customers for a substantial portion of our
revenue in any fiscal period, and the loss of, or a significant
shortfall in demand from, these customers could significantly
harm our results of operations.
During any given fiscal period, a relatively small number of
customers typically accounts for a significant percentage of our
revenue. For example, in 2006, revenue generated by sales to our
top 10 customers, in terms of revenue, accounted for
approximately 58% of our total revenue for the same period. One
of these top 10 customers, CDN Consulting, which acted as a
reseller of our services primarily to a single large content
provider, represented in excess of 21% of our total revenue for
that period. Prospectively, we do not expect sales to this
reseller to continue at comparable levels. In the past, the
customers that comprised our top 10 customers have continually
changed, and we also have experienced significant fluctuations
in our individual customers’ usage of our services. For
example, one of our top 10 customers in 2005 was no longer a
customer at all in 2006. In addition, our operating costs are
relatively fixed in the near term. As a consequence, we may not
be able to adjust our expenses in the short term to address the
unanticipated loss of a large customer during any particular
period. As such, we may experience significant, unanticipated
fluctuations in our operating results which may cause us to not
meet our expectations or those of stock market analysts, which
could cause our stock price to decline.
If we are unable
to attract new customers or to retain our existing customers,
our revenue could be lower than expected and our operating
results may suffer.
In addition to adding new customers, to increase our revenue, we
must sell additional services to existing customers and
encourage existing customers to increase their usage levels. If
our existing and prospective customers do not perceive our
services to be of sufficiently high value and quality, we may
not be able to retain our current customers or attract new
customers. We sell our services pursuant to service agreements
that are generally one to three years in length. Our customers
have no obligation to renew their contracts for our services
after the expiration of their initial commitment period, and
these service agreements may not be renewed at the same or
higher level of service, if at all. Moreover, under some
circumstances, some of our customers have the right to cancel
their service agreements prior to the expiration of the terms of
their agreements. Because of our limited operating history, we
have limited historical data with respect to rates of customer
service agreement renewals. This fact, in addition to the
changing competitive landscape in our market, means that we
cannot accurately predict future customer renewal rates. Our
customers’ renewal rates may decline or fluctuate as a
result of a number of factors, including:
•
their satisfaction or dissatisfaction with our services;
the prices of services offered by our competitors;
•
mergers and acquisitions affecting our customer base; and
•
reductions in our customers’ spending levels.
If our customers do not renew their service agreements with us
or if they renew on less favorable terms, our revenue may
decline and our business will suffer. Similarly, our customer
agreements often provide for minimum commitments that are often
significantly below our customers’ historical usage levels.
Consequently, even if we have agreements with our customers to
use our services, these customers could significantly curtail
their usage without incurring any penalties under our
agreements. In this event, our revenue would be lower than
expected and our operating results could suffer.
It also is an important component of our growth strategy to
market our CDN services to industries, such as enterprise and
the government. As an organization, we do not have significant
experience in selling our services into these markets. We have
only recently begun a number of these initiatives, and our
ability to successfully sell our services into these markets to
a meaningful extent remains unproven. If we are unsuccessful in
such efforts, our business, financial condition and results of
operations could suffer.
Our results of
operations may fluctuate in the future. As a result, we may fail
to meet or exceed the expectations of securities analysts or
investors, which could cause our stock price to
decline.
Our results of operations may fluctuate as a result of a variety
of factors, many of which are outside of our control. If our
results of operations fall below the expectations of securities
analysts or investors, the price of our common stock could
decline substantially. Fluctuations in our results of operations
may be due to a number of factors, including:
•
our ability to increase sales to existing customers and attract
new customers to our CDN services;
•
the addition or loss of large customers, or significant
variation in their use of our CDN services;
•
costs associated with current or future intellectual property
lawsuits;
•
service outages or security breaches;
•
the amount and timing of operating costs and capital
expenditures related to the maintenance and expansion of our
business, operations and infrastructure;
•
the timing and success of new product and service introductions
by us or our competitors;
•
the occurrence of significant events in a particular period that
result in an increase in the use of our CDN services, such as a
major media event or a customer’s online release of a new
or updated video game;
•
changes in our pricing policies or those of our competitors;
•
the timing of recognizing revenue;
•
stock-based compensation expenses associated with attracting and
retaining key personnel;
•
limitations of the capacity of our content delivery network and
related systems;
•
the timing of costs related to the development or acquisition of
technologies, services or businesses;
•
general economic, industry and market conditions and those
conditions specific to Internet usage and online businesses;
limitations on usage imposed by our customers in order to limit
their online expenses; and
•
geopolitical events such as war, threat of war or terrorist
actions.
We believe that our revenue and results of operations may vary
significantly in the future and that
period-to-period
comparisons of our operating results may not be meaningful. You
should not rely on the results of one period as an indication of
future performance.
We generate our
revenue almost entirely from the sale of CDN services, and the
failure of the market for these services to expand as we expect
or the reduction in spending on those services by our current or
potential customers would seriously harm our business.
While we offer our customers a number of services associated
with our content delivery network, we generated nearly 100% of
our revenue in 2006 from charging our customers for the content
delivered on their behalf through our CDN. As we do not
currently have other meaningful sources of revenue, we are
subject to an elevated risk of reduced demand for these
services. Furthermore, if the market for delivery of rich media
content in particular does not continue to grow as we expect or
grows more slowly, then we may fail to achieve a return on the
significant investment we are making to prepare for this growth.
Our success, therefore, depends on the continued and increasing
reliance on the Internet for delivery of media content and our
ability to cost-effectively deliver these services. Factors that
may have a general tendency to limit or reduce the number of
users relying on the Internet for media content or the number of
providers making this content available online include a general
decline in Internet usage, litigation involving our customers
and third-party restrictions on online content, including
copyright restrictions, digital rights management and
restrictions in certain geographic regions, as well as a
significant increase in the quality or fidelity of offline media
content beyond that available online to the point where users
prefer the offline experience. The influence of any of these
factors may cause our current or potential customers to reduce
their spending on CDN services, which would seriously harm our
operating results and financial condition.
Many of our
significant current and potential customers are pursuing
emerging or unproven business models which, if unsuccessful,
could lead to a substantial decline in demand for our CDN
services.
Because the proliferation of broadband Internet connections and
the subsequent monetization of content libraries for
distribution to Internet users are relatively recent phenomena,
many of our customers’ business models that center on the
delivery of rich media and other content to users remain
unproven. For example, social media companies have been among
our top recent customers and are pursuing emerging strategies
for monetizing the user content and traffic on their web sites.
Our customers will not continue to purchase our CDN services if
their investment in providing access to the media stored on or
deliverable through our CDN does not generate a sufficient
return on their investment. A reduction in spending on CDN
services by our current or potential customers would seriously
harm our operating results and financial condition.
We may need to
defend our intellectual property and processes against patent or
copyright infringement claims, which would cause us to incur
substantial costs.
Companies, organizations 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 operate our business.
From time to time, we may receive inquiries from holders of
patents inquiring whether we infringe their proprietary rights.
Companies holding Internet-related patents or other intellectual
property rights are increasingly bringing suits alleging
infringement of such rights or otherwise asserting their rights
and seeking licenses. For example, in June 2006, we were sued by
Akamai and MIT alleging we infringed patents licensed to Akamai.
Any litigation or claims, whether or not valid, could result in
substantial
costs and diversion of resources. In addition, if we are
determined to have infringed upon a third party’s
intellectual property rights, we may be required 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 harmed.
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. These legal protections afford
only limited protection, and we have no currently issued
patents. Monitoring infringement of our intellectual property
rights is difficult, and we cannot be certain that the steps we
have taken will prevent unauthorized use of our intellectual
property rights. We have applied for patent protection in a
number of foreign countries, but the laws in these jurisdictions
may not protect our proprietary rights as fully as in the United
States. 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.
Any unplanned
interruption in the functioning of our network or services could
lead to significant costs and disruptions that could reduce our
revenue 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. Many of our customers
depend primarily or exclusively on our services to operate their
businesses. Consequently, any disruption of our services could
have a material impact on our customers’ businesses. 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,
failure of our software or CDN delivery infrastructure and power
losses. In addition, we deploy our servers in approximately 50
third-party co-location facilities, and these third-party
co-location providers could experience system outages or other
disruptions that could constrain our ability to deliver our
services. We may also experience disruptions caused by software
viruses or other attacks by unauthorized users. While we have
not experienced any significant, unplanned disruption of our
services to date, attacks by unauthorized users in the future
may be successful, and our security measures may not be
effective in preventing damages from such an attack. Despite our
significant infrastructure investments, we may have insufficient
communications and server capacity to address these or other
disruptions, which could result in interruptions in our services.
Any widespread interruption of the functioning of our CDN and
related services for any reason would reduce our revenue and
could harm our business and financial results. If such a
widespread interruption occurred or if we failed to deliver
content to users as expected during a high-profile media event,
game release or other well-publicized circumstance, our
reputation could be damaged severely. Moreover, any disruptions
could undermine confidence in our services and cause us to lose
customers or make it more difficult to attract new ones, either
of which could harm our business and results of operations.
We may have
difficulty scaling and adapting our existing architecture to
accommodate increased traffic and technology advances or
changing business requirements, which could lead to the loss of
customers and cause us to incur unexpected expenses to make
network improvements.
Our CDN services are highly complex and are designed to be
deployed in and across numerous large and complex networks. Our
network infrastructure has to perform well and be reliable for
us to be successful. The greater the user traffic and the
greater the complexity of our products and services, the more
resources we will need to invest in additional infrastructure
and support. We have spent and expect to continue to spend
substantial amounts on the purchase and lease of equipment and
data centers and the upgrade of our technology and network
infrastructure to handle increased traffic over our network and
to roll out new products and services. This expansion is
expensive and complex and could result in inefficiencies,
operational failures or defects in our network and related
software. If we do not expand successfully, or if we experience
inefficiencies and operational failures, the quality of our
products and services and users’ experience could decline.
From time to time, we have needed to correct errors and defects
in our software or in other aspects of our CDN. In the future,
there may be additional errors and defects that may harm our
ability to deliver our services, including errors and defects
originating with third party networks or software on which we
rely. These occurrences could damage our reputation and lead us
to lose current and potential customers. We must continuously
upgrade our infrastructure in order to keep pace with our
customers’ evolving demands. Cost increases or the failure
to accommodate increased traffic or these evolving business
demands without disruption could harm our operating results and
financial condition.
Our operations
are dependent in part upon communications capacity provided by
third-party telecommunications providers. A material disruption
of the communications capacity we have leased could harm our
results of operations, reputation and customer
relations.
We lease private line capacity for our backbone from a third
party provider, Global Crossing Ltd. Our contracts for private
line capacity with Global Crossing generally have terms of three
years. The communications capacity we have leased may become
unavailable for a variety of reasons, such as physical
interruption, technical difficulties, contractual disputes, or
the financial health of our third party provider. As it would be
time consuming and expensive to identify and obtain alternative
third-party connectivity, we are dependent on Global Crossing in
the near term. Additionally, as we grow, we anticipate requiring
greater private line capacity than we currently have in place.
If we are unable to obtain such capacity on terms commercially
acceptable to us or at all, our business and financial results
would suffer. We may not be able to deploy on a timely basis
enough network capacity to meet the needs of our customer base
or effectively manage demand for our services.
Our business
depends on continued and unimpeded access to third-party
controlled end-user access networks.
Our content delivery services depend on our ability to access
certain end-user access networks in order to complete the
delivery of rich media and other online content to end-users.
Some operators of these networks may take measures, such as the
deployment of a variety of filters, that could degrade, disrupt
or increase the cost of our or our customers’ access to
certain of these end-user access networks by restricting or
prohibiting the use of their networks to support or facilitate
our services, or by charging increased fees to us, our customers
or end-users in connection with our services. This or other
types of interference could result in a loss of existing
customers, increased costs and impairment of our ability to
attract new customers, thereby harming our revenue and growth.
In addition, the performance of our infrastructure depends in
part on the direct connection of our CDN to a large number of
end-user access networks, known as peering, which we achieve
through mutually beneficial cooperation with these networks. If
in the future a significant percentage of these
network operators elected to no longer peer with our CDN, the
performance of our infrastructure could be diminished and our
business could suffer.
If our ability to
deliver media files in popular proprietary content formats was
restricted or became cost-prohibitive, demand for our content
delivery services could decline, we could lose customers and our
financial results could suffer.
Our business depends on our ability to deliver media content in
all major formats. If our legal right or technical ability to
store and deliver content in one or more popular proprietary
content formats, such as Adobe Flash or Windows Media, was
limited, our ability to serve our customers in these formats
would be impaired and the demand for our content delivery
services would decline by customers using these formats. Owners
of propriety content formats may be able to block, restrict or
impose fees or other costs on our use of such formats, which
could lead to additional expenses for us and for our customers,
or which could prevent our delivery of this type of content
altogether. Such interference could result in a loss of existing
customers, increased costs and impairment of our ability to
attract new customers, which would harm our revenue, operating
results and growth.
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 implementing our business
plan. In particular, we are dependent on the services of our
Chief Executive Officer, Jeffrey W. Lunsford and also our Chief
Technical Officer, Nathan F. Raciborski. Neither of these
officers nor any of our other key employees is bound by an
employment agreement for any specific term. In addition, we do
not have “key person” life insurance policies covering
any of our officers or other key employees, and we therefore
have no way of mitigating our financial loss were we to lose
their services. There is increasing competition for talented
individuals with the specialized knowledge to deliver content
delivery services and this competition affects both our ability
to retain key employees and hire new ones. The loss of the
services of any of our key employees could disrupt our
operations, delay the development and introduction of our
services, and negatively impact our ability to sell our services.
Our senior
management team has limited experience working together as a
group, and may not be able to manage our business
effectively.
Two members of our senior management team, our President and
Chief Executive Officer, Jeffrey W. Lunsford, and our Chief
Financial Officer, Matthew Hale, have been hired since November
2006. As a result, our senior management team has limited
experience working together as a group. This lack of shared
experience could harm our senior management team’s ability
to quickly and efficiently respond to problems and effectively
manage our business.
We face risks
associated with international operations that could harm our
business.
We have operations and personnel in Japan, the United Kingdom
and Singapore, and we currently maintain network equipment in
France, Germany, Hong Kong, Japan, the Netherlands and the
United Kingdom. As part of our growth strategy, we intend to
expand our sales and support organizations internationally, as
well as to further expand our international network
infrastructure. We have limited experience in providing our
services internationally and such expansion could require us to
make significant expenditures, including the hiring of local
employees, in advance of generating any revenue. As a
consequence, we may fail to achieve profitable operations that
will compensate our investment in international locations. We
are 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 sales and marketing,
deploying services and maintaining our infrastructure in foreign
countries;
•
competition from local content delivery service providers, many
of which are very well positioned within their local markets;
•
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;
•
corporate and personal liability for violations of local laws
and regulations;
•
currency exchange rate fluctuations; and
•
potentially adverse tax consequences.
Internet-related
and other laws relating to taxation issues, privacy and consumer
protection and liability for content distributed over our
network, could harm our business.
Laws and regulations that apply to communications and commerce
conducted over the Internet are becoming more prevalent, both in
the United States and internationally, and may impose additional
burdens on companies conducting business online or providing
Internet-related services such as ours. Increased regulation
could negatively affect our business directly, as well as the
businesses of our customers, which could reduce their demand for
our services. For example, tax authorities abroad may impose
taxes on the Internet-related revenue we generate based on where
our internationally deployed servers are located. In addition,
domestic and international taxation laws are subject to change.
Our services, or the businesses of our customers, may become
subject to increased taxation, which could harm our financial
results either directly or by forcing our customers to scale
back their operations and use of our services in order to
maintain their operations. In addition, the laws relating to the
liability of private network operators for information carried
on or disseminated through their networks are unsettled, both in
the United States and abroad. Network operators have been sued
in the past, sometimes successfully, based on the content of
material disseminated through their networks. We may become
subject to legal claims such as defamation, invasion of privacy
and copyright infringement in connection with content stored on
or distributed through our network. In addition, our reputation
could suffer as a result of our perceived association with the
type of content that some of our customers deliver. If we need
to take costly measures to reduce our exposure to these risks,
or are required to defend ourselves against such claims, our
financial results could be negatively affected.
If we are
required to seek additional funding, such funding may not be
available on acceptable terms or at all.
We may need to obtain additional funding due to a number of
factors beyond our control, including a shortfall in revenue,
increased expenses, increase investment in capital equipment or
the acquisition of significant businesses or technologies. We
believe that our cash, plus cash from operations and the
proceeds from this offering will be sufficient to fund our
operations and proposed capital expenditures for at least the
next 12 months. However, we may need funding before such
time. If we do need to obtain funding, it may not be available
on commercially reasonable terms or at all. If we are unable to
obtain sufficient funding, our business would be harmed. Even if
we were able to find outside funding sources, we might be
required to issue securities in a transaction that could be
highly dilutive to our investors or we may 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. If we are unable to generate or raise capital that is
sufficient to fund our operations, we may be required to curtail
operations, reduce our capabilities or cease operations in
certain jurisdictions or completely.
Our business
requires the continued development of effective business support
systems to support our customer growth and related
services.
The growth of our business depends on our ability to continue to
develop effective business support systems. This is a
complicated undertaking requiring significant resources and
expertise. Business support systems are needed for:
•
implementing customer orders for services;
•
delivering these services; and
•
timely billing for these services.
Because our business plan provides for continued growth in the
number of customers that we serve and services offered, there is
a need to continue to develop our business support systems on a
schedule sufficient to meet proposed service rollout dates. The
failure to continue to develop effective business support
systems could harm our ability to implement our business plans
and meet our financial goals and objectives.
Changes in
financial accounting standards or practices may cause adverse,
unexpected financial reporting fluctuations and affect our
reported results of operations.
A change in accounting standards or practices can have a
significant effect on our operating results and may affect our
reporting of transactions completed before the change is
effective. New accounting pronouncements and varying
interpretations of existing accounting pronouncements have
occurred and may occur in the future. Changes to existing rules
or the questioning of current practices may adversely affect our
reported financial results or the way we conduct our business.
For example, our recent adoption of SFAS 123R in 2006 has
increased the amount of share-based compensation expense we
record. This, in turn, has impacted our results of operations
for the periods since this adoption and has made it more
difficult to evaluate our recent financial results relative to
prior periods. Under SFAS 123R, unrecognized stock-based
compensation totaled $30.1 million at December 31,2006.
We will incur
significant increased costs as a result of operating as a public
company, and our management will be required to devote
substantial time to new compliance initiatives.
As a public company, we will incur significant accounting and
other expenses that we did not incur as a private company. These
expenses include increased accounting, legal and other
professional fees, insurance premiums, investor relations costs,
and costs associated with compensating our independent
directors. In addition, the Sarbanes-Oxley Act of 2002, as well
as rules subsequently implemented by the Securities and Exchange
Commission and the Nasdaq Global Market, impose additional
requirements on public companies, including requiring changes in
corporate governance practices. For example, the listing
requirements of the Nasdaq Global Market require that we satisfy
certain corporate governance requirements relating to
independent directors, audit committees, distribution of annual
and interim reports, stockholder meetings, stockholder
approvals, solicitation of proxies, conflicts of interest,
stockholder voting rights and codes of conduct. Our management
and other personnel will need to devote a substantial amount of
time to these compliance initiatives. Moreover, these rules and
regulations will increase our legal and financial compliance
costs and will make some activities more time-consuming and
costly. For example, we expect these rules and regulations to
make it more difficult and more expensive for us to obtain
director and officer liability
insurance, and we may be required to accept reduced policy
limits and coverage or incur substantial additional costs to
maintain the same or similar coverage. These rules and
regulations could also make it more difficult for us to identify
and retain qualified persons to serve on our board of directors,
our board committees or as executive officers.
If we fail to
maintain proper and effective internal controls, our ability to
produce accurate financial statements could be impaired, which
could adversely affect our operating results, our ability to
operate our business and investors’ views of us.
We must ensure that we have adequate internal financial and
accounting controls and procedures in place so that we can
produce accurate financial statements on a timely basis. We will
be required to spend considerable effort on establishing and
maintaining our internal controls, which will be costly and
time-consuming and will need to be re-evaluated frequently. We
have very limited experience in designing and testing our
internal controls. We are in the process of documenting,
reviewing and, if appropriate, improving our internal controls
and procedures in anticipation of being a public company and
eventually being subject to Section 404 of the
Sarbanes-Oxley Act of 2002, which will require annual management
assessments of the effectiveness of our internal control over
financial reporting. In addition, we will be required to file a
report by our independent registered public accounting firm
addressing these assessments beginning with our Annual Report on
Form 10-K
for the year ended December 31, 2008. Both we and our
independent auditors will be testing our internal controls in
anticipation of being subject to Section 404 requirements
and, as part of that documentation and testing, may identify
areas for further attention and improvement. Implementing any
appropriate changes to our internal controls may entail
substantial costs to modify our existing financial and
accounting systems, take a significant period of time to
complete, and distract our officers, directors and employees
from the operation of our business. These changes may not,
however, be effective in maintaining the adequacy of our
internal controls, and any failure to maintain that adequacy, or
a consequent inability to produce accurate financial statements
on a timely basis, could increase our operating costs and could
materially impair our ability to operate our business. In
addition, investors’ perceptions that our internal controls
are inadequate or that we are unable to produce accurate
financial statements may seriously affect our stock price.
Failure to
effectively expand our sales and marketing capabilities could
harm our ability to increase our customer base and achieve
broader market acceptance of our services.
Increasing our customer base and achieving broader market
acceptance of our services will depend to a significant extent
on our ability to expand our sales and marketing operations.
Historically, we have concentrated our sales force at our
headquarters in Tempe, Arizona. However, we have recently begun
building a field sales force to augment our sales efforts and to
bring our sales personnel closer to our current and potential
customers. Developing such a field sales force will be expensive
and we have limited knowledge in developing and operating a
widely dispersed sales force. As a result, we may not be
successful in developing an effective sales force, which could
cause our results of operations to suffer.
We believe that there is significant competition for direct
sales personnel with the sales skills and technical knowledge
that we require. Our ability to achieve significant growth in
revenue in the future will depend, in large part, on our success
in recruiting, training and retaining sufficient numbers of
direct sales personnel. We have expanded our sales and marketing
personnel from a total of 13 at December 31, 2004 to 81 at
March 1, 2007. New hires require significant training and,
in most cases, take a significant period of time before they
achieve full productivity. Our recent hires and planned hires
may not become as productive as we would like, and we may be
unable to hire or retain sufficient numbers of qualified
individuals in the future in the markets where we do business.
Our business will be seriously harmed if these expansion efforts
do not generate a corresponding significant increase in revenue.
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.
The preparation of these financial statements requires us to
make estimates and judgments about, among other things, taxes,
revenue recognition, share-based compensation costs, contingent
obligations and doubtful accounts. These estimates and judgments
affect the reported amounts of our assets, liabilities, revenue
and expenses, the amounts of charges accrued by us, 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 and at the time they are made. 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, investors may lose confidence in our
ability to manage our business and our stock price could decline.
As part of our
business strategy, we may acquire businesses or technologies and
may have difficulty integrating these operations.
We may seek to acquire businesses or technologies that are
complementary to our business. Acquisitions involve a number of
risks to our business, 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 unknown liabilities associated with acquired
businesses. Any inability to integrate operations or personnel
in an efficient and timely manner could harm our results of
operations. We do not have prior experience as a company in this
complex process of acquiring and integrating businesses. 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, future acquisitions will require the use of
our available cash or dilutive issuances of securities. Future
acquisitions or attempted acquisitions could also harm our
ability to achieve profitability. We may also experience
significant turnover from the acquired operations or from our
current operations as we integrate businesses.
Risks Related to
this Offering
The trading price
of our common stock is likely to be volatile, and you might not
be able to sell your shares at or above the initial public
offering price.
The trading prices of the securities of technology companies
have been highly volatile. Further, our common stock has no
prior trading history. Factors affecting the trading price of
our common stock will include:
•
variations in our operating results;
•
announcements of technological innovations, new services or
service enhancements, strategic alliances or significant
agreements by us or by our competitors;
•
commencement or resolution of, or our involvement in,
litigation, particularly our current litigation with Akamai and
MIT;
•
recruitment or departure of key personnel;
•
changes in the estimates of our operating results or changes in
recommendations by any securities analysts that elect to follow
our common stock;
•
developments or disputes concerning our intellectual property or
other proprietary rights;
market conditions in our industry, the industries of our
customers and the economy as a whole; and
•
adoption or modification of regulations, policies, procedures or
programs applicable to our business.
In addition, if the market for technology stocks or the stock
market in general experiences loss of investor confidence, the
trading price of our common stock could decline for reasons
unrelated to our business, operating results or financial
condition. The trading price of our common stock might also
decline in reaction to events that affect other companies in our
industry even if these events do not directly affect us. Each of
these factors, among others, could cause the value of your
investment in our common stock to decline. Some companies that
have had volatile market prices for their securities have had
securities class actions filed against them. If a suit were
filed against us, regardless of its merits or outcome, it could
result in substantial costs and divert management’s
attention and resources. This could harm our business and cause
our operating results and financial condition to suffer.
Our securities
have no prior market and our stock price may decline after the
offering.
Prior to this offering, there has been no public market for
shares of our common stock. Although we have applied to have our
common stock listed on the Nasdaq Global Market, an active
public trading market for our common stock may not develop or,
if it develops, may not be maintained after this offering. Our
company, the representatives of the underwriters and our
qualified independent underwriter will negotiate to determine
the initial public offering price. The initial public offering
price may be higher than the trading price of our common stock
following this offering. As a result, you could lose all or part
of your investment.
A significant
portion of our total outstanding shares are restricted from
immediate resale but may be sold into the market in the near
future. If there are substantial sales of our common stock, the
price of our common stock could decline.
The price of our common stock could decline if there are
substantial sales of our common stock in the public stock market
after this offering. After this offering, we will
have outstanding
shares of common stock based on the number of shares outstanding
as of December 31, 2006. This
includes shares
being sold in this offering, all of which may be resold in the
public market immediately following this offering. The
remaining shares,
or
approximately %
of our outstanding shares after this offering, are currently
restricted as a result of securities laws or
lock-up
agreements but will be able to be sold in the near future as set
forth below:
Number
of
shares and
percentage of
total
outstanding
Date available
for sale into public market
shares,
or %
Immediately after this offering.
shares,
or %
Generally, 180 days after the
date of this prospectus due to
lock-up
agreements between certain of the holders of these shares and
the underwriters and to contractual arrangements between the
other holders of these shares and us, subject to a potential
extension under certain circumstances.
shares,
or %
At various dates more than
180 days after the date of this prospectus.
After this offering, the holders of an aggregate of
29,960,170 shares of our common stock as of
December 31, 2006, including entities affiliated with one
of our lead underwriters for this offering, will have rights,
subject to some conditions, to require us to file registration
statements covering their shares or to include their shares in
registration statements that we may file for ourselves or other
stockholders. We also intend to register the issuance of all
shares of common stock that we have issued and may issue under
our option plans. Once we register the issuance of these shares,
they can be freely sold in the public market upon issuance,
subject to
lock-up
agreements. Due to these factors, sales of a substantial number
of shares of our common stock in the public market could occur
at any time. These sales, or the perception in the market that
the holders of a large number of shares intend to sell shares,
could reduce the market price of our common stock.
If securities or
industry analysts do not actively follow our business or if they
publish unfavorable research about our business, our stock price
and trading volume could decline.
The trading market for our common stock will depend in part on
the research and reports that securities or industry analysts
publish about us or our business. We do not currently have and
may never obtain research coverage by securities and industry
analysts. If no securities or industry analysts commence
coverage of our company, the trading price for our stock may be
negatively impacted. In the event we obtain securities or
industry analyst coverage, if one or more of the analysts who
covers us downgrades our stock or publishes unfavorable research
about our business, our stock price would likely decline. If one
or more of these analysts ceases coverage of our company or
fails to publish reports on us regularly, demand for our stock
could decrease, which could cause our stock price and trading
volume to decline.
Insiders will
continue to have substantial control over us after this offering
and will be able to influence corporate matters.
Upon completion of this offering, our directors and executive
officers and their affiliates will beneficially own, in the
aggregate,
approximately %
of our outstanding common stock, including
approximately %
beneficially owned by investment entities affiliated with
Goldman Sachs & Co., our co-lead underwriter in this
offering, in each case assuming no exercise of the
underwriters’ option to purchase additional shares from us.
These amounts compare to
approximately %
of our outstanding common stock represented by the shares sold
in this offering, also assuming no exercise of the
underwriters’ option to purchase additional shares from us.
As a result, these stockholders will be able to exercise
significant influence over all matters requiring stockholder
approval, including the election of directors and approval of
significant corporate transactions, such as a merger or other
sale of our company or its assets. This concentration of
ownership could limit your ability to influence corporate
matters and may have the effect of delaying or preventing a
third party from acquiring control over us.
Because
affiliates of the co-lead underwriter for this offering hold a
substantial equity interest in us, the co-lead underwriter for
this offering may have interests that conflict with yours as an
investor in our common stock.
In July 2006, we completed the sale of our Series B
preferred stock to certain investors, after which sale certain
entities affiliated with Goldman Sachs & Co., the
co-lead underwriter for this offering, held approximately 45% of
the outstanding shares of our capital stock, and will
hold % after the completion of this
offering. Because affiliates of Goldman Sachs & Co. own
more than 10% of our outstanding capital stock, Goldman
Sachs & Co. is deemed to be an affiliate of ours under
Rule 2720(b)(1) of the NASD Conduct Rules and, therefore,
the underwriters for this offering may also be deemed to have a
conflict of interest under Rule 2720 of the NASD Conduct
Rules. Accordingly, this offering will be made in compliance
with the applicable NASD Conduct Rules, which require that the
initial public offering price can be no higher than that
recommended by a “qualified independent underwriter,”
as defined by the NASD. Morgan Stanley & Co.
Incorporated is serving in that capacity.
We cannot assure you that the use of a qualified independent
underwriter will be sufficient to eliminate any actual or
potential conflicts of interest. For more information regarding
the role of the qualified independent underwriter in this
offering and other relationships we and our affiliates have with
the underwriters, we refer you to the disclosure under the
heading, “Underwriting.”
As a new
investor, you will experience substantial dilution as a result
of this offering and future equity issuances.
The initial public offering price per share is substantially
higher than the pro forma net tangible book value per share of
our common stock outstanding prior to this offering. As a
result, investors purchasing common stock in this offering will
experience immediate substantial dilution of
$ per share. In addition, we have
issued options to acquire common stock at prices significantly
below the initial public offering price. To the extent
outstanding options are ultimately exercised, there will be
further dilution to investors in this offering. This dilution is
due in large part to the fact that our earlier investors paid
substantially less than the initial public offering price when
they purchased their shares of common stock. In addition, if the
underwriters exercise their option to purchase additional shares
from us or if we issue additional equity securities, you will
experience additional dilution.
Anti-takeover
provisions in our charter documents and Delaware law could
discourage, delay or prevent a change in control of our company
and may affect the trading price of our common stock.
We are a Delaware corporation and the anti-takeover provisions
of the Delaware General Corporation Law may discourage, delay or
prevent a change in control by prohibiting us from engaging in a
business combination with an interested stockholder for a period
of three years after the person becomes an interested
stockholder, even if a change in control would be beneficial to
our existing stockholders. In addition, our restated certificate
of incorporation and amended and restated bylaws may discourage,
delay or prevent a change in our management or control over us
that stockholders may consider favorable. Our restated
certificate of incorporation and amended and restated bylaws,
which will be in effect as of the closing of this offering:
•
authorize the issuance of “blank check” preferred
stock that could be issued by our board of directors to thwart a
takeover attempt;
•
establish a classified board of directors, as a result of which
the successors to the directors whose terms have expired will be
elected to serve from the time of election and qualification
until the third annual meeting following their election;
•
require that directors only be removed from office for cause and
only upon a supermajority stockholder vote;
•
provide that vacancies on the board of directors, including
newly created directorships, may be filled only by a majority
vote of directors then in office;
•
limit who may call special meetings of stockholders;
•
prohibit stockholder action by written consent, requiring all
actions to be taken at a meeting of the stockholders; and
•
require supermajority stockholder voting to effect certain
amendments to our restated certificate of incorporation and
amended and restated bylaws.
For more information regarding these and other provisions, see
the section titled “Description of Capital
Stock — Anti-Takeover Effects of Delaware Law and our
Certificate of Incorporation and Bylaws.”
Our management
will have broad discretion over the use of the proceeds we
receive in this offering and might not apply the proceeds in
ways that increase the value of your investment.
Our management will have broad discretion to use the net
proceeds from this offering, and you will be relying on the
judgment of our management regarding the application of these
proceeds. Our management might not apply the net proceeds of
this offering in ways that increase the value of your
investment. We expect to use the net proceeds from this offering
for general corporate purposes, including working capital and
capital expenditures, which may in the future include
investments in, or acquisitions of, complementary businesses,
services or technologies, or the repayment of all or a portion
of our outstanding credit facility. We have not allocated these
net proceeds for any specific purposes. Our management might not
be able to yield a significant return, if any, on any investment
of these net proceeds. You will not have the opportunity to
influence our decisions on how to use the net proceeds from this
offering.
We do not intend
to pay dividends on our common stock.
We have never declared or paid any cash dividend on our common
stock. We currently intend to retain any future earnings and do
not expect to pay any dividends in the foreseeable future.
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. All statements, other than
statements of historical facts, included in this prospectus
regarding our strategy, future operations, future financial
position, future revenue, projected costs, prospects and plans
and objectives of management are forward-looking statements.
Forward-looking statements include, but are not limited to,
statements about:
•
anticipated trends and challenges in our business and the
markets in which we operate;
•
our ability to compete in our industry and innovation by our
competitors;
•
our ability to establish and maintain intellectual property
rights, including the timing and potential consequences of our
current lawsuit with Akamai and MIT;
•
our expectations regarding our expenses, sales and operations;
•
our ability to attract and retain customers;
•
our ability to anticipate market needs or develop new or
enhanced services to meet those needs;
•
our ability to manage growth and to expand our infrastructure;
•
our ability to manage expansion into international markets and
new industries;
•
our ability to hire and retain key personnel;
•
our expectations regarding the use of proceeds from this
offering;
•
our ability to successfully identify and manage any potential
acquisitions; and
•
our anticipated cash needs and our estimates regarding our
capital requirements and our need for additional financing.
The words “anticipates,”“believes,”“estimates,”“expects,”“intends,”“may,”“plans,”“projects,”“will,”“would” and similar expressions are
intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words.
We may not actually achieve the plans, intentions or
expectations disclosed in our forward-looking statements and you
should not place undue reliance on our forward-looking
statements. Actual results or events could differ materially
from the plans, intentions and expectations disclosed in the
forward-looking statements that we make. We have included
important factors in the cautionary statements included in this
prospectus, particularly in the section entitled “Risk
Factors,” that we believe could cause actual results or
events to differ materially from the forward-looking statements
that we make. Our forward-looking statements do not reflect the
potential impact of any future acquisitions, mergers,
dispositions, joint ventures or investments we may make. The
forward-looking statements in this prospectus relate only to
events as of the date on which the statements were made. We do
not assume any obligation to update any forward-looking
statements, except as required by law.
We estimate that we will receive net proceeds of approximately
$113.9 million from the sale of the shares of common stock
offered in this offering, based on an assumed initial public
offering price of $ per
share, the mid-point of the range set forth on the cover page of
this prospectus, and after deducting the estimated underwriting
discounts and estimated offering expenses payable by us. Each
$1.00 increase or decrease in the assumed initial public
offering price of $per
share would increase or decrease, as applicable, the net
proceeds to us by approximately
$ million, assuming
the number of shares offered by us, as set forth on the cover
page of this prospectus, remains the same and after deducting
the estimated underwriting discounts and commissions payable by
us. If the underwriters’ over-allotment option is exercised
in full, we estimate that our net proceeds will be approximately
$138.3 million. We will not receive any proceeds from the
sale of shares of common stock in this offering by the selling
stockholders, although we will bear the costs, other than
underwriting discounts and commissions, associated with the sale
of these sales.
The principal purposes for this offering are to fund our capital
expenditures for network and other equipment, to increase our
working capital, to create a public market for our common stock,
to increase our ability to access the capital markets in the
future, to provide liquidity for our existing stockholders and
for general corporate purposes. In addition, we intend to repay
the outstanding balance under our credit facility with Silicon
Valley Bank, which carries a variable interest rate based on the
prime or LIBOR rate ranging from 0% to 3.25% over the applicable
rate, and maturation dates ranging from 2007 to 2011. At
December 31, 2006, the outstanding balance under our credit
facility with Silicon Valley Bank equalled approximately
$23.8 million.
We may also use a portion of the net proceeds to acquire or
invest in complementary businesses, products or services, or to
obtain rights to such complementary technologies. We have no
commitments with respect to any such acquisitions or
investments. We may find it necessary or advisable to use the
net proceeds for other purposes, and we will have broad
discretion in the application of the net proceeds. Pending the
uses described above, we intend to invest the net proceeds in
short-term, interest-bearing, investment-grade securities.
We have never declared or paid any dividends on our capital
stock. We currently expect to retain any future earnings for use
in the operation and expansion of our business and do not
anticipate paying any cash dividends. Any further determination
to pay dividends on our common stock will be at the discretion
of our board of directors and will depend on our financial
condition, results of operations, capital requirements and other
factors that our board of directors considers relevant.
The following table sets forth our unaudited cash, cash
equivalents and capitalization as of December 31, 2006. Our
cash, cash equivalents and capitalization is presented:
•
on an actual basis;
•
on a pro forma basis reflecting the filing of our amended and
restated certificate of incorporation and the conversion of each
outstanding share of preferred stock into one share of common
stock upon the closing of this offering; and
•
On a pro forma as-adjusted basis to give effect to the sale of
shares of common stock by us in this offering at an assumed
initial public offering price of
$ per share, the mid-point of
the range set forth on the cover page of this prospectus, and
after deducting the estimated underwriting discounts and
estimated offering expenses payable by us.
You should read this table together with the sections of this
prospectus entitled “Selected Consolidated Financial
Data” and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and with
our consolidated financial statements and related notes
beginning on
page F-1.
Long-term debt, less current
portion (net of discount of $470)
20,415
20,415
20,415
Stockholders’ equity:
Undesignated preferred stock,
$0.001 par value; no shares authorized, issued and
outstanding, actual; 5,000,000 shares authorized, no shares
issued and outstanding, pro forma and pro forma as adjusted
—
—
—
Convertible preferred stock,
$0.001 par value; 33,314,000 shares authorized,
29,960,170 shares issued and outstanding, actual; no shares
authorized, issued and outstanding, pro forma and pro forma as
adjusted
30
—
—
Common stock, $0.001 par
value; 80,100,000 shares authorized, 14,554,794 shares
issued and outstanding, actual; 100,000,000 shares
authorized, pro forma and pro forma as adjusted;
44,514,964 shares issued and outstanding, pro
forma; shares
issued and outstanding, pro forma as adjusted
14
44
Additional paid-in capital
41,712
41,712
Accumulated other comprehensive
loss
(113
)
(113
)
(113
)
Accumulated deficit
(5,054
)
(5,054
)
(5,054
)
Total stockholders’ equity
36,589
36,589
150,439
Total capitalization
$
57,004
$
57,004
$
170,854
(1)
Each $1.00 increase or decrease in the assumed initial public
offering price of $ per share
would increase or decrease, as applicable, the amount of
additional paid-in capital, total stockholders’ equity and
total capitalization by approximately
$ million, assuming the
number of shares
offered by us, as set forth on the cover of this prospectus,
remains the same and after deducting the estimated underwriting
discounts and commissions payable by us.
The number of pro forma as-adjusted shares of common stock shown
as issued and outstanding is based on the number of shares of
our common stock outstanding as of December 31, 2006 and
excludes:
•
3,767,495 shares of common stock issuable upon exercise of
options outstanding as of December 31, 2006 at a weighted
average exercise price of $4.47 per share;
•
65,390 shares of common stock issuable upon exercise of a
warrant outstanding as of December 31, 2006 at an exercise
price of $0.22 per share;
•
602,836 shares of common stock reserved for future issuance
under our Amended and Restated 2003 Incentive Compensation Plan
as of December 31, 2006, plus an additional
950,000 shares that we reserved for issuance under this
plan in March 2007; and
•
shares
of common stock reserved for future issuance under our 2007
Equity Incentive Plan adopted
in ,
subject to future adjustment as more fully described in
“Management — Employee Benefit Plans.”
Our net tangible book value as of December 31, 2006 was
$36.2 million, or $0.81 per share of pro forma common
stock. Pro forma net tangible book value per share represents
the amount of our total tangible assets reduced by the amount of
our total liabilities and divided by the total number of shares
of common stock outstanding including shares of common stock
issued upon the conversion of all outstanding shares of our
preferred stock. Dilution in pro forma as adjusted net tangible
book value per share represents the difference between the
amount per share paid by purchasers of shares of common stock in
this offering and the pro forma as adjusted net tangible book
value per share of common stock immediately after the completion
of this offering. After giving effect to the sale of the shares
of common stock offered by us at an assumed initial public
offering price of $ per
share, the mid-point of the range set forth on the cover page of
this prospectus, and after deducting the estimated underwriting
discounts and estimated offering expenses payable by us, our pro
forma as adjusted net tangible book value as of
December 31, 2006 would have been
$ million, or
$ per share of common stock.
This represents an immediate increase in pro forma net tangible
book value of $ per share to
existing stockholders and an immediate dilution of
$ per share to new investors
in our common stock. The following table illustrates this
dilution on a per share basis:
Assumed initial public offering
price per share
$
Pro forma net tangible book value
per share as of December 31, 2006, before giving effect to
this offering
$
Increase in pro forma net tangible
book value per share attributable to new investors
Pro forma as adjusted net tangible
book value per share after giving effect to this offering
Dilution per share to new
investors in this offering
$
A $1.00 increase or decrease in the assumed initial public
offering price of $ would increase
or decrease, as applicable, our pro forma as adjusted net
tangible book value per share after this offering by
$ per share and the dilution in
pro forma as adjusted net tangible book value to new investors
by $ per share, assuming the
number of shares offered by us, as set forth on the cover of
this prospectus, remains the same and after deducting the
estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
If the underwriters exercise their option to purchase additional
shares of our common stock in full in this offering, the pro
forma as adjusted net tangible book value per share after giving
effect to this offering would be
$ per share, and the dilution
in pro forma net tangible book value per share to investors in
this offering would be $ per share.
The following table summarizes, on a pro forma as adjusted basis
as of December 31, 2006 and after giving effect to the
offering, based on an assumed initial public offering price of
$ per share, the differences
between existing stockholders and new investors with respect to
the number of shares of common stock purchased from us, the
total consideration paid to us and the average price per share
paid.
Shares
Purchased
Total
Consideration
Average Price
Number
Percent
Amount
Percent
Per
Share
Existing stockholders
%
$
%
$
New investors
Total
100.0
%
$
100.0
%
A $1.00 increase or decrease in the assumed initial public
offering price of $ per share
would increase or decrease, as applicable, total consideration
paid by new investors and total
consideration paid by all stockholders by approximately
$ million, assuming that the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same.
If the underwriters exercise their over-allotment option in
full, our existing stockholders would
own % and our new investors would
own % of the total number of shares
of our common stock outstanding after this offering.
The above discussion and tables assume no exercise of
3,767,495 shares of common stock issuable upon the exercise
of stock options outstanding as of December 31, 2006 with a
weighted-average exercise price of approximately $4.47 per share
and 65,390 shares of common stock issuable upon the
exercise of a warrant outstanding as of the date of this
prospectus with an exercise price of $0.22 per share. If all of
these options and this warrant were exercised, then:
•
pro forma as adjusted net tangible book value per share would
increase from
$ to
$ ,
resulting in a decrease in dilution to new investors of
$
per share;
•
our existing stockholders, including the holders of these
options and this warrant, would
own % and our new investors would
own % of the total number of shares
of our common stock outstanding upon the completion of this
offering; and
•
our existing stockholders, including the holders of these
options and this warrant, would have
paid % of total consideration, at
an average price per share of
$ ,
and our new investors would have
paid % of total consideration.
The following tables provide our selected consolidated financial
data. The selected consolidated statement of operations data for
each of the three years in the period ended December 31,2006, and the selected consolidated balance sheet data as of
December 31, 2005 and 2006 have been derived from our
audited consolidated financial statements included elsewhere in
this prospectus. The selected consolidated balance sheet data as
of December 31, 2004 was derived from our audited
consolidated financial statements that are not included in this
prospectus. The selected consolidated statement of operations
data for the years ended December 31, 2002 and 2003 and the
selected consolidated balance sheet data as of December 31,2002 and 2003 have been derived from our unaudited consolidated
financial statements that are not included in this prospectus.
During the period from June 2001 through August 2003, we
operated as a limited liability company. The full year pro forma
2003 financial data represents eight months of operations as a
limited liability company and four months as a corporation. The
share count and per share information for 2003 represents the
end-of-year
share count of the corporation. You should read this information
together with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our
consolidated financial statements and related notes included
elsewhere in this prospectus. Our historical results are not
necessarily indicative of the results to be expected in any
future period.
Weighted average shares used in
calculating net income (loss) per common share — basic
23,079
23,125
23,158
17,061
Weighted average shares used in
calculating net income (loss) per common share —
diluted
23,079
25,971
27,375
17,061
(1)
The pro forma information for the
year ended December 31, 2003 has been prepared by adding
the amounts in each line item in the consolidated statement of
operations for the period from January 1, 2003 through
August 31, 2003 of Limelight Networks, LLC, with the
corresponding amounts for such line item in the consolidated
statement of operations for the period from September 1,2003 through December 31, 2003 of Limelight Networks, Inc.
The pro forma results are provided for comparative purposes only
and do not purport to indicate the results of operations that
would have occurred if our conversion to a corporation had
occurred on January 1, 2003.
In 2006, approximately
$7.6 million in stock-based compensation expense was not
deductible for tax purposes by us, which resulted in us
incurring income tax expense despite our having generated a loss
before income taxes in this period. Future non-deductible
compensation expense related to equity awards granted in 2006
are expected to be $9.4 million, $2.7 million,
$2.7 million and $2.2 million respectively, for 2007,
2008, 2009 and 2010.
This management discussion of our financial condition and
results of operations should be read together with the
consolidated financial statements and related notes that are
included elsewhere in this prospectus. This discussion contains
forward-looking statements, which are based on current
expectations that involve risks and uncertainties. Actual
results and the timing of events may differ materially from
those contained in these forward-looking statements due to a
number of factors, including those discussed in the section
entitled “Risk Factors” and elsewhere in this
prospectus.
Overview
We were founded in 2001 as a provider of content delivery
network services to deliver rich media over the Internet. We
began development of our infrastructure in 2001 and began
generating meaningful revenue in 2002. Since inception, we have
added more than 700 customers and have grown our revenue to
$64.3 million in 2006. We achieved full-year profitability
for the first time in 2004, and we were again profitable on a
full-year basis in 2005. During 2006, we became unprofitable
primarily due to an increase in our stock-based compensation
expense, which increased from $0.1 million in 2005 to
$9.1 million in 2006, and litigation expenses of
$3.2 million.
We primarily derive revenue from the sale of content delivery
network, or CDN, services to our customers. These services
include delivery of digital media, including video, music,
games, software and social media. We generate revenue by
charging customers on a per-gigabyte basis, or on a variable
basis based on peak delivery rate for a fixed period of time, as
our services are used.
The following table sets forth our historical operating results,
as a percentage of revenue for the periods indicated:
We have observed a number of trends in our business that are
likely to have an impact on our financial condition and results
of operations in the foreseeable future. Traffic on our network
has grown dramatically in the last three years. This traffic
growth is the result of growth in the number of new contracts,
as well as growth in the traffic delivered to existing
customers. Our near-exclusive focus is on providing content
delivery network services, which we consider to be our sole
industry segment.
Historically, we have derived a small portion of our revenue
from outside of the United States. Our international revenue has
grown recently, and we expect this trend to continue as we focus
on our strategy of expanding our network and customer base
internationally. For 2005 and 2006, 5% and 8%, respectively, of
our revenue was derived outside of the United States, of which
nearly all was derived from operations in Europe. We generated
no revenue from outside the United Sates in 2004. We expect
foreign revenue in 2007 will grow in absolute dollars and as a
percentage of total revenue from what we have experienced
historically. Our business is managed as a single geographic
segment, and we report our financial results on this basis.
During any given fiscal period, a relatively small number of
customers typically account for a significant percentage of our
revenue. For example, in 2006, revenue generated from sales to
our top 10 customers, in terms of revenue, accounted for
approximately 58% of our total revenue. One of these top 10
customers, CDN Consulting, which acted as a reseller of our
services primarily to a single large content provider,
represented approximately 21% of our total revenue for that
period. Prospectively, we do not expect sales to this reseller
to continue at comparable levels. In 2005, no single customer
accounted for more than 10% of our revenue, and in 2004,
MusicMatch accounted for 13% of our revenue. We anticipate
customer concentration levels will decline compared to prior
years as our customer base continues to grow and diversify. In
addition to selling to our direct customers, we maintain
relationships with a number of resellers that purchase our
services and charge a
mark-up to
their end customers. Revenue generated from sales to direct and
reseller customers accounted for approximately 77% and 23% of
our revenue in 2006, respectively.
In addition to these revenue-related business trends, our cost
of revenue as a percentage of revenue has risen since 2004
primarily related to increased depreciation associated with
increased investments to build out the capacity of our network.
This increase, however, has been partially offset by a reduction
in the cost of bandwidth as a percentage of revenue. Operating
expense has increased in absolute dollars each period as revenue
has increased. Beginning in the second half of 2006, these
increases accelerated due to stock-based compensation and
litigation-related expenses.
We make our capital investment decisions based upon careful
evaluation of a number of variables, such as the amount of
traffic we anticipate on our network, the cost of the physical
infrastructure required to deliver that traffic, and the
forecasted capacity utilization of our network. Our capital
expenditures have increased substantially over time, in
particular as we purchased servers and other computer equipment
associated with our network build-out. For example, in 2004,
2005 and 2006, we made capital expenditures of
$2.6 million, $10.9 million and $40.6 million,
respectively. The substantial increase in capital expenditures
in 2006, in particular, was related to a significant increase in
our network capacity, reflecting our expectation for additional
demand for our services. In the future, we expect these
investments to be generally consistent in absolute dollars with
our expenditures in 2006 and to decrease as a percentage of
total revenue.
A significant portion of our historical capital expenditures
involved related party transactions, in which we expended an
aggregate of $2.1 million, $7.4 million and
$29.9 million on server hardware in 2004, 2005 and 2006,
respectively, from a supplier owned by one of our founders. This
founder has recently divested himself of his ownership position
in this supplier. In other transactions unrelated to this
supplier relationship, we have also generated revenue from
certain customers that are entities related to certain of our
founders. The aggregate amounts of revenue derived from these
related party transactions were $0.2 million,
$0.2 million and $0.3 million in 2004, 2005 and 2006,
respectively. We believe that all of our related-party
transactions reflected arm’s length terms.
We are currently engaged in litigation with one of our principal
competitors, Akamai Technologies, Inc., or Akamai, and its
licensor, the Massachusetts Institute of Technology, or MIT, in
which these parties have alleged that we are infringing three of
their patents. Although no trial date has been set, based on the
schedule currently in place, we believe this case will go to
trial in 2008. Our legal and other expenses associated with this
case have been significant to date, including aggregate
expenditures of $3.1 million in 2006. We have reflected the
full amount of these litigation expenses in our 2006 general and
administrative expenses, as reported in our consolidated
statement of operations. We expect that these expenses will
continue to remain significant and may increase as a trial date
approaches. We expect to offset one-half of the cash impact of
these litigation expenses through the availability of an escrow
fund established in connection with our Series B preferred
stock financing. Any cash reimbursed from this escrow account
will be recorded as additional paid-in capital. The cash offset
from the litigation expense funded through the escrow account is
recorded on our balance sheet in paid-in capital. For additional
details on this escrow fund, see the related discussion under
the caption “— Liquidity and Capital
Resources.”
We were profitable in 2004 and 2005. During 2006, we became
unprofitable primarily due to an increase in our stock-based
compensation expense, which increased from $0.1 million in
2005 to $9.1 million in 2006, and litigation expenses of
$3.2 million. The significant increase in stock-based
compensation reflects an increase in the level of option and
restricted stock grants coupled with a significant increase in
the fair market value per share at the date of grant.
Our future results will be affected by many factors identified
below and in the section of this prospectus entitled “Risk
Factors,” including our ability to:
•
increase our revenue by adding customers and limiting customer
cancellations and terminations, as well as increasing the amount
of monthly recurring revenue that we derive from our existing
customers;
•
manage the prices we charge for our services, as well as the
costs associated with operating our network;
•
successfully manage our litigation with Akamai and MIT to
conclusion; and
•
prevent disruptions to our services and network due to accidents
or intentional attacks.
As a result, we cannot assure you that we will achieve our
expected financial objectives, including positive net income.
Basis of
Presentation
Revenue
We primarily derive revenue from the sale of content delivery
network, or CDN, services to our customers. These services
include delivery of digital media, including video, music,
games, software and social media. We generate revenue by
charging customers on a per-gigabyte basis, or on a variable
basis based on peak delivery rate for a fixed period of time, as
our services are used. Our customer agreements relating to these
recurring services generally have a term of one to three years.
However, some of our contracts with large customers operate on a
month-to-month
basis. The majority of our agreements 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. Our customer agreements typically automatically
renew at the end of the initial term for an additional period
unless the customer elects not to renew. Based on service usage
experience, we and our customers often negotiate revised monthly
minimum usage levels or other modified services or terms during
a commitment period. For example, in exchange for increased
minimum usage levels, we often agree to a reduced per-gigabyte
pricing structure. Historically, we have derived substantially
all of our revenue from these recurring service arrangements,
which accounted for 94%, 98% and 99% of our revenue in 2004,
2005 and 2006, respectively.
Cost of revenue consists of costs related to the delivery of
services, as well as the depreciation costs associated with our
network. Costs related to the delivery of our services include:
•
fees related to bandwidth provided by network operators;
•
fees paid for the lease of private line capacity for our
backbone;
•
fees paid for co-location services, which are the housing of
servers in third-party data centers;
•
network operations employee costs, including stock-based
compensation expense; and
•
costs associated with licenses.
We enter into contracts with third-party network and data center
providers, with terms typically ranging from several months to
several years. Our contracts related to bandwidth provided by
network operators generally commit us to pay either a fixed
monthly fee or monthly fees plus additional fees for bandwidth
usage above a contracted level. Our master contract with Global
Crossing provides for the lease of private lines of varying
capacity for our backbone, at fixed monthly fees with
commitments ranging from 2 to 3 years. In addition to
purchasing services from communications providers, we connect
directly to many Internet service providers, or ISPs, generally
without either party paying the other. This industry practice,
known as peering, benefits us by allowing us to place content
objects directly on user access networks, which helps us provide
higher performance delivery for our customers. This practice
also benefits the ISP and its customers by allowing them to
receive improved content delivery through our local servers. We
do not consider these relationships to represent the culmination
of an earnings process. Accordingly, we do not recognize as
revenue the value to the ISPs associated with the use of our
servers nor do we recognize as expense the value of the
bandwidth received at discounted or no cost.
During 2006, we continued to reduce our network bandwidth costs
per gigabyte transferred by entering into new supplier contracts
with lower pricing and amending existing contracts to take
advantage of price reductions from our existing suppliers.
However, due to increased traffic delivered over our network,
our total bandwidth costs increased during 2006. We anticipate
our overall bandwidth costs will continue to increase in
absolute dollars as a result of expected higher traffic levels,
partially offset by continued reductions in bandwidth costs per
unit. We expect that our overall bandwidth costs as a percentage
of revenue will remain relatively consistent with our historical
results. 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 future
periods.
Depreciation expense related to our network equipment has
increased over time due to additional equipment purchases,
particularly those in 2006. We anticipate depreciation expense
related to our network equipment will continue to increase in
2007 in absolute dollars and as a percentage of revenue due to
full year depreciation on 2006 purchases and depreciation on
additional purchases expected to be made in 2007. In 2007 and
2008, we expect that depreciation expense will increase in
absolute dollars and decrease as a percentage of revenue.
In total, we believe our cost of revenue will increase in 2007
in both absolute dollars and as a percentage of revenue.
Thereafter, we expect that the cost of revenue will increase in
absolute dollars but could potentially decrease as a percentage
of revenue. 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, 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.
General and administrative expense consists primarily of the
following components:
•
payroll and related costs, including stock-based compensation
expense for executive, finance, business applications, human
resources and other administrative personnel;
•
fees for professional services and litigation expenses; and
•
other expenses such as insurance, allowance for doubtful
accounts and corporate office rent.
We expect our general and administrative expense to increase in
2007 in absolute dollars due to increased stock-based
compensation expense on equity grants made in the later part of
2006, payroll and related costs attributable to increased
hiring, continued costs associated with ongoing litigation, as
well as increased accounting and legal and other costs
associated with public reporting requirements and compliance
with the requirements of the Sarbanes-Oxley Act of 2002. In 2007
and in the longer term, we expect our general and administrative
expense to decrease as a percentage of revenue.
Sales and
Marketing Expense
Sales and marketing expense consists primarily of payroll and
related costs, including stock-based compensation expense and
commissions for personnel engaged in marketing, sales and
service support functions, as well as advertising, promotional
and travel expenses.
We anticipate our sales and marketing expense will continue to
increase in future periods in absolute dollars and as a
percentage of revenue due to an expected increase in commissions
on higher forecast sales, the expected increase in hiring of
sales and marketing personnel, increases in stock-based
compensation expense and additional expected increases in
marketing costs such as advertising.
Research and
Development Expense
Research and development expense consists primarily of payroll
and related costs and stock-based compensation expense
associated with the design, development, testing and
certification of the software, hardware and network architecture
of our content delivery network system. Research and development
costs are expensed as incurred.
We anticipate our research and development expense will increase
in future periods in absolute dollars and as a percentage of
revenue due to increased stock-based compensation expense as
well as increased payroll and related costs associated with
continued hiring of development personnel and investments in our
core technology and refinements to our other service offerings.
Non-Network
Depreciation Expense
Non-network
depreciation expense consists of depreciation on equipment and
furnishing used by general administrative, sales and marketing
and research and development personnel.
Interest
Expense
Interest expense includes interest paid on our debt obligations
as well as amortization of deferred financing costs.
Interest
Income
Interest income includes interest earned on invested cash
balances and cash equivalents. We anticipate interest income
will increase in 2007 in absolute dollars due to an increase in
the cash balances and cash equivalents resulting from proceeds
of this offering and operating cash flow we expect to generate
during the year.
Our other income consists primarily of gains or losses from the
disposal of assets.
Income Tax
Expense
Income tax expense depends on the statutory rate in the
countries where we sell our services as well as the expenses in
any year that are not deductible in those jurisdictions.
Historically, we have primarily been subject to taxation in the
United States because we have sold the majority of our services
to customers in the United States. In the future, we intend to
further expand our sales of services to customers located
outside the United States, in which case we would become further
subject to taxation based on the foreign statutory rates in the
countries where these sales took place, and our effective tax
rate could fluctuate accordingly.
In 2006, approximately $7.6 million of stock-based
compensation expense was not deductible for tax purposes by us,
as certain executives and other employees made tax elections
which established tax bases in these awards granted at lower
than the fair value recognized within the financial statements.
This permanent difference was material to our pre-tax net loss
for the year of $1.5 million. Future
non-tax
deductible expenses related to equity awards granted in 2006 are
expected to be $9.4 million, $2.7 million,
$2.7 million and $2.2 million for 2007, 2008, 2009 and
2010, respectively, based upon the unvested portion of the
equity awards outstanding at December 31, 2006, and the
anticipated vesting at that time.
Critical
Accounting Policies and Estimates
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 U.S.
generally accepted accounting principles. These principles
require us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue and expenses,
cash flow and related disclosure of contingent assets and
liabilities. Our estimates include those related to revenue
recognition, accounts receivable reserves, income and other
taxes, stock-based compensation and equipment 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. To the extent that there are material differences
between these estimates and our actual results, our future
financial statements will be affected.
We define our “critical accounting policies” as those
U.S. generally accepted accounting principles 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.
Revenue
Recognition
We recognize service revenue in accordance with the Securities
and Exchange Commission’s Staff Accounting
Bulletin No. 104, “Revenue
Recognition,” and the Financial Accounting Standards
Board’s, 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
assessment of that customer’s ability to pay for the
services provided. 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 customer’s 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 CDN services to
customers. 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 customer’s
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 arrangements. When we
enter into such arrangements, each element is accounted for
separately over its respective service or delivery 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.
As of December 31, 2006 we had not licensed, but in the
future we may license, software under perpetual and term license
agreements. In such case, we would 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 would
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, be deferred and
subsequently recognized when delivered. The difference between
the total arrangement fee and the amount deferred for the
undelivered elements would be 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 over the term of the
contract, based on the reseller’s contracted non-refundable
minimum purchase commitments 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 under these
agreements on a net or gross basis, depending on the terms of
the arrangement, in accordance with
EITF 99-19
“Recording Revenue Gross as a Principal Versus Net as an
Agent.”
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
vendor’s 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
and amounts billed under extended payment terms. Deferred
revenue was not material to total liabilities or total revenues
during prior years.
Accounts
Receivable and Related Reserves
Trade accounts receivable are recorded at the invoiced amounts
and do not bear interest. We record reserves as a reduction of
our accounts receivable balance. Estimates are used in
determining these reserves and are based upon our review of
outstanding balances on a customer-specific,
account-by-account
basis. These estimates could change significantly if our
customers’ financial condition changes or if the economy in
general deteriorates. 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 the deferral of revenue
until payment is made or we determine payment is reasonably
assured. In addition, we recorded a reserve for service credits.
Reserves for service credits are measured based on an analysis
of credits to be issued after the month of billing related to
management’s estimate of the resolution of customer
disputes and billing adjustments. We do not have any off-balance
sheet credit exposure related to our customers.
Stock-Based
Compensation
Prior to January 1, 2006, we accounted for employee stock
options pursuant to Statement of Financial Accounting Standards,
or SFAS, No. 123, Accounting for Stock-Based
Compensation, and SFAS No. 148, Accounting for
Stock-Based Compensation — Transition and
Disclosure. Under this method, compensation expense was
recorded for stock options granted prior to January 1, 2006
using the minimum value method.
The fair value of the shares of common stock that underlie the
stock options we have granted has historically been determined
by our board of directors. Because there has been no public
market for our common stock, our board has determined the fair
value of our common stock at the time of grant of the option by
considering a number of objective and subjective factors,
including our sales of preferred stock to unrelated third
parties, our operating and financial performance, the lack of
liquidity of our capital stock, trends in the broader
e-commerce
market and other similar technology stocks. Beginning in July
2006, our board began receiving contemporaneous valuations
performed by an unrelated valuation specialist.
In connection with the preparation of the financial statements
necessary for a planned registration of shares with the
Securities and Exchange Commission and based on the preliminary
valuation information presented by the underwriters selected for
the planned offering, we reassessed the estimated accounting
fair value of common stock in light of the potential completion
of this offering. The valuation methodology that most
significantly impacted this reassessment of fair value was the
market-based assessment of the valuation of existing comparable
public companies. This methodology also de-emphasized the
$260.0 million liquidation preference available to
preferred shareholders in the event of a sale of our company. In
determining the reassessed fair value of the common stock during
2006, we also determined it appropriate to reassess the estimate
of accounting fair value for periods prior to December 31,2006 based on operational achievements in executing against the
operating plan and market trends. Because of the impact the
achievement of unique milestones had on the valuation during the
various points in time before the reassessment, certain
additional adjustments for factors unique to us were considered
in the reassessed values determined for the 12 months ended
December 31, 2006, which impacted valuations throughout the
twelve month period ended December 31, 2006. These included:
In July 2006, we sold a controlling interest to an investor
group led by entities affiliated with Goldman, Sachs &
Co. through the issuance of shares of Series B preferred
stock, at a price of $4.89 per share, for total aggregate
consideration of $130.0 million. As part of the
transaction, we repurchased 20,880,000 shares of common stock
for an aggregate net consideration of $102.1 million.
•
In the fourth quarter of 2006, we appointed both a Chief
Executive Officer and a Chief Financial Officer with past public
company roles in a similar capacity.
•
Revenue growth in 2006 exceeded 200%, to $64.3 million
compared to revenue in 2005 of $21.3 million.
Based upon the reassessment, we determined the accounting fair
value of the options granted to employees from February 1,2006 to December 31, 2006 was greater than the exercise
price for certain of those options.
Based upon the reassessment discussed above, we determined the
reassessed accounting fair value of the options to purchase
5,385,542 shares of common stock granted to employees
during the period from February 1, 2006 to
December 31, 2006 ranged from $1.81 to $9.37 per share. Of
these shares, 1,070,000 were issued at prices ranging from $9.80
to $19.80 for which the impact on the fair value was small given
the grants were intended to be well above fair value.
Stock-based compensation expense for the year ended
December 31, 2006 includes the difference between the
reassessed accounting fair value per share of the common stock
on the date of grant and the exercise price per share and is
amortized over the vesting period of the underlying options
using the straight-line method. There are significant judgments
and estimates inherent in the determination of the reassessed
accounting fair values. For this and other reasons, the
reassessed accounting fair value used to compute the stock-based
compensation expense may not be reflective of the fair market
value that would result from the application of other valuation
methods, including accepted valuation methods for tax purposes.
As of January 1, 2006, we have adopted
SFAS No. 123 (revised 2004) Share-Based
Payment, or SFAS No. 123R. We are required to
adopt SFAS No. 123R under the prospective method, in
which nonpublic entities that previously applied
SFAS No. 123 using the minimum-value method, whether
for financial statement recognition or pro forma disclosure
purposes, would continue to account for unvested stock options
outstanding at the date of adoption of SFAS No. 123R
in the same manner as they had been accounted for prior to the
adoption of SFAS No. 123R. That is, since we have been
accounting for stock options using the minimum-value method
under SFAS No. 123, we will continue to apply
SFAS No. 123 in future periods to stock options
outstanding at January 1, 2006. SFAS No. 123R
requires measurement of all employee stock-based compensation
awards using a fair-value method. The grant date fair value was
determined using the Black-Scholes-Merton pricing model. The
Black-Scholes-Merton valuation calculation requires us to make
key assumptions such as future stock price volatility, expected
terms, risk-free rates and dividend yield. The weighted-average
expected term for stock options granted was calculated using the
simplified method in accordance with the provisions of Staff
Accounting Bulletin No. 107, Share-Based
Payment. The simplified method defines the expected term as
the average of the contractual term and the vesting period of
the stock option. We have estimated the volatility rates used as
inputs to the model based on an analysis of the most similar
public companies for which we have data. We have used judgment
in selecting these companies, as well as in evaluating the
available historical volatility data for these companies.
SFAS No. 123R requires us to develop an estimate of
the number of stock-based awards which will be forfeited due to
employee turnover. Quarterly changes in the estimated forfeiture
rate may have a significant effect on stock-based compensation,
as the effect of adjusting the rate for all expense amortization
after January 1, 2006 is recognized in the period the
forfeiture estimate is changed. If the actual forfeiture rate is
higher than the estimated forfeiture rate, then an adjustment is
made to increase the estimated forfeiture rate, which will
result in a decrease to the expense recognized in the
financial statements. If the actual forfeiture rate is lower
than the estimated forfeiture rate, then an adjustment is made
to decrease the estimated forfeiture rate, which will result in
an increase to the expense recognized in the financial
statements. The risk-free rate is based on the
U.S. Treasury yield curve in effect at the time of grant.
We have never paid cash dividends, and do not currently intend
to pay cash dividends, and thus have assumed a 0% dividend yield.
We will continue to use judgment in evaluating the expected
term, volatility and forfeiture rate related to our own
stock-based awards on a prospective basis, and in incorporating
these factors into the model. If our actual experience differs
significantly from the assumptions used to compute our
stock-based compensation cost, or if different assumptions had
been used, we may have recorded too much or too little
stock-based compensation cost.
We recognize expense using the straight-line attribution method.
Unrecognized stock-based compensation totaled $30.1 million
at December 31, 2006, of which we expect to amortize
$15.2 million for 2007, and $7.7 million for 2008 and
the remainder thereafter. We expect our stock-based compensation
expense to increase as we grant additional options.
Contingencies
We record contingent liabilities resulting from asserted and
unasserted claims against us, when it is probable that a
liability has been incurred and the amount of the loss is
reasonably estimable. We disclose contingent liabilities when
there is a reasonable possibility that the ultimate loss will
exceed the recorded liability. Estimating probable losses
requires analysis of multiple factors, in some cases including
judgments about the potential actions of third-party claimants
and courts. Therefore, actual losses in any future period are
inherently uncertain.
Deferred
Taxes
When preparing our consolidated financial statements, we are
required to estimate our income taxes in each of the
jurisdictions in which we operate. We estimate our actual
current tax liability together with assessing temporary
differences resulting from differing treatment of items for tax
and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within our
consolidated balance sheet. We must then assess the likelihood
our deferred tax assets will be recovered from future taxable
income within the relevant jurisdiction and to the extent we
believe that recovery is not likely, we must establish a
valuation allowance. The financial statements included in this
report do not reflect a valuation allowance on our deferred tax
assets, because we believe it is “more likely than
not” that our deferred tax assets will be recovered from
future taxable income. Should we determine we would not be able
to realize all or part of our net deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged
to expense in the period such determination was made.
We conduct business in various foreign countries. During 2006,
we established corporations in a portion of the foreign
countries in which we conduct business. We have not provided
U.S. tax for the profits of our foreign corporations, as we
intend to permanently reinvest these profits outside the United
States.
Taxing authorities in the United States and other countries in
which we do business are increasing their scrutiny of how
businesses are taxed. We believe we maintain adequate tax
reserves to offset any potential tax liabilities that may arise
upon audit. If such amounts ultimately prove to be unnecessary,
the associated reserves would be reversed, resulting in our
recording a tax benefit in the period the reserves were no
longer deemed necessary. Conversely, if our estimates prove to
be less than the ultimate assessment, a charge to expense would
be recorded in the period in which the assessment is determined.
The increase in total revenue for 2006 as compared to 2005 was
due to an increase in revenue from the sale of our recurring CDN
services. The increase in CDN services revenue was 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.
Cost of
Revenue
Year Ended
December 31,
Increase
Percent
2005
2006
(Decrease)
Change
(in thousands)
Cost of revenue
$
11,888
$
35,978
$
24,090
203
%
The increase in cost of revenue for 2006 as compared to 2005 was
primarily due to an increase in aggregate bandwidth and
co-location fees of $13.1 million due to higher traffic
levels, an increase in depreciation expense of network equipment
of $7.4 million due to increased investment in our network,
an increase of $1.6 million in royalty expenses, an
increase in the payroll and related employee costs of
$1.2 million associated with increased staff and an
increase of stock-based compensation expense of
$0.5 million and an increase of $0.3 million in other
costs.
Cost of revenue in 2005 and 2006 was composed of the following:
The increase in general and administrative expenses for 2006 as
compared to 2005 was primarily due to an increase of
$6.6 million in stock-based compensation expense, an
increase of $3.2 million in professional fees and legal
expenses related to our litigation with Akamai and MIT,
including $1.6 million which is reimbursable to us from an
escrow fund established in connection with our 2006 stock
repurchase, an increase of $1.9 million in payroll and
related employee costs as a result of headcount growth, an
increase of $0.6 million in bad debt expense and an
increase in other expenses of $1.9 million.
The following table quantifies the net change in the components
of general and administrative expenses between 2005 and 2006:
The increase in sales and marketing expenses for 2006 as
compared to 2005 was primarily due to an increase of
$2.1 million in payroll and related employee costs,
including $1.1 million in additional salaries and
$1.0 million in additional commissions on increased
revenue. Additional increases were due to an increase of
$0.3 million in stock-based compensation expense, an
increase of $0.6 million in marketing programs, an increase
of $0.3 million in reseller commissions and an increase of
$0.4 million in other expenses. These increases are
consistent with the 202% increase in revenue for the period.
The following table quantifies the net change in the components
of sales and marketing expenses between 2005 and 2006:
The increase in research and development expenses for 2006 as
compared to 2005 was primarily due to an increase of
$1.7 million in stock-based compensation expense and an
increase of $1.0 million in higher payroll and related
employee costs associated with our hiring of additional network
and software engineering personnel.
The increase in interest expense for 2006 as compared to 2005
was due to increased borrowings, primarily to fund equipment
purchases to build out our network.
Interest
Income
Year Ended
December 31,
Increase
Percent
2005
2006
(Decrease)
Change
(in thousands)
Interest income
$
—
$
208
$
208
N/A
The increase in interest and other income for 2006 as compared
to 2005 was due to the increase in our average cash balance. In
2005, we generally operated with a minimal cash balance and
therefore had no interest earnings.
The increase in other income (expense), net was primarily
related to gain on disposal of assets in 2006.
Income Tax
Expense
Year Ended
December 31,
_
_
Increase
Percent
2005
2006
(Decrease)
Change
(in thousands)
Income tax expense
$
300
$
2,187
$
1,887
629
%
We had income tax expense in 2006 despite having a pre-tax loss
of $1.5 million due to the fact that in 2006, approximately
$7.6 million of stock-based compensation expense was not
deductible by us for tax purposes. This non-deductible stock
compensation expense was material to our pre-tax net loss for
the year of $1.5 million. Future non-deductible expenses
related to equity awards granted in 2006 are expected to be
$9.4 million, $2.7 million, $2.7 million and
$2.2 million for 2007, 2008, 2009 and 2010, respectively,
based upon the unvested portion of the equity awards outstanding
at December 31, 2006, and the anticipated vesting at that
time.
The increase in total revenue for 2005 as compared to 2004 was
due to an increase in revenue from the sale of our recurring CDN
services. The increase in CDN services revenue was 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.
Cost of
Revenue
Year Ended
December 31,
_
_
Increase
Percent
2004
2005
(Decrease)
Change
(in thousands)
Cost of revenue
$
5,609
$
11,888
$
6,279
112
%
The increase in cost of revenue for 2005 as compared to 2004 was
primarily due to an increase in aggregate bandwidth and
co-location fees of $4.3 million due to higher traffic
levels, an increase in depreciation expense of network equipment
of $2.1 million due to increased investment in our network,
and an increase in payroll and related employee costs of
$0.2 million, offset by a decrease in other costs of
$0.3 million.
The increase in general and administrative expenses for 2005 as
compared to 2004 was primarily due to an increase of
$0.9 million in payroll and related employee costs
associated with increased personnel and performance bonuses, an
increase of $0.1 million of stock-based compensation
expense, an increase of $0.1 million in professional fees
and legal expenses and an increase of $0.9 million in other
expenses, offset by a decrease of $0.1 million in bad debt
expense.
The following table quantifies the net change in the components
of general and administrative expenses between 2004 and 2005:
The increase in sales and marketing expenses for 2005 as
compared to 2004 was primarily due to an increase of
$0.8 million in payroll and related employee costs,
particularly commissions, for sales and marketing personnel and
an increase of $0.2 million in marketing programs. These
increases are consistent with the 90% increase in revenue for
the period.
The increase in research and development expenses for 2005 as
compared to 2004 was primarily due to higher payroll and related
employee costs associated with our hiring of additional network
and software engineering personnel.
Interest
Expense
Year Ended
December 31,
Increase
Percent
2004
2005
(Decrease)
Change
(in thousands)
Interest expense
$
189
$
955
$
776
405
%
The increase in interest expense for 2005 as compared to 2004
was due to increased borrowings, primarily to fund equipment
purchases to build out our network.
Interest
Income
Year Ended
December 31,
Increase
Percent
2004
2005
(Decrease)
Change
(in thousands)
Interest income
$
1
$
—
$
(1
)
100
%
For the years 2005 and 2004, we generally operated with a
minimal cash balance and therefore had little or no interest
earnings.
The decrease in other income (expense), net was $32,000.
Income Tax
Expense
Year Ended
December 31,
Increase
Percent
2004
2005
(Decrease)
Change
(in thousands)
Income tax expense
$
306
$
300
$
(6
)
2
%
Income tax expense was essentially unchanged from 2005 as there
was very little change in pre-tax income. Our effective tax rate
in 2004 was 37% and in 2005 was 43%.
The following tables set forth selected unaudited quarterly
consolidated statements of operations for the last eight fiscal
quarters, as well as the percentage that each line item
represents of the total net revenue. The information for each of
these quarters has been prepared on the same basis as the
audited consolidated financial statements included elsewhere in
this prospectus and, in the opinion of the management, includes
all adjustments, consisting solely of normal recurring
adjustments, necessary for the fair presentation of the results
of operations for these periods. This data should be read in
conjunction with the audited consolidated financial statements
and related notes included elsewhere in this prospectus. These
quarterly operating results are not necessarily indicative of
our operating results for any future period.
Our net revenue and cost of net revenue have increased
sequentially during the last eight quarters associated with
growth in service revenue from existing customers and the
continuous addition of new customers each quarter.
To date, we have not identified any seasonal fluctuations in our
quarterly results. However, our rapid revenue growth may have
overshadowed any impact of seasonality.
Gross margins have fluctuated on a quarterly basis primarily
related to the timing and amount of investment in the build out
of our network capacity, which impacts the amount of
depreciation. During the second half of 2006, our gross margins
declined as depreciation and amortization increased due to the
dramatic increase in the amount of capital investment in network
equipment during 2006. Services cost as a percentage of revenue
also increased due to expansion of bandwidth internationally,
royalty fees and stock-based compensation expense.
Operating expenses increased sequentially due to growth in the
business. Operating expenses generally declined as a percentage
of total revenue through the first half of 2006 as revenue
growth outpaced the need for operating expense increases. During
the second half of 2006, general and administrative expenses
increased significantly, primarily due to amortization of
deferred stock-based compensation expense and increased
litigation costs. We currently expect amortization of
stock-based compensation and litigation expenses to be generally
consistent on a quarterly basis with the fourth quarter of 2006
through 2007. We also currently expect these legal costs to
remain generally consistent on a quarterly basis through 2007.
Also in the second half of 2006, we began to increase our
investment in sales and marketing to increase market coverage
and presence. This included increased sales and marketing
headcount and increased spending on marketing programs.
Our income tax expense (benefit) was impacted in the second half
of 2006 due to certain
non-tax
deductible expenses related to stock-based compensation. These
expenses resulted in taxable income in the third and fourth
quarter of 2006, as compared to a loss before taxes in our
consolidated financial statements.
Our quarterly results of operations have varied in the past and
are likely to do so again in the future. As such, we believe
that
period-to-period
comparisons of our operating results should not be relied upon
as an indication of future performance. In future periods, the
market price of our common stock could decline if our revenue
and results of operations are below the expectations of analysts
and investors.
Liquidity and
Capital Resources
To date, we have financed our operations primarily through
private sales of common and preferred stock and subordinated
notes, borrowings from financial institutions, and cash
generated by our operations. As of December 31, 2006, our
cash and cash equivalents totaled $7.6 million.
Operating
Activities
Cash provided by operating activities increased
$3.8 million to $6.3 million for the year ended
December 31, 2006, compared to $2.5 million for the
year ended December 31, 2005. Cash provided by operating
activities increased by $0.9 million to $2.5 million
for the year ended December 31, 2005, compared to
$1.6 million for the year ended December 31, 2004. The
increase in cash provided by operating activities for 2006 was
primarily due to a net loss for the period of $3.7 million,
offset by an increase in non-cash charges of depreciation and
stock-based compensation of $19.7 million. The increase in
2005 related to an increase in depreciation and amortization,
partially offset by a decrease in working capital. The increase
in 2004 as compared to previous years was primarily due to
changes in working capital. We expect that cash provided by
operating activities will continue to increase as a result of an
upward trend of net income. 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.
Investing
Activities
Cash used in investing activities increased $29.8 million
to $40.6 million for the year ended December 31, 2006,
compared to $10.9 million for the year ended
December 31, 2005. Cash used in investing activities
increased by $8.4 million to $10.9 million for the
year ended December 31, 2005, compared to $2.5 million
for the year ended December 31, 2004. Cash used in
investing for all years represented capital expenditures
primarily for computer equipment associated with the build-out
and expansion of our content delivery network.
We expect to have significant ongoing capital expenditure
requirements, as we continue to invest in and expand our content
delivery network. We currently anticipate making aggregate
capital expenditures of approximately $40.0 million to
$50.0 million in each of 2007 and 2008.
Cash provided by financing activities increased
$31.0 million to $40.4 million for the year ended
December 31, 2006, compared to cash provided from financing
activities of approximately $9.4 million for the year ended
December 31, 2005. Cash provided by financing activities
increased $8.0 million to $9.4 million for the year
ended December 31, 2005, compared to $1.3 million for
the year ended December 31, 2004. Cash provided by
financing activities in 2006 reflects net proceeds from our July
2006 private equity transaction in which we recorded
$126.3 million of net proceeds, as well as
$12.2 million of net borrowings on our bank line. These
amounts were offset by $102.1 million of share repurchases
in 2006. Cash provided from financing activities in 2005 and
2004 were primarily from borrowing on our various debt financing
lines.
Our credit facilities with Silicon Valley Bank provide up to
$25.0 million in the form of a term loan and up to a
$5.0 million revolving credit facility for working capital
requirements. As of December 31, 2006, the balance
outstanding under the term loan was approximately
$23.8 million, and there was no balance outstanding under
the revolving credit facility for working capital. The credit
facility bears interest at a variable rate determined by using
either the prime rate plus a margin or the LIBOR rate plus a
margin, at our choice. The prime rate and LIBOR rate margins
range from 0% to 1.5% or 2.0% to 3.25%, respectively, depending
on our achievement of certain debt coverage ratios and the type
of borrowing. The outstanding loan is secured by all of our
tangible assets. The loan agreement contains financial and
non-financial covenants, including maintaining a tangible net
worth, as defined in the credit facility, of at least
$30.0 million plus 50% of each quarter’s net income
going forward. Through December 31, 2006, we were in
compliance with all required covenants. We intend to use a
portion of the net proceeds of this offering to repay the
outstanding debt under this credit facility.
In connection with our Series B preferred stock financing
in July 2006, an escrow account was established with an initial
balance of approximately $10.2 million to serve as security
for the indemnification obligations of our stockholders
tendering shares in that financing. The escrow agreement
specifies the procedure by which indemnified parties may make a
claim against the escrow fund. Any amounts in escrow not paid in
respect to claims for indemnification under the purchase
agreement, and not subject to pending claims for
indemnification, are to be released to the tendering
stockholders upon the earliest to occur of (1) the eighteen
month anniversary of the closing of the Series B preferred
stock financing, (2) the closing of a liquidation as
defined in our amended and restated certificate of incorporation
or (3) the closing of this offering. Unless our lawsuit
with Akamai and MIT settles prior to this offering, we expect to
make a claim for the entire remaining amount of the escrow fund.
As of March 1, 2007, the balance remaining in this escrow
account totaled approximately $9.0 million.
We believe that our existing cash and cash equivalents and
existing amounts available under our revolving credit facility,
together with the net proceeds from this offering, will be
sufficient to meet our anticipated cash needs for at least the
next 12 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. In the event that additional financing is required
from outside sources, we may not be able to raise it on terms
acceptable to us or at all. If we are unable to raise additional
capital when desired, our business, operating results and
financial condition could be harmed.
Contractual
Obligations, Contingent Liabilities and Commercial
Commitments
In the normal course of business, we make certain long-term
commitments for operating leases, primarily office facilities,
bandwidth and computer rack space. These leases expire on
various dates
ranging from 2007 to 2011. We expect that the growth of our
business will require us to continue to add to and increase our
long-term commitments in 2007 and beyond. As a result of our
growth strategies, we believe that our liquidity and capital
resources requirements will grow in absolute dollars but will be
generally consistent with that of historical periods on an
annual basis as a percentage of net revenue.
The following table presents our contractual obligations and
commercial commitments as of December 31, 2006 over the
next five years and thereafter:
12
13 to 24
25 to 36
36 to 48
Total
Months
Months
Months
Months
Thereafter
(in thousands)
Operating leases
Bandwidth leases
$
18,531
$
11,207
$
5,268
$
1,886
$
170
—
Rack space leases
5,097
3,930
966
199
2
—
Real estate leases
1,735
524
485
344
314
68
Total operating
leases
25,363
15,662
6,718
2,430
486
68
Capital leases(1)
277
272
5
Bank debt(1)
23,818
2,938
5,293
5,293
5,293
5,001
Total commitments
$
49,458
$
18,872
$
12,016
$
7,723
$
5,779
$
5,069
(1)
Excludes interest payments on each obligation.
We intend to use a portion of the net proceeds of this offering
to repay all of our obligations outstanding under our bank lines
and capital leases.
We are currently engaged in litigation with Akamai and MIT in
which we are alleged to be infringing three of their patents. We
are not able at this time to estimate the range of potential
loss nor do we believe that a loss is probable. Therefore, we
have made no provision for this lawsuit in our financial
statements.
Off Balance Sheet
Arrangements
We do not have, and have never had, any relationships with
unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes.
Non-GAAP Measures
In evaluating our business, we consider and use Adjusted EBITDA
as a supplemental measure of our operating performance. We use
EBITDA only to assist in reconciliation to Adjusted EBITDA. We
define EBITDA as net income before net interest expense,
provision for income taxes, depreciation and amortization. We
define Adjusted EBITDA as EBITDA plus expenses that we do not
consider reflective of our ongoing operations. We use Adjusted
EBITDA as a supplemental measure to review and assess our
operating performance. We also believe use of Adjusted EBITDA
facilitates investors’ use of operating performance
comparisons from period to period and company to company by
backing out potential differences caused by variations in such
items as capital structures (affecting relative interest expense
and stock-based compensation expense), the book amortization of
intangibles (affecting relative amortization expense), the age
and book value of facilities and equipment (affecting relative
depreciation expense) and other non cash expenses. We also
present Adjusted EBITDA because we believe it is frequently used
by securities analysts, investors and other interested parties
as a measure of financial performance.
The terms EBITDA and Adjusted EBITDA are not defined under
U.S. generally accepted accounting principles, or
U.S. GAAP, and are not measures of operating income,
operating
performance or liquidity presented in accordance with
U.S. GAAP. Our EBITDA and Adjusted EBITDA have limitations
as analytical tools, and when assessing our operating
performance, you should not consider EBITDA and Adjusted EBITDA
in isolation, or as a substitute for net income (loss) or other
consolidated income statement data prepared in accordance with
U.S. GAAP. Some of these limitations include, but are not
limited to:
•
EBITDA and Adjusted EBITDA do not reflect our cash expenditures
or future requirements for capital expenditures or contractual
commitments;
•
they do not reflect changes in, or cash requirements for, our
working capital needs;
•
they do not reflect the interest expense, or the cash
requirements necessary to service interest or principal
payments, on our debt;
•
they do not reflect income taxes or the cash requirements for
any tax payments;
•
although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized often will have to be
replaced in the future, and EBITDA and Adjusted EBITDA do not
reflect any cash requirements for such replacements;
•
while stock-based compensation is a component of operating
expense, the impact on our financial statements compared to
other companies can vary significantly due to such factors as
assumed life of the options and assumed volatility of our common
stock; and
•
other companies may calculate EBITDA and Adjusted EBITDA
differently than we do, limiting their usefulness as comparative
measures.
We compensate for these limitations by relying primarily on our
GAAP results and using Adjusted EBITDA only supplementally.
EBITDA and Adjusted EBITDA are calculated as follows for the
periods presented:
Plus: litigation expenses
recoverable from escrow(1)
—
—
1,560
Adjusted EBITDA
$
1,868
$
4,697
$
21,284
(1)
During 2006, we repurchased stock in a transaction with a total
value of $102.1 million. Selling stockholders agreed to
hold $10.2 million of the proceeds to offset specific
claims for reimbursement associated with the Akamai lawsuit and
other undisclosed obligations that may arise. During 2006, we
had $1.6 million of litigation costs subject to
reimbursement from this escrow.
Recent Accounting
Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB)
issued Financial Interpretation No. (FIN) 48, Accounting for
Uncertainty in Income Taxes, which clarifies the accounting
for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. The
interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FIN 48 is effective for fiscal years
beginning
after December 15, 2006. We are currently reviewing our tax
positions taken to determine the effect, if any, that the
adoption of this Interpretation will have on our results of
operations or financial condition.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurement (SFAS No. 157).
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements, but does not require any new fair value
measurement. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007 and interim periods
within those fiscal years. We are in the process of determining
the effect, if any, that the adoption of SFAS No. 157
will have on our consolidated financial statements. Because
Statement No. 157 does not require any new fair value
measurements or remeasurements of previously computed fair
values, we do not believe the adoption of this Statement will
have a material effect on our results of operations or financial
condition.
On February 15, 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No. 159).
Under this Standard, we may elect to report financial
instruments and certain other items at fair value on a
contract-by-contract
basis with changes in value reported in earnings. This election
is irrevocable. SFAS No. 159 provides an opportunity
to mitigate volatility in reported earnings that is caused by
measuring hedged assets and liabilities that were previously
required to use a different accounting method than the related
hedging contracts when the complex provisions of
SFAS No. 133 hedge accounting are not met.
SFAS No. 159 is effective for years beginning after
November 15, 2007. Early adoption within 120 days of
the beginning of our 2007 fiscal year is permissible, provided
we have not yet issued interim financial statement for 2007 and
have adopted SFAS No. 157. We are currently evaluating
the potential impact of adopting this Standard.
Quantitative and
Qualitative Disclosures About Market Risk
Interest Rate
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. Our investments are primarily with our commercial
bank and, by policy, we 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. We do not believe that a 10% change
in interest rates would have a significant impact on our
interest income, operating results or liquidity.
Foreign
Currency Risk
Substantially all of our customer agreements are denominated in
U.S. dollars, and therefore our revenue are not subject to
foreign currency risk. Because we have operations in Europe and
Asia, however, we may be exposed to fluctuations in foreign
exchange rates with respect to certain operating expenses and
cash flows. Additionally, we may continue to expand our
operations globally and sell to customers in foreign locations,
potentially with customer agreements denominated in foreign
currencies, which may increase our exposure to foreign exchange
fluctuations. At this time, we do not have any foreign hedge
contracts because exchange rate fluctuations have had little or
no impact on our operating results and cash flows.
Inflation
Risk
We do not believe that inflation has had a material effect on
our business, financial condition or results of operations. If
our costs were to become subject to significant inflationary
pressures, we may not be able to fully offset such higher costs
through price increases. Our inability or failure to do so could
harm our business, financial condition and results of operations.
Limelight Networks is a leading provider of high-performance
content delivery network services. We digitally deliver content
for traditional and emerging media companies, or content
providers, including businesses operating in the television,
music, radio, newspaper, magazine, movie, videogame and software
industries. Using Limelight’s content delivery network, or
CDN, content providers are able to provide their end-users with
a high-quality media experience for rich media content including
video, music, games, software and social media. As consumer
demand for media content over the Internet has increased, and as
enabling technologies such as broadband access to the Internet
have proliferated, consumption of rich media content has become
increasingly important to Internet end-users and therefore to
the content providers that serve them. We developed our services
and architected our network specifically to meet the unique
demands content providers face in delivering rich media content
to large audiences of demanding Internet end-users. Our
comprehensive solution delivers content providers a
high-quality, highly scalable, highly reliable offering at a low
cost. As of February 2007, over 700 customers have chosen
Limelight Networks to deliver the high-quality media experiences
their consumers seek online.
We are rapidly growing our content delivery capacity and
expanding our sales and service capabilities in advance of what
we believe will be a dramatic and sustained surge in Internet
traffic. The environment in which we are scaling our business is
characterized by three macro trends, all of which reinforce the
need for content delivery networks:
•
consumption and distribution of rich media content are expanding
rapidly;
•
older alternatives for delivering rich media content over basic
Internet connections are not scaling well; and
•
a new set of technical, management and economic requirements
have emerged for content providers to meet the needs of
demanding consumers of rich media content.
Consumption and
Distribution of Rich Media Content Expanding
Multiple forces have created, and continue to drive, a
substantial unmet need to rapidly and efficiently deliver large
files and broadcast-quality media to large audiences over the
Internet. These forces include the following:
•
Proliferation of broadband Internet
connections. According to a report from
Strategy Analytics, nearly half of all U.S. households had
broadband Internet access in 2006, with broadband Internet
penetration expected to reach 73% by 2010. In addition, IDC
estimates that the average speed of downstream access for a
broadband connection, the speed at which an end-user accesses
media files, doubled from the third quarter of 2004 to the same
quarter of 2006 (“Market Analysis: U.S. Broadband Services
2006-2010 Forecast,” IDC, September 2006). The
proliferation of broadband Internet connections has provided an
increasing number of users with the capability to access rich
media content efficiently.
•
Consumption of media via the Internet is rivaling
consumption via other media channels. The
proliferation of broadband Internet has fundamentally changed
the way that consumers access and interact with media content.
According to Forrester Research, Inc., consumers between the
ages of
18-26 spend
approximately 12 hours per week using the Internet,
compared to approximately 10.5 hours per week watching
television (“State of the Consumers and Technology:
Benchmark 2006,” Forrester Research, Inc., July 2006). In
addition, eMarketer estimates that at the end of 2006, nearly
60% of all Internet users regularly watched videos online. That
number is expected to climb to 80% by the end of 2010.
•
Consumers desire on-demand access to a broad range of
personalized media content. Through
technologies like Internet search, personal digital video
recorders,
video-on-demand
and social media platforms, consumers are increasingly
accustomed to immediate, on-demand access to media content,
including videos, music and photos provided by media or content
providers or by users themselves.
•
Proliferation of Internet-connected
devices. The proliferation of devices that
are capable of connecting to the Internet, such as MP3 players,
mobile phones and videogame consoles, has given users even more
control and flexibility over how and where they access and use
media content from the Internet.
Content providers have recognized this evolving shift in
consumer behavior and the consumption of rich digital media.
Television, music, radio, newspaper, magazine, movie, videogame,
software and other traditional and emerging media companies all
have or are developing large libraries of rich media and video
content. The broad reach provided by the Internet allows these
content providers to distribute their content through content
aggregators or directly to consumers. The Internet also enables
content providers to offer their entire content libraries to
consumers. As a result, content providers are able to monetize a
much larger portion of their media content libraries than has
been possible under offline, non-Internet modes of distribution.
Alternatives for
Delivering Rich Media Content over the Internet
Companies looking to deliver rich media content to users via the
Internet have two primary alternatives: deliver content using
basic Internet connectivity, in some cases with significant
investment in additional infrastructure, or utilize a CDN.
Content
Delivery via Basic Internet Connectivity
Basic Internet connectivity is capable of delivering media
content to users, but is ill-suited for delivering the large
media files and broadcast-quality media that are commonplace
today. The Internet is a complex network of networks that was
designed principally to connect every Internet network point to
every other Internet network point via multiple, redundant
paths. To reach a given user, content from a provider’s
website must normally traverse multiple networks. These networks
include those of the website’s Internet service provider,
or ISP, one or more Internet backbone carriers — each
of which provides a network of high-speed communication lines
between major interconnection points — and the
user’s ISP. At any point along this path, data packets
associated with the website’s content can be lost or
delayed, impeding the transfer of data to the user. Internet
protocols are designed to reliably transport data packets, but
are not designed to ensure
end-to-end
performance. These protocols are effective for delivery of most
types of traditional content, but are often ineffective for
delivery of rich media content. When data packets are lost or
delayed during the delivery of rich media content, the result is
noticeable to users because playback is interrupted. This
interruption causes songs to skip, videos to freeze and
downloads to be slower than acceptable for demanding consumers.
This lack of performance and its dramatic effect on user
experience make the delivery of rich media content via the basic
Internet extremely challenging.
In response, some content providers have chosen to invest
significant capital to build the infrastructure of servers,
storage and networks necessary to bypass, as much as possible,
the public Internet. This substantial capital outlay and the
development of the expertise and other technical resources
required to manage such a complex infrastructure can be
time-consuming and prohibitively expensive for all but the
largest of companies.
Content
Delivery via Content Delivery Networks
A content delivery network, or CDN, offloads the delivery of
content from a media provider’s central website
infrastructure to the CDN’s service delivery
infrastructure. In general, the infrastructure of a CDN is
composed of hundreds or thousands of servers distributed at
various points around the Internet, linked together by software
that controls where media content objects are stored and how
they should be delivered to end-users. Deploying content objects
in numerous, distributed locations
can reduce the network distance between users and the media
content they seek, reducing the potential for
performance-inhibiting network congestion. The architecture of
early CDNs reflected the importance and prevalence, at the time,
of web page objects such as photos and graphics. Early CDNs
typically deployed small server clusters in a large number of
locations, relied on the public Internet to connect the
clusters, and stored only the most popular content objects in
their local caches, which are computing resources used to store
frequently accessed data for rapid access. Because each server
cluster was small, with few servers available for the storage
and delivery of content, and with rarely more than a single
network connection, some early CDNs employed optimization
algorithms in an effort to effectively manage and allocate these
relatively scarce resources.
When a requested content object is unavailable on the server
cluster, a cache miss, which is a failed attempt to acquire a
requested content object in a local cache, occurs. To handle a
cache miss, early CDNs were required to access the missing
object over the Internet from the content provider’s
servers. A cache miss, and the time required to obtain the
missing object over the Internet, degrades the end-user’s
experience and increases the computing resource cost of
servicing the end-user’s request. As the consumption of
rich media has grown, the requirement to cache a sufficient
number of media objects to guarantee a high-quality end-user
experience at an efficient price has strained the architecture
of early CDNs.
The New
Requirements for Delivering Rich Media Content
We believe the unique characteristics of rich media content
delivery and the rapid growth of rich media consumption have
created a new set of technical, management and economic
requirements for businesses seeking to deliver rich media
content. These requirements include the following:
•
Delivering a consistently high-quality media
experience. User experience is critical for
content providers because consumers increasingly expect a
high-quality experience, will not tolerate interruptions or
inconsistency in the delivery of content, and may never return
to a particular media provider if that provider is unable to
meet their expectations. A media stream, for example, should
begin immediately and play continuously without interruption
every time a customer accesses that stream.
•
Delivering expansive content libraries of rich
media. Consumers, particularly those who are
accustomed to broadband-enabled Internet services such as
high-quality television and radio, increasingly demand the
ability to consume any form of media content online. To meet
this demand, traditional media companies are moving their
enormous libraries of content, such as television shows and
movies, online. At the same time, emerging content businesses,
such as user-generated content companies, are creating expansive
libraries of rich media. Users expect a consistent media
experience across every title in these large libraries, for each
title regardless of its popularity, each time it is viewed.
•
Ability to scale content delivery capacity to handle
rapidly accelerating demand and diversity of audience
interest. Content providers also need to
scale delivery of their content smoothly as the size of their
audience increases. When a large number of users simultaneously
access a particular website, the content provider must be able
to meet that surge in demand without making users wait. Rapidly
accelerating demand can be related to a single event, such as a
major news or sporting event, or can be spread across an entire
library of content, such as when a social media website surges
in popularity.
•
Reliability. Throughout the path data
must traverse to reach a user, problems with the underlying
infrastructure supporting the Internet can occur. For instance,
servers can fail, or network connections can drop. Avoiding
these problems is important to content providers because
network, datacenter, or service provider outages can mean
frustrated users, lost audiences and missed revenue
opportunities.
Flexibility and manageability. Content
providers are making significant investments in preparing their
media libraries for delivery over the Internet. Once content is
ready for Internet distribution, content providers must be able
to support a wide range of formats, begin to distribute their
content quickly, and monitor their delivery activities.
•
Managing delivery costs. Managing the
cost of content delivery is important for content providers so
that they can maximize profits. As a result, the combination of
major capital outlays and operating expenditures required to
build and maintain large server clusters, peak period capacity,
extensive Internet backbone networks and multiple connections to
global broadband access networks is simply not practical for
most companies. As users increasingly demand access to large
files and media streams, the infrastructure costs associated
with providing this content are rising.
The capital, expertise, and other managerial effort necessary to
meet these requirements can be challenging. As demand for the
delivery of rich media content increases, these challenges will
become increasingly difficult to meet. We believe, therefore,
that there is a significant opportunity for an outsourced
Internet content delivery network optimized for the delivery of
rich media content.
The Limelight
Networks Solution for Rich Media Content Delivery
We are a leading provider of content delivery services for
digital media content including video, music, games, software
and social media. We designed our delivery solution specifically
to handle the demanding requirements of delivering rich media
content over the Internet. Our solution enables content
providers and aggregators to provide their end-users with
high-quality experiences across any media type, library size, or
audience scale without expending the capital and developing the
expertise needed to build out and manage their own networks.
In designing and building our content delivery network, we built
and deployed a globally-distributed network of thousands of
servers specially configured for the delivery of rich media
content with the following design advantages:
Densely-Configured, High-Capacity
Architecture. Our network infrastructure
consists of dense clusters of specially-configured servers
organized into large, logical CDN locations. The extensive
storage capacity of these logical CDN locations leads to fewer
cache misses than would occur in an early CDN architecture and
provides maximum scalability and responsiveness to surges in
end-user demand.
Many Connections to Other Networks. Our
logical CDN locations are directly connected to hundreds of user
access networks, which are computer networks connected to
end-users. In addition, for dedicated connectivity between our
logical CDN locations, we lease our own private optical backbone
and metro area networks. Lastly, our infrastructure has multiple
connections to the Internet. In combination, these connections
enable us to frequently bypass the often-congested public
Internet, improving the speed of content delivery.
Intelligent Software to Manage the
Network. We have developed proprietary
software that manages our content delivery system. This software
intelligently manages the delivery of content objects, storage
and retrieval of customer content libraries, activity logging
and information reporting.
Flexibility to Meet Varying Customer
Demands. We handle both download and
streaming deliveries, and do so across what we believe is one of
the broadest range of formats in our industry, including Adobe
Flash, MP3 audio, QuickTime, RealNetworks RealPlayer and Windows
Media.
All of the elements of our network work seamlessly together.
Content providers upload content either directly to us or to
their own servers, which are connected directly to our network.
Upon request from an end-user, we distribute that content to one
or more massive storage server clusters which feed hundreds of
specially configured servers at each content delivery location
around the world. The content is then delivered directly to
end-users through our relationships with over 600 broadband
Internet service providers, or over the public Internet if
appropriate. Our customers compensate us for this service by
paying us on a per-gigabyte basis, or on a variable basis based
on peak delivery rate for a fixed period of time, as our
services are used.
Key Benefits of
the Limelight Networks Solution
Our content delivery network architecture and service offering
were designed and built specifically to meet the demands of rich
media content delivery. We are able to deliver the following
customer benefits:
High
Quality User Experience
We enable users to receive their requested content such as
software or movie downloads in a timely manner and to enjoy a
high-quality media experience when watching a television show or
playing a video game online. We accomplish this, in part, by
delivering content from servers that can be closer to users than
a content provider’s own servers, and by delivering more
than half of our content volume directly to a user’s access
network, bypassing much of the congestion typically experienced
in the public Internet. We also operate a dedicated high-speed
(10 gigabits per second) backbone which enables us to move
content quickly between locations on our network.
High
Scalability Across Media Type, Library Size, and Audience
Size
We have built a global network of logical CDN locations with
extensive storage capacity across the United States, Europe, and
Asia that enables us to rapidly deliver digital media worldwide.
Each of our logical CDN locations hold a substantial amount of
computing power and storage capacity. Our current global
delivery capability exceeds 1 terabit per second. This capacity
allows us to support traffic spikes associated with special
one-time or unexpected events. Our highly scalable
infrastructure also enables us to maintain our performance
levels as our customers’ audiences grow, media file sizes
increase, and content libraries expand.
High
Reliability
Our distributed CDN architecture, managed by our proprietary
software, seamlessly and automatically responds in real time to
network and datacenter outages. Each of our content delivery
network locations connects to multiple Internet backbone and
broadband Internet service provider networks, and has multiple
redundant servers, enabling us to continue serving content even
if a particular network connection or server fails. Automatic
failover and recovery not only provide uninterrupted customer
service but also simplify network maintenance and upgrades.
Comprehensive
Solution
We provide an integrated solution focused on ease of
implementation and management to address our customers’
full delivery needs. We can begin delivery services for a new
customer within days of a customer’s placing an order. We
also support both download and streaming delivery in a broad
variety of formats including Adobe Flash, MP3 audio, QuickTime,
RealNetworks RealPlayer and Windows Media. In addition, our
value-added services include a web-based customer portal that
provides management information reports and a download manager
that simplifies the downloading process for the end-user.
Lastly, we offer custom services to address customers’
non-standard delivery needs.
Low
Content Delivery Costs
Our content delivery services enable customers to avoid the
substantial upfront and ongoing capital requirements of
upgrading and maintaining their datacenters and networks in
order to deliver media content themselves. Customers benefit
from the lower cost associated with the delivery of content
using our infrastructure, which is designed specifically for
delivering rich media content, and
the expertise we have acquired from serving over 700 customers.
Our customers pay for the traffic we deliver for them, and they
have the flexibility to purchase additional delivery capacity at
any time to support their changing business needs.
Our
Strategy
Our strategic goal is to enhance our position as a leading
provider of content delivery services for digital media content.
Key elements of our strategy include:
Continue
to Focus on Customers with Media Content
Our core set of customers are traditional and emerging media
companies, including businesses operating in the television,
music, radio, newspaper, magazine, movie, videogame and software
industries. We intend to continue to focus on this group as we
believe it represents a stable and growing business opportunity.
There has been rapid growth of rich media content delivered over
the Internet in recent years, and we believe that the market
will continue to experience robust growth.
Expand
Content Delivery Network Infrastructure to Serve New
Markets
While the market for online rich media content delivery in the
United States is still in its early, growth stage, we believe
there are also significant growth opportunities abroad. We plan
to expand our content delivery network reach and increase the
processing power, storage and connectivity of our existing CDN
locations in order to continue our expansion into key
international markets, including Europe and the Asia Pacific
region.
Continue
to Innovate
Our innovative content delivery infrastructure is a primary
driver of our success in the CDN market. Customer requirements
will continue to advance, however, and competitors will not
stand still. As a result, we intend to continue investing in our
technology and network to improve our capabilities further.
Doing so will enable us to handle even larger file sizes and
customer content libraries, as well as increasingly demanding
delivery methods and file formats, beyond what we currently
handle. We plan to continue working with some of the most
sophisticated and demanding CDN customers in the world to help
define and drive our research and development priorities.
Expand
Contact Delivery Network Capacity to Further Scale
Advantage
Continued investment in the physical assets that comprise our
network will strengthen the positive reinforcing dynamic that
currently exists in our business. This dynamic begins with the
media delivery performance we achieve via our infrastructure.
Today, because our content delivery architecture excels at
delivering rich media, we attract a significant number of CDN
customers and a significant amount of CDN traffic. Our customers
and traffic volumes make us an attractive partner for broadband
access networks seeking direct connections to improve the
Internet experiences of their end-users. More and
higher-capacity direct connections with broadband access
networks further enhance the performance of our infrastructure,
thereby attracting additional customers and additional traffic,
which then spurs more and faster direct connections with
broadband access networks. We refer to this self-reinforcing
cycle as the “backroom network effect.”
Enhance
Our Distribution Capabilities
We intend to expand our direct and indirect sales and
distribution channels to broaden our customer relationships as
well as deepen our penetration of existing customer accounts. We
plan to continue hiring, adding to both our domestic and
international sales and management teams. Our international
hiring efforts will be focused, initially, on Europe and Asia,
and then will transition to other geographies. In addition to
building upon our strong relationships with current partners, we
intend to
form new ties with third-party distribution partners in order to
complement our direct sales efforts. Enhancing our distribution
capabilities will also help us address additional industry
verticals.
Continue
to Meet Customer Needs with Enhanced Services
We intend to enhance our existing standard offerings with
value-added services closely related to our core media content
delivery capability. We plan to develop these services both
internally and through collaboration with our growing list of
strategic partners. We may also elect to acquire technologies or
services that will enhance our value proposition to customers.
Expand
Our Partner Relationships
Limelight’s leadership position in the industry has
attracted a list of partners that use our network to enhance
their own service offerings. Additionally, these partners offer
services that complement our core offerings. These partner
services include digital rights management, content management
systems, advertising insertion, content encoding and
transcoding,
e-commerce
systems, and managed hosting. We intend to continue to
strengthen our existing relationships with these partners, as
well as to develop additional relationships.
Services
Our services are purpose-built for the delivery of digital media
to large, global audiences. Our primary services are the
following:
Limelight Networks Streaming Media (Streaming delivery); and
•
Limelight Networks Custom CDN.
A customer typically chooses Content Delivery for digital media
files, such as purchased movies and games, which are destined to
reside, either permanently or for some period of time, on a
user’s computer or other device. A customer typically
chooses Streaming Media for live events, Internet radio
services, and other content that is not intended to reside on
the user’s device for even a short period of time. A
customer typically chooses Custom CDN if it has one or more
unique requirements that are not commonly supported by CDNs,
such as the need to execute proprietary software from the edge
servers of the CDN. In many cases, a customer will choose more
than one of these services, utilizing different services for
different content types or services.
Limelight
Networks Content Delivery and Streaming Media
Limelight Networks Content Delivery provides HTTP/web
distribution of digital media files such as video, music, games,
software and social media.
Limelight Networks Streaming Media provides on-demand
and/or live
streaming for all major formats including Adobe Flash, MP3
audio, QuickTime, RealNetworks RealPlayer and Windows Media.
When media files are streamed to an end-user, the files are not
stored on the user’s computer, but rather are received
directly and played by the user’s media player software in
real-time.
The following are additional chargeable options for customers of
our Content Delivery and Streaming Media services:
•
LUX. Web-based management and reporting
console that allows customers to manage their provisioned
Limelight services, as well as monitor usage, activity, and
delivery metrics via customizable CDN reporting.
•
StorageEdge. Service option for storing
a customer’s content library within our CDN architecture,
ensuring consistent, high-quality delivery of every file, from
the most to the least popular, across the customer’s entire
library.
Download Manager. Client-deployed
software for managing downloads that enables end-users to
download multiple objects with one click.
•
Traffic Services Manager. Service
management option that allows our customers to designate and
control traffic requests divided among multiple service delivery
infrastructures, including Limelight Networks, providing the
customer an easy way to manage network redundancy among internal
and externally-provisioned delivery infrastructures.
•
Geo-Compliance. Content rights
compliance offering that allows our customer to define the
specific geographic location of a user prior to fulfilling the
user’s content request, allowing the content provider to
manage geographic restrictions for licensed content distribution.
•
MediaVault. Security offering for
Content Delivery and Streaming Media customers that securely
associates digital media or stream locations (URLs) with
authorized viewers, protecting content from access by
unauthorized users.
•
Content Control. Performance management
offering for Content Delivery that allows our customers to
manage costs by limiting the speed of digital media deliveries
to their end-users.
•
Log Access. Access to an aggregated set
of detailed activity logs (on-demand or live), allowing our
customers to access detailed content and user information from
our edge delivery servers.
•
API. Programmatic interface to
Limelight services and reporting which allows a customer’s
applications to directly access and pull information into their
systems, as well as directly manage Limelight services as part
of the customer’s application interface and workflow.
Limelight
Networks Custom CDN
Limelight Networks Custom CDN provides customized content
delivery deployments and solutions, built with some or all of
our standard CDN components, but in a configuration unique to
the customer. A typical Custom CDN solution includes specific
servers and related resources dedicated to a particular customer
so that custom applications or services may be placed on our
network along with the customer’s digital media content,
Limelight CDN connectivity for scalable delivery and Limelight
professional services for implementing and managing the solution.
Complementary
Partner Services
As a leader in the industry, Limelight has attracted a list of
partners that use our network to enhance their own service
offerings. Additionally, these partners offer services that
complement our core offerings. These partner services include
digital rights management, content management systems,
advertising insertion, content encoding and transcoding,
e-commerce
systems and managed hosting.
Technology
We have developed an innovative system for Internet-based
delivery of digital media, based on a content delivery network
built specifically for large media files, high bit-rate media
streams, expanding content libraries and global audiences. This
system and technology platform has the following key elements:
Globally-Deployed
Servers
•
We have built and deployed a globally distributed network of
more than 4,000 servers specially configured for the delivery of
rich media content at 52 points of presence, or POPs, and 16
logical CDN locations, or a group of POPs, in the U.S., Europe
and Asia. Content consumers can connect to Limelight servers
that are closer to them, in network terms, than a content
provider’s own servers, eliminating much of the Internet
congestion and inconsistent network
performance that could affect the delivery of content. This
reduces or eliminates the visible symptoms of poor Internet
performance, including slow start times and stopping or skipping
during playback.
Densely-Configured,
High-Capacity Architecture
•
Our architecture consists of dense clusters of
specially-configured edge servers and storage servers deployed
at each POP. A logical CDN location is provisioned with hundreds
of edge servers, which users connect to and which store our
customers’ most popular content files. A logical CDN
location also contains one or more intermediate storage systems,
which act as large, deep media file caches and store less
frequently requested content files. When an edge server in the
logical CDN location needs a file that it does not have, it can
often retrieve that object from the intermediate storage system,
rather than from a customer’s website servers or from
another location in our system. These retrievals from
intermediate storage systems are very fast, because they occur
across a local area or metro area ethernet network, rather than
across our backbone or across the public Internet. This
architecture enables us to maximize the amount of content stored
at each CDN location without requiring that we store every
content file on every edge server.
•
We have configured each of our CDN locations to connect with
hundreds of networks. They are also equipped with the capacity
to support additional network connections as needed. This design
allows us to provide maximum scalability and responsiveness as
end-user demand increases. In addition, any server within a CDN
location can send and receive data via any network at that
location. This
“any-to-any”
capability allows us to use our network connections to the
greatest extent possible, without having to simultaneously
optimize servers and networks, as some CDNs do. Each of our edge
servers has access to whichever locally-attached network is best
for each delivery.
Connectivity
•
In aggregate, our logical CDN locations are directly connected
to more than 600 broadband Internet access networks around the
world. Whenever possible, we use these interconnections to place
content objects directly on users’ access networks, which
means those users’ requested files reach them without ever
traversing the public Internet. We believe that there is no
faster method available for delivering content to a user. More
than half of our total content delivery volume is delivered in
this fashion.
•
When we are not connected directly to the user’s broadband
Internet access provider, we use commercial Internet carriers to
deliver content objects to the user’s broadband provider.
We maintain commercial relationships with many of the
world’s largest Internet carriers, including Deutsche
Telecom, France Telecom and Global Crossing, with multiple
commercial Internet carrier connections at each of our CDN
locations.
•
Our CDN locations in the United States and Europe are connected
together via a dedicated optical backbone, which we operate,
that includes redundant 10 gigabit per second connections to
every location. Our logical CDN locations in Asia are connected
to our U.S./Europe network via managed circuits. By connecting
all of our locations with a network infrastructure that we
operate and on which we manage the traffic flows (rather than
relying on the often-congested public Internet), we are able to
rapidly move objects around our network when needed to service
user requests. Also, using our own network, rather than relying
on the public Internet, means that the stream our edge server
acquires will be as high-quality as the stream we receive from
our customer.
We have developed proprietary software that manages our content
delivery system. This software consists of several components:
—
Edge server software for managing download and streaming
delivery of content objects;
—
Software for assigning resources within our infrastructure and
for systematically improving our infrastructure over time as our
customers and infrastructure components change;
—
Intermediate cache server systems and software for storing
customer content libraries; and
—
Customer portal and customer reporting software.
Flexibility
•
Using our proprietary edge server software, we handle both
download and streaming deliveries across what we believe is one
of the broadest range of formats in our industry, including
Adobe Flash, MP3 audio, QuickTime, RealNetworks RealPlayer and
Windows Media.
Customers
Our core set of customers are media companies and other
providers of online media content. As of March 1, 2007, we
had over 700 customers worldwide, including many top names in
the fields of video, digital music, new media, games, rich media
applications and software delivery. Based on 2006 revenue, our
largest customers in each of these fields included:
•
Video: MSNBC, Viacom.
•
Music: RadioIO, ABC Radio.
•
Games: Microsoft (XBOX), Valve
Corporation.
•
Software: Microsoft, Adobe Systems.
•
Social Media: MySpace.
One customer, CDN Consulting, which acted as a reseller of our
services primarily to a single large content provider, accounted
for more than 10% of our revenue in 2006. Prospectively, we do
not expect sales to this reseller to continue at comparable
levels. No customer accounted for more than 10% of our revenue
in 2005, and one customer, MusicMatch, accounted for more than
10% of our revenue in 2004.
Competition
The content delivery network market is highly competitive and is
characterized by multiple types of vendors offering varying
combinations of computing and bandwidth to content providers.
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. Our primary competitors include
content delivery service providers such as Akamai Technologies,
Inc., or Akamai, Level 3 Communications, which recently
acquired SAVVIS Communications’ CDN services business,
Digital Island, and Internap Network Services Corporation, which
recently acquired VitalStream. Also, as a result of the growth
of the content delivery market, a number of companies are
currently attempting to enter our market, either directly or
indirectly, some of which may become significant competitors in
the future. Internationally, we compete with local content
delivery service providers, many of which are very well
positioned within their local markets.
We believe that the principal competitive factors affecting the
content delivery market include such attributes as:
•
Performance, as measured by file delivery time and end-user
media consumption rates;
•
Scalability;
•
Proprietary software designed to efficiently locate and deliver
large media files;
•
Ease of implementation;
•
Flexibility in designing delivery systems for unique content
types and mixes;
•
Reliability; and
•
Cost efficiency.
While many of our current competitors, as well as a number of
our potential competitors, have longer operating histories,
greater name recognition and greater financial, technical and
marketing resources than we do, we believe that we compete
favorably on the basis of these factors, taken as a whole. In
particular, we believe that our service offerings compete
strongly in the areas of performance and scalability, which are
two of the most critical elements involved in the delivery of
rich media content over the Internet, and in the area of cost
efficiency.
Research and
Development
Our research and development organization is responsible for the
design, development, testing and certification of the software,
hardware and network architecture of our content delivery
network system. As of March 1, 2007, we had 15 employees in
our research and development group, substantially all of whom
were located at our headquarters in Tempe, Arizona. Our
engineering efforts support product development across all major
types of rich media content, including videos, music, games,
software and social media, in various file formats and protocols
such as Adobe Flash, MP3 audio, QuickTime, RealNetworks
RealPlayer and Windows Media. We test our system to ensure
scalability in times of peak media demand. We use
internally-developed and third-party software to monitor and to
track the performance of our network in the major Internet
consumer markets around the world where we provide services for
our customers. Our research and development expenses were
approximately $0.2 million in 2004, $0.5 million in
2005 and $3.2 million in 2006, including stock-based
compensation expense of $1.7 million in 2006. We believe
that the investments that we have made in research and
development have been effectively utilized. In the future, we
anticipate that our research and development expenditures will
increase as a percentage of our revenue as we grow our business.
Sales and
Marketing
We sell our services directly through our telesales and field
sales forces. We also have customers who incorporate our
services into their offerings and function as resellers, as well
as other distribution partners. We target media companies and
other providers of online media content through our:
•
Telesales force. Our telesales force is
responsible for managing direct sales opportunities within the
mid-market within North America.
•
Field sales force. In October 2006, we
began to develop a field sales force and have since hired
11 sales personnel in various geographic markets. This
sales force is responsible for managing direct sales
opportunities in major accounts in North America, Europe and the
Asia Pacific region.
Distribution partners. We have certain
customers who incorporate our services into their offerings, and
we also maintain relationships with a number of resellers and
distribution partners.
We focus our marketing efforts on increasing brand awareness,
communicating product advantages and generating qualified leads
for our sales force and resellers. We rely on a variety of
marketing vehicles, including trade shows, advertising, public
relations, webinars, our website and collaborative relationships
with technology vendors.
We intend to expand our current sales and marketing organization
in additional international territories.
Intellectual
Property
Our success depends in part upon our ability to protect our core
technology and other intellectual capital. To accomplish this,
we rely on a combination of intellectual property rights,
including patents, trade secrets, copyrights, trademarks, domain
registrations and contractual protections.
We have 14 patent applications pending in the United States. We
also have 36 regional or national patent applications pending in
foreign countries and five patent applications filed under the
Patent Cooperation Treaty awaiting possible entry into the
regional or national phase. We do not currently have any issued
patents, and we do not know whether any of our patent
applications will result in the issuance of a patent or whether
the examination process will require us to narrow our claims.
Any patents that may be issued to us may be contested,
circumvented, found unenforceable or invalidated, and we may not
be able to prevent third parties from infringing them.
Therefore, we cannot predict the exact effect of having a patent
with certainty.
We have five pending trademark applications in the United
States. Our name, Limelight Networks, has been filed for
multiple classes in the United States, Australia, Canada, the
European Union, India, Japan, South Korea and Singapore. Three
of the
non-U.S. trademark
applications have issued. There is a risk that pending trademark
applications may not issue, and that those trademarks that have
issued may be challenged by others who believe they have
superior rights to the marks.
We generally control access to and use of our proprietary
software and other confidential information through the use of
internal and external controls, including physical and
electronic security; contractual protections with employees,
contractors, customers and partners; and domestic and foreign
copyright laws.
Despite our efforts to protect our trade secrets and proprietary
rights through intellectual property rights and licenses and
confidentiality agreements, there is risk that unauthorized
parties may still copy or otherwise obtain and use our software
and technology. In addition, we intend to expand our
international operations, and effective patent, copyright,
trademark and trade secret protection may not be available or
may be limited in foreign countries. Further, expansion of our
business with additional employees, locations and legal
jurisdictions may create greater risk that our trade secrets and
proprietary rights will be harmed. If we fail to effectively
protect our intellectual property and other proprietary rights,
our business could be harmed.
Third parties could claim that our products or technologies
infringe their proprietary rights. The Internet content delivery
industry is characterized by the existence of a large number of
patents, trademarks, and copyrights and by frequent litigation
based on allegations of infringement or other violations of
intellectual property rights. We expect that infringement claims
may further increase as the number of products, services, and
competitors in our market increases. Further, continued success
in this market may provide an impetus to those who might use
intellectual property litigation as a weapon against us. As
described under “Legal Proceedings” below, we are
currently party to a lawsuit in which Akamai and the
Massachusetts Institute of Technology, or MIT, allege that we
are infringing three patents assigned to MIT and exclusively
licensed by MIT to Akamai. The outcome of this or any other
litigation is inherently unpredictable. In addition, to the
extent that we gain greater
visibility and market exposure as a public company, we are
likely to face a higher risk of being the subject of
intellectual property infringement claims from other third
parties.
Legal
Proceedings
In June 2006, Akamai and MIT filed a lawsuit against us in the
U.S. District Court for the District of Massachusetts
alleging that we are infringing two patents assigned to MIT and
exclusively licensed by MIT to Akamai. In September 2006, Akamai
and MIT expanded their claims to assert infringement of a third
patent. These two matters have been consolidated by the Court.
In addition to monetary relief, including treble damages,
interest, fees and costs, the consolidated complaint seeks an
order permanently enjoining us from conducting our business in a
manner that infringes the relevant patents. A permanent
injunction could prevent us from operating our CDN altogether.
The Court has set a claims construction hearing, known as a
Markman hearing, for May 2007. Although the Court has not set a
trial date, based on the schedule currently in place, we believe
it is likely that the case will go to trial in 2008.
Akamai and MIT have asserted two of the patents at issue in the
current litigation in two previous lawsuits against different
defendants. Both cases were filed in the same district court as
the current action, and assigned to the same judge currently
presiding over the lawsuit filed against us. In one case, a
portion of one of these patents was upheld but neither lawsuit
resulted in the defendant being able to obtain a license from
Akamai or MIT, nor did the lawsuits result in a settlement. In
addition, Akamai acquired the defendant prior to final
resolution of the lawsuit in one of these cases.
While we believe that the claims asserted by Akamai and MIT are
without merit and intend to vigorously defend the action, we
cannot assure you that this lawsuit ultimately will be resolved
in our favor. An adverse ruling could seriously impact our
ability to conduct our business and to offer our products and
services to our customers. This, in turn, would harm our
revenue, market share, reputation, liquidity and overall
financial position.
From time to time, we may become involved in legal proceedings
arising in the ordinary course of our business. Other than the
patent litigation filed against us by Akamai and MIT, we are not
presently a party to any material legal proceedings.
Employees
As of March 1, 2007, we had 158 employees, including 81 in
sales and marketing, 47 in network engineering and operations,
15 in research and development and 15 in general and
administrative. Of these employees, 154 are based in the United
States and four are based in the United Kingdom. In addition, we
have one sales and marketing consultant based in Singapore. We
consider our current relationship with our employees to be good.
None of our employees is represented by a labor union or is a
party to a collective bargaining agreement.
Facilities
We lease approximately 7,529 square feet and
13,341 square feet of space in our two headquarters
buildings in Tempe, Arizona under leases that expire in 2009 and
2010, respectively. We also lease approximately
8,224 square feet of space for a data center in Phoenix,
Arizona under a lease that expires in 2010. We believe we will
need additional space before this time, and we have ample
options in the local area to expand our use of facilities space.
We also lease space for our field personnel in various locations
in the United States and Europe. Additionally, we lease
substantial data center space in approximately 50 computing
centers around the world from market-leading co-location vendors
such as Equinix and Switch and Data.
Our executive officers, directors and key employees, and their
ages and positions as of March 20, 2007 are as follows:
Name
Age
Position
Jeffrey W. Lunsford
41
President, Chief Executive Officer
and Chairman
Nathan F. Raciborski
40
Co-Founder, Chief Technical
Officer and Director
Matthew Hale
54
Chief Financial Officer and
Secretary
Michael M. Gordon
50
Co-Founder and Chief Strategy
Officer
Allan M. Kaplan
36
Co-Founder and Director
William H. Rinehart
43
Co-Founder
Erik W. Gabler
37
Senior Vice President of
International Sales & Global Account Management
Louis A. Greco III
37
Vice President of North American
Sales and Business Development Channels
Joseph H. Gleberman(3)
49
Director
Robert Goad(3)
52
Director
Fredric W. Harman(1)(2)(3)
46
Director
Peter J. Perrone(2)(3)
39
Director
David C. Peterschmidt(1)(2)(3)
59
Director
Gary Valenzuela(1)(3)
50
Director
(1)
Member of our Audit Committee.
(2)
Member of our Compensation Committee
(3)
Member of our Nominating and Governance Committee
Jeffrey W. Lunsford has served as our President,
Chief Executive Officer and Chairman since November 2006. Prior
to joining us, Mr. Lunsford served as Chairman and Chief
Executive Officer of WebSideStory, Inc., a provider of on-demand
digital marketing applications, from April 2003 to November
2006. Prior to that, he served as the Chief Executive Officer of
TogetherSoft Corporation, a software development company, from
September 2002 to February 2003, and as the Senior Vice
President of Corporate Development of S1 Corporation, a provider
of customer interaction software for financial and payment
services, from March 1996 to August 2002. He also currently
serves on the board of directors of WebSideStory, Inc. and
Midtown Bank and Trust Company. Mr. Lunsford received a
B.S. in Information and Computer Sciences from the Georgia
Institute of Technology.
Nathan F. Raciborski, one of our Co-Founders in
June 2001, has served as our Chief Technical Officer since June
2001 and as a director since July 2006. Prior to co-founding
Limelight, Mr. Raciborski was the Co-Founder and Chief
Technical Officer of Aerocast, Inc., from 1999 to 2000. In 1997,
he co-founded Entera and served on its board of directors until
it was acquired by Cacheflow in 2000. In 1993,
Mr. Raciborski co-founded and served as President, Chief
Executive Officer and Director of Primenet Services for the
Internet, which later merged with GlobalCenter, Inc. where he
served as President and Director. GlobalCenter was acquired in
1997 by Frontier Communications, Inc., where he served as
President of Network Services until 1998. He also currently
serves as a managing member of Cocoon Capital, LLC, a private
venture fund.
Matthew Hale has served as our Chief Financial
Officer since December 2006. Prior to joining us, Mr. Hale
served as President and Chief Financial Officer of S1
Corporation, a provider of customer interaction software for
financial and payment services, from March 2000 to November
2006. Prior to that, from 1995 to 2000, Mr. Hale served as
Chief Financial Officer of
CCI-Triad
Systems, Inc., a provider of enterprise inventory control and
point of sale systems. Mr. Hale also spent over eight years
with the accounting firm of Ernst & Young LLP
(formerly, Ernst & Whinny). He is a member of the
California and American Institutes of Certified Public
Accountants. Mr. Hale received a B.B.A. in Accounting from
Idaho State University.
Michael M. Gordon, one of our Co-Founders in June
2001, has served as our Chief Strategy Officer since January
2005. Prior to joining us in a full-time capacity,
Mr. Gordon served as a Consulting Expert to Keller Rohrback
PLC, a law firm, from January 2003 through April 2004. Prior to
that, he served as Co-founder and Chief Executive Officer of
Axient Communications, Inc. from January 1999 through October
2002. In April 2002, the U.S. District Court for the District of
Arizona approved a consent judgment entered into between
Mr. Gordon and the U.S. Department of Labor relating to the
Labor Department’s allegations that in 1997, while
Mr. Gordon was a fiduciary of the retirement plan of
Gateway Data Science Corporation, or Gateway, Gateway failed to
forward funds withheld from Gateway’s employees’
paychecks to the retirement plan within the time limits
prescribed by the Employee Retirement Income Security Act, or
ERISA. Pursuant to the judgment, Mr. Gordon agreed to pay
restitution to the Gateway retirement plan, as well as certain
fees and penalties, and to be permanently enjoined from serving
as a named fiduciary of any retirement plan organized under
ERISA and from future violations of ERISA and related federal
laws. The judgment expressly provided, however, that it would
not prevent Mr. Gordon from serving as an executive officer
of other companies with which he might be affiliated in the
future. In February 2004, the Labor Department reduced the civil
penalties previously assessed against Mr. Gordon by 40%
after it determined that, while Gateway had failed to abide by
the time limits prescribed by ERISA, Mr. Gordon had acted
in good faith. Mr. Gordon received a B.S. in Finance from
Ohio State University.
Allan M. Kaplan, one of our Co-Founders in June
2001, has served as a director since August 2003, including
serving as Chairman of our board of directors through November
2006. Mr. Kaplan also served as a Partner of Milestone
Equity Partners from October 2001 to November 2003. Prior to
co-founding Limelight, Mr. Kaplan served as Senior Vice
President of Business Development and as a Director of Axient
Communications from 1999 to 2000. In 1997, Mr. Kaplan
co-founded Entera, which was acquired by Cacheflow in 2000. In
1993, Mr. Kaplan co-founded and served as Senior Vice
President and Director of Primenet Services for The Internet,
which later merged with GlobalCenter, where he served as Vice
President of Operations and Director. GlobalCenter was acquired
in 1997 by Frontier Communications, where he served as Senior
Vice President of Network Services until 1998. Mr. Kaplan
also currently serves as a managing member of Cocoon Capital,
LLC a private venture fund, and sits on the advisory board of
Greenhill SAVP.
William H. Rinehart, one of our Co-Founders in
June 2001, and was our President and Chief Executive Officer
from June 2001 to October 2006 and was a director from August
2003 through October 2006. Mr. Rinehart is engaged in
international business development activities on our behalf, and
he does not presently serve as one of our officers or directors.
Prior to co-founding Limelight, Mr. Rinehart served in a
number of executive-level sales positions at Critical Path,
Inc., a provider of Internet messaging products and services,
from 1998 to 2000. In 2002, the SEC alleged that during a
portion of the time Mr. Rinehart was associated with
Critical Path, Mr. Rinehart participated in a fraudulent
scheme to inflate Critical Path’s revenue and earnings.
Mr. Rinehart and the SEC entered into a settlement under
which Mr. Rinehart neither admitted nor denied the
allegations and agreed to be fined, was enjoined from future
violations of certain U.S. securities laws, and was
prohibited from serving as an officer or director of a public
company through August 2007. Mr. Rinehart previously served
as the Senior Vice President and General Manager of Frontier
Communications, Inc. in 1998, as the Senior Vice President and
General Manager of GlobalCenter, Inc. from 1997 to 1998, as the
Vice President of Product Development in 1996 and as the Vice
President of Sales in 1997 of Genuity, and as the Vice President
and General Manager of MFS Communications from 1995 to 1996.
Mr. Rinehart received a B.S. in Business Administration
from Ball State University.
Erik Gabler has served as our Senior Vice
President of International Sales & Global
Account Management since January 2005. From December 2003
to January 2005, he served as our Vice President of Business
Development, from December 2002 to December 2003 as our Vice
President of Sales, and from July 2001 to December 2002 as our
Director of Sales. Prior to joining us, Mr. Gabler served
as National Director of Co-location Sales for WebVision from
October 1998 to June 2001. He also served as Director of ISP
Sales for GlobalCenter, Inc., a unit of Frontier Communications,
Inc., from July 1997 to September 1998. Mr. Gabler received
a B.A. in Organizational Communications from Arizona State
University.
Louis A. Greco III has served as our Vice
President of North American Sales and Business Development
Channels since December 2006. From August 2005 to December 2006,
he served as our Vice President of Sales and, from August 2003
to August 2005, he served as our National Sales Director. Prior
to joining us, Mr. Greco served as a senior sales executive
for Cable & Wireless America, an Internet network
service provider, from June 2003 to July 2003. He also served in
various senior sales and sales management positions for MCI
WorldCom, a global business and residential communications
company, from October 1996 to February 2003. Mr. Greco
received a B.A. in Communication Sciences and English Literature
from the University of Connecticut.
Joseph H. Gleberman has served as a director since
September 2006. Mr. Gleberman has been a Managing Director
in Goldman, Sachs & Co.’s Principal Investment
Area since 1993. Prior to joining the Principal Investment Area,
he served in a variety of capacities in the Investment Banking
Division and the Mergers & Acquisitions Department at
Goldman, Sachs & Co., which he joined in 1982. He also
currently serves on the boards of directors of Euramax Holdings,
Inc., iFormation Group, LLC, iHealth Technologies, Inc., and
XLHealth Corporation. Mr. Gleberman received a B.A. and an
M.A. from Yale University, and an M.B.A. from Stanford
University.
Robert Goad has served as a director since
September 2006. Mr. Goad has served as the Chairman and
Chief Executive officer of Diveo Broadband Networks, Inc., an
owner and operator of wireless voice and data networks and data
centers in North and South America, since July 2002. Since 2000,
he has served as the Chairman and Chief Executive Officer of
Diamond Management, and its predecessor, Columbia Management,
which manages a portfolio of companies in communications, media
and entertainment industries. He previously served as the
Interim Chief Executive Officer for Yankee Entertainment and
Sports Network, a regional sports television network, from March
2004 through November 2004. Mr. Goad currently serves on
the boards of directors of Yankee Entertainment, Grupo Clarin
S.A., Diveo and Diamond Management.
Fredric W. Harman has served as a director since
September 2006. Mr. Harman has served as a Managing Partner
of Oak Investment Partners since 1994. From 1991 to 1994,
Mr. Harman served as a General Partner of Morgan Stanley
Venture Capital. Mr. Harman currently serves as a director
of U.S. Auto Parts, an online provider of aftermarket auto
parts, and several privately held companies, including Aspect
Software Inc., a provider of contact center solutions, and
Demand Media, Inc., an Internet new media company.
Mr. Harman received a B.S. and an M.S. in Electrical
Engineering from Stanford University, where he was a Hughes
Fellow, and an M.B.A. from the Harvard Graduate School of
Business.
Peter J. Perrone has served as a director since
July 2006. Mr. Perrone has been a Vice President in
Goldman, Sachs & Co.’s Principal Investment Area
since 2002. Prior to transferring to the Principal Investment
Area in 2001, Mr. Perrone worked in the High Technology
Group at Goldman, Sachs & Co., where he started as an
Associate in 1999. Mr. Perrone also currently serves on the
board of directors of Teneros, Inc., Tervela, Inc. and Woven
System, Inc. Mr. Perrone received a B.S. from Duke
University, an M.S. from the Georgia Institute of Technology and
an M.B.A. from the Massachusetts Institute of Technology, Sloan
School of Management.
David C. Peterschmidt has served as a director
since February 2007. Mr. Peterschmidt has served as
President and Chief Executive Officer and as a director of
Openwave Systems, Inc. since November 2004. Prior to joining
Openwave, Mr. Peterschmidt served as Chief Executive
Officer and Chairman of Securify, Inc., from September 2003 to
November 2004. Mr. Peterschmidt was Chief Executive Officer
and Chairman of Inktomi, Inc. from July 1996 to March 2003.
Mr. Peterschmidt also currently serves on the boards of
directors of Business Objects S.A., UGS Corp. and Cellular
Telecommunications and Internet Association (CTIA).
Mr. Peterschmidt received a B.A. in Political Science from
the University of Missouri and an M.A. from Chapman College.
Gary Valenzuela has served as a director since
February 2007. Mr. Valenzuela has served as President of
Powerplay Properties LLC since July 2000. Prior to that,
Mr. Valenzuela served as Senior Vice President and Chief
Financial Officer of Yahoo! Inc. from January 1996 to July 2000,
and he was Senior Vice President and Chief Financial Officer of
TGV Software, Inc., a supplier of Internet software products,
from January 1994 to January 1996. He is a Certified Public
Accountant in California. Mr. Valenzuela received a B.S. in
Business Administration with an Accounting Emphasis and a
Computer Systems minor from San Jose State University.
Executive
Officers
Our executive officers are elected by, and serve at the
discretion of, our board of directors. There are no family
relationships among any of our directors or officers.
Board of
Directors
Our board of directors is currently composed of nine members,
six of whom are independent within the meaning of the
independent director guidelines of the Nasdaq Stock Market LLC.
Prior to this offering, our board of directors will be divided
into three staggered classes of directors. At each annual
meeting of stockholders, a class of directors will be elected
for a three-year term to succeed the same class whose terms are
then expiring. The terms of the directors will expire upon the
election and qualification of successor directors at the Annual
Meeting of Stockholders to be held during the years 2008 for the
Class I directors, 2009 for the Class II directors and
2010 for the Class III directors.
•
Our Class I directors will be Messrs. Goad, Kaplan and
Lunsford;
•
Our Class II directors will be Messrs. Gleberman,
Harman and Perrone; and
•
Our Class III directors will be Messrs. Peterschmidt,
Raciborski and Valenzuela.
Our amended and restated certificate of incorporation and bylaws
provide that the number of our directors, which is currently
nine members, shall be fixed from time to time by a resolution
of the majority of our board of directors. Each officer serves
at the discretion of the board of directors and holds office
until his successor is duly elected and qualified or until his
or her earlier resignation or removal. There are no family
relationships among any of our directors or executive officers.
The division of our board of directors into three classes with
staggered three-year terms may delay or prevent a change of our
management or a change of control.
Committees of the
Board of Directors
As of the closing of this offering, our board will have an audit
committee, a compensation committee, and a nominating and
corporate governance committee, each of which will have the
composition and responsibilities described below.
monitor the rotation of partners of the independent auditors on
the Company engagement team as required by law;
•
review our financial statements and review our critical
accounting policies and estimates; and
•
review and discuss with management and the independent auditors
the results of the annual audit and our quarterly financial
statements.
The members of our audit committee are Messrs. Harman,
Peterschmidt and Valenzuela. We believe that the composition of
our audit committee meets the requirements for independence
under the current requirements of the Nasdaq Stock Market LLC
and SEC rules and regulations. We believe that the functioning
of our audit committee complies with the applicable requirements
of the Nasdaq Stock Market LLC and SEC rules and regulations. We
intend to comply with future requirements to the extent they
become applicable to us.
Compensation
Committee
Our compensation committee oversees our corporate compensation
programs. The compensation committee will also:
•
review and recommend policy relating to compensation and
benefits of our officers and employees;
•
review and approve corporate goals and objectives relevant to
compensation of the Chief Executive Officer and other senior
officers;
•
evaluate the performance of our officers in light of established
goals and objectives;
•
set compensation of our officers based on its evaluations;
•
administer the issuance of stock options and other awards under
our stock plans; and
•
review and evaluate, at least annually, its own performance and
that of its members, including compliance with the committee
charter.
The members of our compensation committee are Messrs. Harman,
Perrone and Peterschmidt, each of whom our board of directors
has determined is independent within the meaning of the
independent director guidelines of the Nasdaq Stock Market LLC.
We believe that the composition of our compensation committee
meets the requirements for independence under, and the
functioning of our compensation committee complies with, any
applicable requirements of the Nasdaq Stock Market LLC and SEC
rules and regulations. We intend to comply with future
requirements to the extent they become applicable to us.
Nominating and
Governance Committee
We have established a nominating and governance committee to
oversee and assist our board of directors in reviewing and
recommending nominees for election as directors. The nominating
and governance committee will also:
•
assess the performance of the board of directors;
•
direct guidelines for the composition of our board of
directors; and
•
review and administer our corporate governance guidelines.
The members of our nominating and governance committee are
Messrs. Gleberman, Goad, Harman, Perrone, Peterschmidt and
Valenzuela, each of whom is a non-management member of our board
of directors.
Our board of directors may from time to time establish other
committees.
Prior to the completion of this offering we expect to adopt a
code of ethics for our principal executive and senior financial
officers applicable to our Chief Executive Officer, Chief
Financial Officer and other principal executive and senior
financial officers. In addition, we expect to adopt a code of
business conduct and ethics for all employees, officers and
directors. These codes will become effective as of the effective
date of this offering.
Compensation
Committee Interlocks and Insider Participation
None of the members of our compensation committee has at any
time been one of our officers or employees. None of our
executive officers serves, or in the past year has served, as a
member of the board of directors or compensation committee of
any entity that has one or more executive officers who serve on
our board of directors or compensation committee.
Director
Compensation
In 2006, we did not provide any member of our board of directors
compensation in his capacity as a director. In 2007, David C.
Peterschmidt and Gary Valenzuela joined our board of directors,
and each were granted an option to purchase 35,000 shares
of our common stock at an exercise price of $3.14 per
share. We also agreed to pay each of these directors an annual
cash retainer of $25,000. In addition, we agreed to pay each of
Messrs. Peterschmidt and Valenzuela $5,000 annually for
membership on each committee on which they serve. In the future,
our board of directors expects to adopt a non-employee director
compensation policy that will provide non-employee directors
with an overall compensation package that we believe will be
considered customary for directors of a public company and would
allow us to attract and retain qualified members of our board of
directors. Such a policy may include initial and annual equity
awards, annual cash retainers associated with board of directors
and board committee service, and cash meeting fees. However, at
this time no such policy has been agreed to nor adopted.
Allan M. Kaplan, one of our Co-Founders and a member of our
board of directors, has been a part-time employee of ours since
August 2006 and served as a consultant to us during the first
seven months of 2006. Under this employment arrangement,
Mr. Kaplan provides advisory level services to members of
our executive team and receives a salary of $6,250 per
month, plus standard benefits available to our other employees.
In addition, our arrangement with Mr. Kaplan provides that
we will not, except in the case of termination for cause,
terminate Mr. Kaplan’s employment with us or terminate
the benefits to which he is entitled under this arrangement
until July 2007. In August 2006, concurrently with our granting
of options to each of our other Co-Founders, we granted
Mr. Kaplan an option to purchase 625,000 shares of
common stock with an exercise price of $0.40 per share,
which vests at a rate of approximately 1/12th per month
from the grant date. In September 2006, Mr. Kaplan
exercised this option in full. We recognized $1,478,000 in
stock-based compensation expense for financial reporting
purposes with respect to this option grant, computed in
accordance with FAS 123R. In 2006, pursuant to his
consulting and employment arrangements with us, Mr. Kaplan
earned an aggregate of $37,500 in salary, $337,622 in bonus,
$8,868 in other compensation (representing amounts paid for
health and life insurance) and, together with the option award
value described above, total compensation of $1,861,990.
Compensation
Discussion and Analysis
Our executive compensation program is designed to attract
individuals with the skills necessary for us to achieve our
business objectives, to reward those individuals fairly over
time, to retain those individuals who continue to perform at or
above the levels that we expect and to closely align the
compensation of those individuals with our performance on both a
short-term and long-term basis. To that end, our executive
officers’ compensation has two primary components: base
cash compensation, or salary, stock option grants and stock
awards. In addition, we have in the past and may in the future
provide discretionary performance bonuses to individuals or all
employees to recognize individual performance or the achievement
of important business objectives such as the development of our
network, the establishment and maintenance of key strategic
relationships, the growth of our customer base, as well as
financial and operational performance. Finally, we also provide
our executive officers a variety of benefits that are available
generally to all salaried employees.
General
We view each component of executive compensation as related but
distinct. Although we review total compensation of our executive
officers, we do not believe that significant compensation
derived from one component of compensation should negate or
reduce compensation from other components. We determine the
appropriate level for each compensation component based in part,
but not exclusively, on competitive benchmarking consistent with
our recruiting and retention goals, our view of internal equity
and consistency, our overall performance and other
considerations we deem relevant. For annual compensation
reviews, we evaluate each executive’s performance, look to
industry trends in compensation levels and generally seek to
ensure that compensation is appropriate for an executive
officer’s level of responsibility and for the promotion of
future performance. Except as described below, we have not
adopted any formal or informal policies or guidelines for
allocating compensation between long-term and currently paid out
compensation, between cash and non-cash compensation or among
different forms of non-cash compensation. However, our
philosophy is to make a greater percentage of an employee’s
compensation performance-based and to keep cash compensation to
a nominally competitive level while providing the opportunity to
be well rewarded through equity if we perform well over time. To
this end, we use stock options as a significant component of
compensation because we believe that they best relate an
individual’s compensation to the creation of stockholder
value. While we offer competitive base salaries and the
potential for cash bonus, stock-based compensation has also been
a significant motivator in attracting employees for
Internet-related and other technology companies. In the future,
we expect our newly constituted compensation committee to be
active in establishing comprehensive policies and guidelines for
executive compensation.
As our board of directors historically has not operated through
the use of committees, we have not, prior to March 2007, had a
compensation committee of the board of directors. Our full
board, however, has traditionally sought to perform, at least
annually, a review of our executive officers’ overall
compensation packages to determine whether they provide adequate
incentives and motivation and whether they adequately compensate
our executive officers relative to comparable officers in other
companies with which we compete in attracting and retaining our
executives. To date, we have conducted a detailed analysis of
the cash and equity compensation of our chief executive officer,
and established general budgetary guidelines for aggregate
annual employee cash compensation that our chief executive
officer has allocated among individual executives and employees
on a case by case basis in his discretion. For compensation
decisions regarding the grant of equity compensation, including
vesting schedules and, in some cases, milestones providing for
accelerated vesting if such milestones are achieved, relating to
employees other than to our chief executive officer, the board
of directors typically considers recommendations from the chief
executive officer
and/or other
members of management. Upon completion of this offering, we
intend for the compensation committee to play the primary role
in setting compensation levels for our executive officers among
all compensation components. We also anticipate that the
compensation committee will also have the authority to grant
awards under our 2007 Equity Incentive Plan, which will be
effective upon completion of this offering.
Elements of
Compensation
Executive compensation consists of the following elements:
Base Compensation. We fix executive
officer base compensation at a level that we believe enables us
to hire and retain individuals in a competitive environment and
reward individual performance according to satisfactory levels
of contribution to our overall business goals. We also
take into account the base salaries that are payable by
companies with which we believe we generally compete to attract
and retain our executives. The salaries of
Messrs. Raciborski, Gordon, Rinehart, Greco and Gabler were
increased by approximately 22%, 20%, 22% and 0%, respectively,
in 2006, and by approximately 34%, 22%, 0%, 11%, and 17% for
2007, respectively. These increases were part of our normal
annual compensation review process and reflect our review of the
compensation levels of similar positions at comparable
companies. Messrs. Lunsford and Hale were hired by us in
2006 and, therefore, did not receive a salary increase for 2007.
Annual Incentive Cash Bonuses. We have
periodically utilized cash bonuses to reward performance
achievements and have in place annual target incentive bonuses
for each of our executive officers, payable either in whole or
in part, depending on the extent to which the employee’s
applicable performance goals are achieved. In 2006, we paid
incentive cash bonuses for all employees generally in the range
of $40,000 to $337,000 for members of our executive management,
and $5,000 to $36,000 for other employees, with higher bonuses
awarded to certain members of executive management in connection
with our strong performance in 2006. Bonuses have generally been
reviewed and approved by our board of directors, which has
worked to determine the performance and operational criteria
necessary for award of such bonuses. The bonuses for
Mr. Raciborski, our Chief Technology Officer,
Mr. Gordon, our Chief Strategy Officer and
Mr. Rinehart, our Chief Executive Officer until November
2006, were based on over-achievement against our 2006 business
plan. Mr. Lunsford received a $100,000 signing bonus upon
joining us in November 2006. For 2006, Messrs. Lunsford,
Raciborski, Gordon, Rinehart, Gabler and Greco each received an
aggregate bonus of $100,000, $337,622, $337,622, $337,622,
$40,000 and $44,190, respectively, which represented
approximately 31%, 115%, 125%, 115%, 29% and 33% of their base
salaries, respectively.
Long-Term Incentive Program. We believe
that long-term performance is achieved through an ownership
culture that encourages such performance by our executive
officers through the use of stock and stock-based awards. We
utilize stock options to ensure that our executive officers have
a continuing stake in our long-term success. Because our
executive officers are awarded stock options with an exercise
price equal to or greater than the fair market value of our
common stock on the date of grant, the determination of which is
discussed below, these options will have value to our executive
officers only if the market price of our common stock increases
after the date of grant. Typically, our stock option grants to
new employees vest at the rate of 25% after the first year of
service with remainder vesting ratably over the subsequent
36 months. For non-new hire stock option grants, vesting
typically occurs ratably over 48 months from the date of
grant. Authority to make stock option grants to executive
officers has historically rested with our board of directors,
and we expect our board of directors will delegate that
authority to our compensation committee in the future. In
determining the size of stock option grants to executive
officers, our board of directors considers our performance
against the strategic plan, individual performance against the
individual’s objectives, the experience of our board
members, the extent to which shares subject to previously
granted options are vested and the recommendations of our chief
executive officer and other members of management.
We do not have any program, plan or obligation that requires us
to grant equity compensation on specified dates and, because we
have not been a public company, we have not made equity grants
in connection with the release or withholding of material
non-public information. However, we intend to implement policies
to ensure that equity awards are granted at fair market value on
the date that the grant action occurs.
Stock Options and Equity Awards. Our
Amended and Restated 2003 Incentive Compensation Plan authorizes
us to grant options to purchase shares of our common stock to
our employees and executive officers, which is described in
further detail under “— Employee Benefit
Plans.” During 2006, we granted options to
Messrs. Lunsford, Raciborski, Hale, Gordon and Rinehart, to
purchase 1,000,000, 625,000, 70,000, 625,000, and
625,000 shares of our common stock, respectively. We
granted an option to Mr. Lunsford for 500,000 shares
of common stock at an exercise price of $9.80 per share and an
option for 500,000 shares of common stock at an exercise
price of $19.80 per share. We granted an option to Mr. Hale
for 70,000 shares of common stock at an exercise price of
$10.00 per share. With the exception of the grants to
Messrs. Lunsford and Hale, the option grants had an
exercise price of $0.40 per share. Each of the grants to
Messrs. Lunsford and Hale were made in connection with
their commencement of employment at Limelight, respectively, and
the remaining grants were made by our board of directors as part
of our annual process of reviewing equity positions of our
employees, and the board determined that, in light of the
individuals’ performance, equity ownership and level of
vesting, it was appropriate to provide additional incentive for
each of these personnel.
Prior to the completion of this offering, we plan to adopt a new
2007 Equity Incentive Plan, which is described below under
“— Employee Benefit Plans.” The 2007 Equity
Incentive Plan will replace our existing 2003 Incentive
Compensation Plan immediately following this offering and will
afford greater flexibility in making a wide variety of equity
awards, including stock options, shares of restricted stock,
restricted stock units, stock appreciation rights, performance
units and performance shares, to executive officers and our
other employees. Other than the equity plans described above, we
do not have any equity security ownership guidelines or
requirements for our executive officers.
Other Benefits. Executive officers are
eligible to participate in all of our employee benefit plans,
such as medical, dental, vision, group life, short and long-term
disability, and supplemental insurance and our 401(k) plan, in
each case on the same basis as other employees, subject to
applicable laws. We also provide vacation and other paid
holidays to all employees, including our executive officers,
which are comparable to those provided at peer companies.
Executive
Compensation Tables
The following table provides information regarding the
compensation of each of the individuals who served as our
principal executive officer and principal financial officer in
2006 and each of the next three most highly compensated
executive officers during 2006. We refer to these executive
officers as our named executive officers.
Summary
Compensation Table
Stock
Option
All Other
Name and
Principal Position
Salary
Bonus
Awards(1)
Awards(1)
Compensation(2)
Total
Jeffrey W. Lunsford(3)
$
38,333
$
100,000
$
1,668,000
$
367,000
$
322
$
2,173,655
President, Chief Executive
Officer and Chairman
Nathan F. Raciborski
220,000
337,622
—
1,481,000
11,476
2,050,098
Co-Founder and Chief Technical
Officer
Matthew Hale(4)
22,917
—
44,000
18,000
28
84,945
Chief Financial
Officer
Michael M. Gordon(5)
180,000
337,622
—
1,483,000
11,265
2,011,887
Co-Founder and Chief Strategy
Officer
William H. Rinehart(6)
220,000
337,622
—
1,480,000
8,537
2,046,159
Co-Founder
Erik W. Gabler
180,000
40,000
—
3,000
3,867
226,867
Senior Vice President of
International Sales and Global Account Management
Louis A. Greco III
140,453
197,444
—
1,800
3,867
343,564
Vice President of North American
Sales and Business Development Channels
(1)
Amounts represent stock-based compensation expense for fiscal
year 2006 for stock and option awards under SFAS 123R as
discussed in Note 8, Stockholders’ Equity subheading
“Incentive
Compensation Plan,” of the Notes to Consolidated Financial
Statements included elsewhere in this prospectus.
(2)
Represents amounts paid for health and life insurance for the
employee and the employee’s family members.
(3)
Mr. Lunsford’s annual salary upon completion of this
offering will be $400,000.
(4)
Mr. Hale’s annual salary upon completion of this
offering will be $275,000.
(5)
Mr. Rinehart served as our Chief Executive Officer until
October 2006.
(6)
Mr. Gordon served as our principal financial officer until
November 2006.
Grants of
Plan-Based Awards in 2006
The following table provides information regarding grants of
stock options and other plan based awards to each of our named
executive officers during the fiscal year ended
December 31, 2006. All options granted to
Messrs. Raciborski, Gordon, and Rinehart were granted at
the fair market value of our common stock, as determined by our
board of directors on the date of grant. The options granted to
Messrs. Lunsford and Hale were granted at exercise prices in
excess of the fair market value of our common stock on the date
of grant. These options were granted under our Amended and
Restated 2003 Incentive Compensation Plan.
All Other
All Other
Option Awards:
Exercise or
Grant Date
Stock Awards:
Number of
Base Price
Fair Value
Number of
Securities
of Option
of Stock
Shares of
Underlying
Awards
and Option
Name
Grant
Date
Stock or
Units(#)
Options(#)
($/sh)
Awards($)(1)
Jeffrey W. Lunsford
11/20/06
—
500,000
(2)
$
9.80
$
3,567,000
11/20/06
—
500,000
(3)
19.80
2,971,000
10/20/06
1,000,000
(4)
—
—
10,040,000
Nathan F. Raciborski
08/02/06
—
625,000
(5)
0.40
3,135,000
Matthew Hale
12/01/06
—
70,000
(2)
10.00
448,000
12/01/06
230,000
—
—
1,255,000
Michael M. Gordon
08/02/06
—
625,000
(5)
0.40
448,000
William H. Rinehart
08/02/06
—
525,000
(5)
0.40
448,000
Erik W. Gabler
—
—
—
—
—
Louis A. Greco III
—
—
—
—
—
(1)
Amounts represent total fair value of stock and option awards
granted in 2006 under SFAS 123R as discussed in Note 8,
Stockholders’ Equity subheading “Incentive
Compensation Plan,” of the Notes to Consolidated Financial
Statements included elsewhere in this prospectus.
(2)
Vests
1/4 after
one year and approximately
1/48 per
month thereafter. Option expires 10 years from the date of
grant.
(3)
Vests
1/48 after
two years and approximately
1/48 per
month thereafter. Option expires 10 years from the date of
grant.
(4)
Twelve and one-half percent (12.5%) of the shares vested on the
grant date. An additional twelve and one-half percent (12.5%) of
the shares vest on the
120th day
after the grant date, and
1/48 of
the shares vest each month thereafter.
(5)
Vests approximately
1/12 per
month. The board of directors has authorized the early exercise
of this grant. Option expires 10 years from the date of
grant.
The following table presents certain information concerning the
outstanding option awards held as of December 31, 2006 by
each named executive officer.
Stock
Awards
Equity
Incentive
Equity
Incentive
Plan Awards:
Plan Awards:
Market or
Option
Awards
Number of
Payout Value
Number of
Number of
Unearned
of Unearned
Securities
Securities
Shares, Units
Shares, Units
Underlying
Underlying
or Other
or Other
Unexercised
Unexercised
Option
Option
Rights
Rights
Options:
Options:
Exercise
Expiration
That Have
That Have
Name
Exercisable
(#)
Unexercisable(#)
Price($)
Date
Not Vested
(#)
Not Vested
($)
Jeffrey W. Lunsford
—
500,000
$
9.80
11/20/16
(1)
875,000
(2)
$
1,111,250
—
500,000
19.80
11/20/16
(3)
—
—
Nathan F. Raciborski
—
—
—
—
—
—
Matthew Hale
—
70,000
10.00
12/01/16
(4)
230,000
(4)
292,100
Michael M. Gordon
—
—
—
—
—
—
William H. Rinehart
—
—
—
—
—
—
Erik W. Gabler
243
—
0.21
12/15/13
(5)
—
—
3,500
71,500
0.40
10/27/15
(6)
—
—
Louis A. Greco III
18,900
51,100
0.40
10/27/15
(7)
—
—
(1)
Vesting commenced November 20, 2006 and vests
1/4
after one year and approximately
1/48 per
month thereafter.
(2)
12.5% of the shares vested on the grant date, October 20,2006. An additional 12.5% of the shares vest on the
120th day
after the grant date, and approximately
1/48 of
the shares vest on the corresponding day of each month
thereafter.
(3)
Vesting commenced November 20, 2006 and vests
1/48 after
two years and approximately
1/48 per
month thereafter.
(4)
Vesting commenced December 1, 2006 and vests
1/4
after one year and approximately
1/48 per
month thereafter.
(5)
Vesting commenced December 15, 2003 and vests
1/4
after one year and approximately
1/36 per
month thereafter.
(6)
Vesting commenced November 1, 2005 and vests
1/4 after
one year and approximately
1/36 per
month thereafter.
(7)
Vesting commenced November 1, 2005 and vests
1/4
after one year and approximately
1/48
per month thereafter.
Option Exercises
and Stock Vested in Last Fiscal Year
The following table presents certain information concerning the
exercise of options and vesting of stock awards by each of our
named executive officers during the fiscal year ended
December 31, 2006, including the value of gains on exercise
and the value of the stock awards.
Option
Awards
Stock
Awards
Number of
Number of
Shares
Value
Shares
Value
Acquired on
Realized on
Acquired on
Realized on
Name
Exercise(#)
Exercise($)
Vesting(#)
Vesting($)(1)
Jeffrey W. Lunsford
—
$
—
125,000
$
50,000
Nathan F. Raciborski
500,000
0
—
—
625,000
0
—
—
Matthew Hale
—
—
—
—
Michael M. Gordon
250,000
0
—
—
625,000
0
—
—
William H. Rinehart
275,000
0
—
—
625,000
0
—
—
Erik W. Gabler
209,772
39,857
—
—
3,807
4,073
—
—
25,000
22,000
—
—
Louis A. Greco III
25,410
4,828
—
—
(1)
The aggregate dollar amount realized upon the vesting of a stock
award represents the aggregate market price of the shares of our
common stock underlying the stock award on the vesting date
(assumed to be the midpoint of the price range set forth on the
cover page of this prospectus) multiplied by the shares vested
on the vesting date.
Pension
Benefits
None of our named executive officers participates in or has
account balances in qualified or non-qualified defined benefit
plans sponsored by us.
Nonqualified
Deferred Compensation
None of our named executive officers participates in or has
account balances in non-qualified defined contribution plans or
other deferred compensation plans maintained by us.
Employment
Agreements and Change of Control Arrangements
Jeffrey W.
Lunsford
We have entered into an employment agreement, dated
October 20, 2006, with Mr. Lunsford, our President,
Chief Executive Officer and Chairman of the Board.
Compensation. Mr. Lunsford’s
annual salary is $325,000 per year and will be increased to
$400,000 per year effective upon the closing of this
offering.
Mr. Lunsford is eligible to receive an annual cash
incentive bonus payable based on achievement of performance
goals established by our board of directors. During calendar
year 2007, Mr. Lunsford’s target annual incentive
bonus is $275,000. The earned annual cash incentive bonus, if
any, payable to Mr. Lunsford will depend upon the extent to
which the applicable performance goals specified by our board of
directors are achieved.
We paid Mr. Lunsford a $100,000 signing bonus pursuant to
his employment agreement. In addition, the employment agreement
provides that, in the event that Mr. Lunsford’s prior
employer,
WebSideStory, Inc., fails to pay amounts owed to him pursuant to
WebSideStory, Inc.’s bonus plan, we will pay
Mr. Lunsford such amount minus the amount actually paid to
Mr. Lunsford by WebSideStory, Inc. under WebSideStory,
Inc.’s bonus plan.
Equity Awards. Pursuant to his
employment agreement, Mr. Lunsford was granted
1,000,000 shares of our restricted common stock under our
Amended and Restated 2003 Incentive Compensation Plan on
October 20, 2006. Of these shares, 12.5% vested on
October 20, 2006. An additional 12.5% vested on
February 17, 2007, and one forty-eighth of the total number
of shares will vest monthly thereafter assuming
Mr. Lunsford’s continued employment with us.
On November 20, 2006, Mr. Lunsford was granted an
option to purchase 500,000 shares of our common stock
pursuant to his employment agreement at a per share exercise
price equal to $9.80 under the Amended and Restated 2003
Incentive Compensation Plan. This option is scheduled to vest at
a rate of 25% of the shares on the first anniversary of the
grant, and one forty-eighth of the total number of shares on a
monthly basis thereafter, assuming Mr. Lunsford’s
continued employment with us.
We also issued Mr. Lunsford an option to purchase
500,000 shares of our common stock on November 20,2006 at a per share price of $19.80 under the Amended and
Restated 2003 Incentive Compensation Plan. This option is
scheduled to vest at a rate of one forty-eighth of the total
number of shares on a monthly basis beginning on the second
anniversary of the date of grant.
Expenses. Mr. Lunsford’s
employment agreement provides that we will reimburse him for
reasonable travel, entertainment and other expenses incurred by
him in furtherance of the performance of his employment duties.
Such reimbursement includes the cost incurred by
Mr. Lunsford in flying his personal airplane on business
travel up to a maximum of $400 per hour and the cost
incurred by Mr. Lunsford in renting an apartment in the
Phoenix area, not to exceed $2,000 per month.
Potential Payments Upon Termination or
Change-in-Control
and Other
Distributions. Mr. Lunsford’s
employment agreement defines a change of control as the
consummation of a merger or consolidation or the approval of a
plan of complete liquidation or for the sale or disposition of
all or substantially all of our assets.
In the event we consummate a change of control transaction, 50%
of Mr. Lunsford’s then outstanding unvested equity
awards will vest. Assuming that such change of control occurred
on December 31, 2006, Mr. Lunsford would potentially
gain $ assuming that the price per
share of our common stock as of December 31, 2006
is ,
which is the mid-point of the range indicated on the cover page
of this prospectus.
In the event that we terminate Mr. Lunsford’s
employment without cause or Mr. Lunsford resigns for good
reason, and the termination is in connection with a change of
control, then Mr. Lunsford will receive (i) continued
payment of his base salary for twelve months, (ii) payment
in the amount equal to 100% of Mr. Lunsford’s target
annual incentive for the year in which the termination occurs,
(iii) the vesting of 100% of Mr. Lunsford’s then
outstanding unvested equity awards, and (iv) reimbursement
for premiums paid for continued heath benefits for
Mr. Lunsford and any of his eligible dependents until the
earlier of 12 months or the date on which Mr. Lunsford
and his eligible dependants are covered by a similar plan.
Assuming that such change of control occurred on
December 31, 2006, Mr. Lunsford would potentially gain
$ assuming that the price per
share of our common stock as of December 31, 2006
is ,
which is the mid-point of the range indicated on the cover page
of this prospectus.
In the event that we terminate Mr. Lunsford’s
employment without cause or Mr. Lunsford resigns for good
reason, and such termination is not in connection with a change
in control, Mr. Lunsford will receive (i) continued
payment of his base salary for twelve months, (ii) the
current year’s target annual incentive bonus pro-rated to
the date of termination and, (iii) reimbursement for
premiums paid for
continued health benefits for Mr. Lunsford and any of his
eligible dependents until the earlier of 12 months or the date
on which Mr. Lunsford and his eligible dependents are
covered by a similar plan.
If Mr. Lunsford terminates his employment voluntarily or is
terminated for cause, then (i) all further vesting of his
outstanding equity awards will terminate immediately,
(ii) all payments of compensation to Mr. Lunsford will
terminate immediately, and (iii) Mr. Lunsford will be
eligible for severance only in accordance with our then
established plans. In addition, if Mr. Lunsford terminates
his employment voluntarily within the first full year following
November 20, 2006, he is required to sell to us all of his
shares of our stock for an aggregate of $1.00.
In the event Mr. Lunsford’s employment is terminated
due to death or disability, 25% of his then unvested options
shall vest.
Material Conditions or Obligations of
Severance. Mr. Lunsford’s
employment agreement provides that the receipt of any severance
or other benefits described above is subject to:
Mr. Lunsford’s signing and not revoking a separation
agreement and release of claims; Mr. Lunsford agreeing that
during his employment term and for 24 months thereafter, he
will not solicit any of our employees for employment or directly
or indirectly engage in, have any ownership interest in or
participate in any entity that as of the date of termination
competes with us in any substantial business; and
Mr. Lunsford not knowingly and materially making any
disparaging, criticizing, or otherwise derogatory statements
regarding us.
Matthew
Hale
We have entered into an employment agreement, dated
November 22, 2006, with Mr. Hale, our Chief Financial
Officer and Secretary.
Compensation. Mr. Hale’s
employment agreement provides that we will pay Mr. Hale an
annual salary of $225,000, which will be increased to $275,000
upon the closing of this offering. Mr. Hale’s
employment agreement also provides that we will pay
Mr. Hale an annual bonus of $50,000 up until the closing of
this offering, which is payable in accordance with our normal
payroll practices. Mr. Hale is also eligible to receive an
incentive bonus, which when combined with his annual cash
incentive bonus, would entitle him to earn an aggregate of
$100,000 in bonuses for calendar year 2007. This incentive bonus
will be payable upon the achievement of performance goals
established by the board of directors or by the compensation
committee of the board of directors. During calendar year 2007,
Mr. Hale’s target annual incentive is $50,000, which
shall be adjusted upward in an amount equal to any portion of
the annual bonus Mr. Hale is entitled to receive before the
close of this offering that we have not paid to Mr. Hale.
Equity Awards. Mr. Hale’s
employment agreement provides that we will grant Mr. Hale
230,000 shares of restricted common stock under the Amended
and Restated 2003 Incentive Compensation Plan. One-fourth of the
total number of shares of restricted common stock subject to
this grant vests and our right of repurchase with respect to
such vested shares lapses on December 1, 2008. Thereafter,
an additional one forty-eighth of the total number of shares of
restricted common stock subject to this grant vests and our
right of repurchase to such vested shares lapses on each
calendar month anniversary after December 1, 2008.
Additionally, Mr. Hale’s employment agreement provides
that we will issue Mr. Hale an option to purchase
70,000 shares of common stock at a per share exercise price
equal to $10.00 per share under the terms of the Amended
and Restated 2003 Incentive Compensation Plan. One-forth of the
total number of options to purchase shares of common stock
subject to this grant vests and becomes exercisable on
December 1, 2008. Thereafter, an additional one
forty-eighth of the total number of options to purchase shares
of common stock subject to this grant vests and becomes
exercisable on each calendar month anniversary after
December 1, 2008.
Employment
Benefits. Mr. Hale’s employment
agreement provides that we will reimburse Mr. Hale for
reasonable expenses incurred in the furtherance of performing
his duties, including up to
$2,000 per month incurred in renting an apartment in the
Phoenix area for a period not to exceed one hundred and eighty
days from the date Mr. Hale commenced service as our Chief
Financial Officer. Additionally, Mr. Hale’s employment
agreement provides that we will reimburse Mr. Hale for
reasonable moving and relocation related expenses in connection
with Mr. Hale’s move from the Atlanta metro area to
the Phoenix area, provided that such moving and relocation
related expenses do not exceed $140,000 in the aggregate.
Potential Payments Upon Termination or
Change-in-Control
and Other Distributions. Mr. Hale’s
employment agreement defines a change of control as the
consummation of a merger or consolidation or the approval of a
plan of complete liquidation or for the sale or disposition of
all or substantially all of our assets.
In the event that we consummate a change of control transaction,
50% of Mr. Hale’s then outstanding unvested equity
awards will vest. Assuming that such change of control occurred
on December 31, 2006, Mr. Hale would potentially gain
$ assuming that the price per
share of our common stock as of December 31, 2006 is
$ , which is the mid-point of the
range indicated on the cover page of this prospectus.
In the event that we terminate Mr. Hale’s employment
without cause or Mr. Hale resigns for good reason, in
either case in connection with a change of control,
Mr. Hale will receive continued payment for 12 months
of his then current annual salary, 100% of the current
year’s target annual incentive bonus, 100% of
Mr. Hale’s then outstanding unvested equity awards
will vest and reimbursement for premiums paid for continued
health benefits under our health plan until the earlier of
12 months or the date upon which Mr. Hale and
Mr. Hale’s eligible dependents become covered under
similar plans. Assuming that such termination or resignation in
connection with a change of control occurred on
December 31, 2006, Mr. Hale would potentially gain
$ assuming that the price per
share of our common stock as of December 31, 2006 is
$ , which is the mid-point of the
range indicated on the cover page of this prospectus.
In the event that we terminate Mr. Hale’s employment
without cause or Mr. Hale resigns for good reason, in
either case other than in connection with a change of control,
Mr. Hale will receive continued payment for 12 months
of his then current annual salary, the current year’s
target annual incentive bonus pro-rated to the date of
termination and reimbursement for premiums paid for continued
health benefits under our health plans until the earlier of
12 months or the date upon which Mr. Hale and
Mr. Hale’s eligible dependents become covered under
similar plans.
In the event that we terminate Mr. Hale’s employment
for cause or Mr. Hale resigns without good reason, all
payments of compensation to Mr. Hale will terminate
immediately and all further vesting of Mr. Hale’s
outstanding equity awards will terminate immediately.
Mr. Hale will be eligible for severance benefits only in
accordance with our then-established plan. In the event that
Mr. Hale’s employment is terminated due to death or
disability, 25% of Mr. Hale’s then unvested options
shall vest.
Material Conditions or Obligations of Severance
Mr. Hale’s employment agreement
provides that the receipt of any severance or other benefits
described above is subject to Mr. Hale’s signing and
not revoking a separation agreement and release of claims;
agreeing that during his employment term and for 24 months
thereafter, he will not solicit any of our employees for
employment or directly or indirectly engage in, have any
ownership interest in or participate in any entity that as of
the date of termination competes with us in any substantial
business; and not knowingly and materially making any
disparaging, criticizing or otherwise derogatory statements
regarding us.
Our board of directors adopted our 2007 Equity Incentive Plan
in
2007, and our stockholders approved this plan
in
2007. Our 2007 Equity Incentive Plan provides for the grant of
incentive stock options, within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended, to our
employees and any parent and subsidiary corporations’
employees, and for the grant of nonstatutory stock options,
restricted stock, restricted stock units, stock appreciation
rights, performance units and performance shares to our
employees, directors and consultants and our parent and
subsidiary corporations’ employees and consultants.
Share Reserve. We have reserved a total
of shares
of our common stock for issuance under the 2007 Equity Incentive
Plan, plus (a) any shares which have been reserved but not
issued under our 2003 Incentive Compensation Plan as of the
effective date of this offering and (b) any shares returned
to our 2003 Incentive Compensation Plan on or after the
effective date of this offering as a result of termination of
options or the repurchase of shares issued under the 2003
Incentive Compensation Plan. In addition, our 2007 Equity
Incentive Plan provides for annual increases in the number of
shares available for issuance thereunder on the first day of
each fiscal year, beginning with our 2008 fiscal year, equal to
the least of:
•
% of
the outstanding shares of our common stock on the last day of
the immediately preceding fiscal year;
•
shares; or
•
such other amount as our board of directors may determine.
Administration of Awards. Our board of
directors or a committee of our board administers our 2007
Equity Incentive Plan. Our compensation committee will be
responsible for administering all of our equity compensation
plans. In the case of options intended to qualify as
“performance based compensation” within the meaning of
Section 162(m) of the Internal Revenue Code of 1986, as
amended, the committee will consist of two or more “outside
directors” within the meaning of Section 162(m) of the
Internal Revenue Code of 1986, as amended.
The administrator has the power to determine the terms of the
awards, including the exercise price, the number of shares
subject to each such award, the exercisability of the awards and
the form of consideration payable upon exercise. The
administrator also has the authority to institute an exchange
program whereby the exercise prices of outstanding awards may be
reduced, outstanding awards may be surrendered in exchange for
awards with a lower exercise price or outstanding awards may be
transferred to a third-party.
Stock Options. The plan administrator
will determine the exercise price of options granted under our
2007 Equity Incentive Plan, but the exercise price of options
granted under our 2007 Equity Incentive Plan must at least be
equal to the fair market value of our common stock on the date
of grant. The term of an incentive stock option may not exceed
ten years, except that with respect to any participant who owns
10% of the voting power of all classes of our outstanding stock
as of the grant date, the term must not exceed five years and
the exercise price must equal at least 110% of the fair market
value on the grant date. The administrator determines the term
of all other options.
After termination of an employee, director or consultant, he or
she may exercise his or her option for the period of time stated
in the option agreement. Generally, if termination is due to
death or disability, the option will remain exercisable for
12 months. In all other cases, the option will generally
remain exercisable for three months. However, an option
generally may not be exercised later than the expiration of its
term.
Stock Appreciation Rights. Stock
appreciation rights may be granted under our 2007 Equity
Incentive Plan. Stock appreciation rights allow the recipient to
receive the appreciation in the fair
market value of our common stock between the exercise date and
the date of grant. The administrator determines the terms of
stock appreciation rights, including when such rights become
exercisable and whether to pay the increased appreciation in
cash or with shares of our common stock, or a combination
thereof. Stock appreciation rights expire under the same rules
that apply to stock options.
Restricted Stock. Restricted stock may
be granted under our 2007 Equity Incentive Plan. Restricted
stock awards are shares of our common stock that vest in
accordance with terms and conditions established by the
administrator. The administrator will determine the number of
shares of restricted stock granted to any employee. The
administrator may impose whatever conditions to vesting it
determines to be appropriate. For example, the administrator may
set restrictions based on the achievement of specific
performance goals. Shares of restricted stock that do not vest
are subject to our right of repurchase or forfeiture.
Restricted Stock Units. Restricted
stock units may be granted under our 2007 Equity Incentive Plan.
Restricted stock units are awards of restricted stock,
performance shares or performance units that are paid out in
installments or on a deferred basis. The administrator
determines the terms and conditions of restricted stock units
including the vesting criteria and the form and timing of
payment.
Performance Units and Performance
Shares. Performance units and performance
shares may be granted under our 2007 Equity Incentive Plan.
Performance units and performance shares are awards that will
result in a payment to a participant only if performance goals
established by the administrator are achieved or the awards
otherwise vest. The administrator will establish organizational
or individual performance goals in its discretion, which,
depending on the extent to which they are met, will determine
the number
and/or the
value of performance units and performance shares to be paid out
to participants. Performance units shall have an initial dollar
value established by the administrator prior to the grant date.
Performance shares shall have an initial value equal to the fair
market value of our common stock on the grant date. Payment for
performance units and performance shares may be made in cash or
in shares of our common stock with equivalent value, or in some
combination, as determined by the administrator.
Transfer of Awards. Unless the
administrator provides otherwise, our 2007 Equity Incentive Plan
does not allow for the transfer of awards and only the recipient
of an award may exercise an award during his or her lifetime.
Change of Control Transactions. Our
2007 Equity Incentive Plan provides that in the event of our
change in control, as defined in the 2007 Equity Incentive Plan,
each outstanding award will be treated as the administrator
determines, including that the successor corporation or its
parent or subsidiary will assume or substitute an equivalent
award for each outstanding award. The administrator is not
required to treat all awards similarly. If there is no
assumption or substitution of outstanding awards, the awards
will fully vest, all restrictions will lapse and the awards will
become fully exercisable. The administrator will provide notice
to the recipient that he or she has the right to exercise the
option and stock appreciation right as to all of the shares
subject to the award, all restrictions on restricted stock will
lapse and all performance goals or other vesting requirements
for performance shares and units will be deemed achieved at 100%
of target levels, and all other terms and conditions met. The
option or stock appreciation right will terminate upon the
expiration of the period of time the administrator provides in
the notice. In the event the service of an outside director is
terminated on or following a change in control, other than
pursuant to a voluntary resignation, his or her options and
stock appreciation rights will fully vest and become immediately
exercisable, all restrictions on restricted stock will lapse and
all performance goals or other vesting requirements for
performance shares and units will be deemed achieved at 100% of
target levels, and all other terms and conditions met.
Plan Amendments. Our 2007 Equity
Incentive Plan will automatically terminate in 2017, unless we
terminate it sooner. In addition, our board of directors has the
authority to amend, suspend
or terminate the 2007 Equity Incentive Plan provided such action
does not impair the rights of any participant.
Amended and
Restated 2003 Incentive Compensation Plan
Our Amended and Restated 2003 Incentive Compensation Plan was
adopted by our board of directors and approved by our
stockholders effective October 2006. Our Amended and Restated
2003 Incentive Compensation Plan provides for the grant of
incentive stock options, within the meaning of Section 422
of the Internal Revenue Code, to our employees, and for the
grant of nonstatutory stock options, stock grants and stock
purchase rights to our employees, directors and consultants. As
of December 31, 2006, options to purchase
3,767,495 shares of common stock were outstanding and
602,836 shares were available for future grant under this
plan. In March 2007, we reserved an additional
950,000 shares for future grant under this plan.
We will not grant any additional awards under our Amended and
Restated 2003 Incentive Compensation Plan following this
offering. Instead, we will grant options under our 2007 Equity
Incentive Plan. However, our Amended and Restated 2003 Incentive
Compensation Plan will continue to govern the terms and
conditions of all outstanding options and stock purchase rights
previously granted under the Amended and Restated 2003 Incentive
Compensation Plan following this offering.
Our Amended and Restated 2003 Incentive Compensation Plan
provides that in the event of a proposed sale of all or
substantially all of our assets or any merger or consolidation
in which we are not the surviving corporation, the successor
entity may, with the consent of our board of directors or a
committee designated by our board of directors, assume each
outstanding option or substitute an equivalent option or right.
If the successor entity does not assume or substitute the
outstanding options, then (i) each option will terminate
upon the consummation of the sale, merger or consolidation and
(ii) our board of directors, or a committee designated by
our board of directors, has the authority, within its
discretion, to provide for the acceleration of vesting or
exercisability of options and other awards granted by us under
our Amended and Restated 2003 Incentive Compensation Plan. Our
board of directors, or a committee designated by our board of
directors, is required to give notice of any proposed sale,
merger or consolidation a reasonable time prior to the closing
date of such sale, merger or consolidation in order to give our
option holders an opportunity to exercise any options that are
then exercisable before the closing of the transaction.
401(k)
Plan
We have established a tax-qualified employee savings and
retirement plan for all employees who satisfy certain
eligibility requirements, including requirements relating to age
and length of service. Under our 401(k) plan, employees may
elect to reduce their current compensation by up to 15% or the
statutory limit, $15,000 in 2006, whichever is less, and have us
contribute the amount of this reduction to the 401(k) plan. In
addition, beginning January 1, 2007, we match employee
deferrals as follows: a
dollar-for-dollar
(100%) match on an eligible employee’s deferral that does
not exceed three percent (3%) of compensation for the year
and a fifty percent (50%) match on the next two percent
(2%) of the employee’s deferrals. We intend for the 401(k)
plan to qualify under Section 401 of the Code so that
contributions by employees or by us to the 401(k) plan, and
income earned on plan contributions, are not taxable to
employees until withdrawn from the 401(k) plan.
Limitation on
Liability and Indemnification Matters
Our amended and restated certificate of incorporation, which
will be in effect upon the completion of this offering, contains
provisions that limit the liability of our directors for
monetary damages to the fullest extent permitted by Delaware
law. Consequently, our directors will not be personally liable
to us or our stockholders for monetary damages for any breach of
fiduciary duties as directors, except liability for:
•
any breach of the director’s duty of loyalty to us or our
stockholders;
any act or omission not in good faith or that involves
intentional misconduct or a knowing violation of law;
•
unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware
General Corporation Law; or
•
any transaction from which the director derived an improper
personal benefit.
Our amended and restated certificate of incorporation and
amended and restated bylaws to be in effect upon the completion
of this offering provide that we are required to indemnify our
directors and officers, in each case to the fullest extent
permitted by Delaware law. Our amended and restated bylaws also
provide that we are obligated to advance expenses incurred by a
director or officer in advance of the final disposition of any
action or proceeding, and permit us to secure insurance on
behalf of any officer, director, employee or other agent for any
liability arising out of his or her actions in that capacity
regardless of whether we would otherwise be permitted to
indemnify him or her under the provisions of Delaware law. We
have entered and expect to continue to enter into agreements to
indemnify our directors, executive officers and other employees
as determined by our board of directors. With specified
exceptions, these agreements provide for indemnification for
related expenses including, among other things, attorneys’
fees, judgments, fines and settlement amounts incurred by any of
these individuals in any action or proceeding. We believe that
these bylaw provisions and indemnification agreements are
necessary to attract and retain qualified persons as directors
and officers. We also maintain directors’ and
officers’ liability insurance.
The limitation of liability and indemnification provisions in
our amended and restated certificate of incorporation and
amended and restated bylaws may discourage stockholders from
bringing a lawsuit against our directors and officers for breach
of their fiduciary duty. They may also reduce the likelihood of
derivative litigation against our directors and officers, even
though an action, if successful, might benefit us and other
stockholders. Further, a stockholder’s investment may be
adversely affected to the extent that we pay the costs of
settlement and damage awards against directors and officers as
required by these indemnification provisions. At present, there
is no pending litigation or proceeding involving any of our
directors, officers or employees for which indemnification is
sought, and we are not aware of any threatened litigation that
may result in claims for indemnification.
In addition to the director and executive compensation
arrangements discussed above under “Management,” the
following is a description of transactions since January 1,2004, to which we have been a party in which the amount involved
exceeded or will exceed $120,000 and in which any of our
directors, executive officers, beneficial holders of more than
5% of our capital stock, or entities affiliated with them, had
or will have a direct or indirect material interest.
Preferred Stock
Issuances
In July 2006, we issued an aggregate of 26,579,970 shares
of our Series B preferred stock at a purchase price of
$4.8909 per share to certain accredited investors in a
private placement transaction. As a result of this transaction,
entities affiliated with Goldman, Sachs & Co., one of
the lead underwriters of this offering, became holders of more
than five percent of our common stock. The following table sets
forth the aggregate number of the securities acquired by these
entities:
In July 2006, we entered into an amended and restated
investors’ rights agreement with the purchasers of our
preferred stock that provides for certain rights relating to the
registration of their shares of common stock issued upon
conversion of their preferred stock. The holders of 5% of our
capital stock listed in the above table are parties to this
agreement, as is another holder of 5% of our capital stock, Oak
Investment Partners XII, L.P. See “Description of Capital
Stock — Registration Rights” for additional
information.
Stockholders’
Agreement
In July 2006, we entered into a stockholders’ agreement
with the purchasers of our preferred stock and certain holders
of our common stock that provides for certain rights of first
refusal with respect to the stock subject to the agreement,
certain rights relating to the co-sale of such securities and
certain rights with respect to the voting of the securities
subject to the agreement. Pursuant to this agreement, the
parties agreed to vote any shares of our common stock held by
them in favor of directors nominated by a majority of the
holders of the then outstanding shares of common stock held by
the parties to the agreement. The parties also agreed to vote
any shares of our preferred stock held by them in favor of four
directors designated by GS Capital Partners V Institutional,
L.P. and GS Capital Partners V Fund, L.P. This
agreement and all rights thereunder, including rights to
designate directors, automatically terminate upon completion of
this offering, and members previously elected to our board of
directors pursuant to the agreement will continue to serve as
directors until their successors are duly elected by the holders
of our common stock.
Stockholder
Tender Agreement and Escrow
In May 2006, we entered into a purchase agreement for the sale
of our Series B preferred stock, which transaction closed
in July 2006. The purchase agreement provided for an aggregate
of $102.1 million of the proceeds from the sale of the
Series B preferred stock to be used by us to repurchase
shares of our common stock from existing stockholders, holders
of vested stock options to purchase shares of our common stock
and warrant holders at a price not to exceed $4.8909 per
share. In connection with this transaction, we entered into a
stockholder tender agreement with certain
of our stockholders. Pursuant to this agreement, in July 2006 we
repurchased the following common stock and vested stock options
held by certain individuals who were serving as directors
and/or
executive officers at that time, or entities affiliated with
these individuals, at a purchase price of $4.8909 per share:
•
1,134,866 shares of our common stock from Michael and
Lauren Gordon;
•
50,000 shares of our common stock from Thunder Road Capital
LLC. Michael M. Gordon is a managing member of Thunder Road
Capital LLC;
•
2,951,872 shares of our common stock from Kaplan Group
Investments LLC. Allan M. Kaplan is a managing member of Kaplan
Group Investments LLC;
•
244,579 shares of our common stock from Cocoon Capital LLC.
Nathan F. Raciborski and Allan M. Kaplan are managing members of
Cocoon Capital LLC;
•
1,354,415 shares of our common stock from the Raciborski
Group Limited Partnership;
•
1,455,791 shares of common stock from Nathan F.
Raciborski;
•
1,735,871 shares of our common stock from the Rinehart
Family Trust dated May of 1999;
•
352,884 shares of our common stock from Erik W. Gabler and
Nicole A. Gabler;
•
123,981 shares of our common stock subject to a vested
option held by Erik W. Gabler, with an exercise price of
$0.21 per share; and
•
44,590 shares of our common stock subject to a vested
option held by Louis A. Greco III, with an exercise price
of $0.21 per share.
The purchase agreement also provided for an aggregate of
$10.2 million of the funds used to repurchase shares to be
held in an escrow account to serve as security for the
indemnification obligations of the tendering stockholders under
the purchase agreement. We entered into a related escrow
agreement in July 2006, which provides for the establishment of
an escrow fund pursuant to the terms of the purchase agreement
and describes the process by which indemnified parties may make
a claim against the escrow fund. The purchasers of our
Series B preferred stock and their affiliates and their
respective officers, directors and employees are indemnified
parties under the escrow agreement. The following table sets
forth the holders of at least 5% of our capital stock which are
indemnified parties under the purchase agreement and the escrow
agreement:
Investor
GS Capital Partners V Fund, L.P.
GS Capital Partners V Offshore
Fund, L.P.
GS Capital Partners V
GmbH & Co. KG
GS Capital Partners V
Institutional, L.P.
Oak Investment Partners XII, L.P.
Any amounts in escrow not paid in respect to claims for
indemnification under the purchase agreement, and not subject to
pending claims for indemnification, are to be released to the
tendering stockholders upon the earliest to occur of
(i) the eighteen month anniversary of the closing of the
Series B preferred stock financing, which occurred in July
2006, (ii) the closing of a liquidation as defined in our
amended and restated certificate of incorporation or
(iii) the closing of this offering.
Transactions With
Entities Affiliated With Our Co-Founders
Vendor
Relationship
Our primary provider of server hardware to date has been
MicroPro Logistics, which is a wholly owned subsidiary of
Earthworks Underground Specialists, Inc. Nathan F. Raciborski
owned all of the outstanding shares of Earthworks until December
2006. We purchased equipment from MicroPro
totaling $2.1 million in 2004, $7.4 million in 2005,
and $29.9 million in 2006. In December 2006,
Mr. Raciborski sold a portion of his shares in Earthworks
and MicroPro to an unrelated third-party investor and
contributed the balance of his shares to Kairos Foundation, a
private charitable organization not controlled by
Mr. Raciborski. Earthworks currently owes approximately
$800,000 to Mr. Raciborski, pending a final accounting
analysis of Earthworks’ retained earnings balance. As a
result, Mr. Raciborski may be deemed to hold a continuing
financial interest in Earthworks.
Customer
Relationships
Nathan F. Raciborski owned 25% of the outstanding shares of
Priority Networks, Inc., which is one of our customers. We
recorded revenue from Priority Networks of $125,298 in 2004,
$210,701 in 2005 and $260,476 in 2006. In August 2006, Priority
Networks, Inc. was acquired by Smart City Holdings, LLC, and
Mr. Raciborski no longer has any ownership interest in
Priority Networks, Inc.
William H. Rinehart, Allan M. Kaplan and
Nathan F. Raciborski each own approximately 25% of the
outstanding stock of Four Point Play, Ltd., a subsidiary of
which is one of our customers. We recorded revenues from that
subsidiary of approximately $38,537 in 2004, $20,874 in 2005 and
$7,720 in 2006.
Lending and
Lease Transactions
We borrowed $100,000 in January 2003, $275,000 in April 2003,
$425,000 in March 2004, $500,000 in November 2004 and $400,000
in April 2005 from the Raciborski Family Foundation. Nathan F.
Raciborski is the founder of the Raciborski Family Foundation,
but does not hold investment authority over this entity.
Payments related to those notes during 2004 totaled $295,699, of
which $202,167 was principal and the balance was interest.
Payments related to those notes during 2005 totaled $1,617,940,
of which $1,497,833 was principal and the balance was interest.
All notes accrued interest at a rate of 14%. We paid off these
notes in full in August 2005.
Nathan F. Raciborski loaned $100,000 to Limelight Mainstreet
Tempe, LLC, our wholly owned subsidiary, in 2002 and accrued
interest in 2003 and 2004 in the amount of $40,111.
Mr. Raciborski also entered into an equipment rental
agreement with Limelight Mainstreet and accrued $60,000 of
rental payments under the equipment rental agreement in 2004. In
2005, Mr. Raciborski loaned an additional $114,444 to
Limelight Mainstreet in exchange for the equipment that had been
previously rented. We made a $20,000 principal payment to
Mr. Raciborski in June of 2005. Interest accrued at 20% for
a total interest expense of $33,960 in 2005. The total loan
balance of principal and accrued interest at the year end of
2005 was $270,187. Interest accrued at 20% for a total interest
expense of $21,065 in 2006. In July 2006, we paid the total loan
balance of principal and accrued interest of $291,251 in full.
We paid Thunder Road Capital fees of $84,000 in 2004 and $77,000
in 2005 for providing guarantees to various third-party lessors
in support of our leases with those lessors. Allan M. Kaplan and
Michael M. Gordon are members of Thunder Road Capital and the
sole members who participated in the transaction with us.
We entered into two
12-month
term capital leases with Ridgeline Capital, LLC. Michael M.
Gordon is the managing member of Ridgeline. The first capital
lease commenced in February 2005 for network equipment valued at
$950,207 with an implied interest rate of 18% and the second
capital lease commenced in March 2005 for network equipment
valued at $289,894 with an implied interest rate of 19%. These
two capital leases were fully paid off in August 2005, and we
assumed title to the leased equipment. Interest expense,
including loan origination fees, relating to these two capital
leases was $129,901 in 2005.
We lease approximately 1,000 square feet of office space
from Cocoon Capital, LLC in Phoenix, Arizona. Cocoon Capital is
50% owned each by Nathan F. Raciborski and Allan M. Kaplan. We
paid rent to Cocoon Capital for this facility totaling $38,400
in 2004, $25,600 in 2005 and $19,800 in 2006.
In addition, Cocoon Capital is the owner of record for the T-1
and phone lines that we use at this location. We reimbursed
Cocoon Capital for those expenses in the aggregate of $41,790 in
2004. Cocoon Capital sold the building in late 2006, but has
entered into a
month-to-month
lease at $1,200 per month. We have agreed to these month to
month expenses, but we have not entered any formal lease
agreement. We expect to vacate this facility by the end of 2007.
Stock Option
Grants
Certain stock option grants made in 2006 to our directors and
executive officers and related option grant policies are
described in this prospectus under the captions
“Management — Director Compensation” and
“Management — Option Grants in Last Fiscal
Year.” Pursuant to our director and executive officer
compensation policy or prior arrangements, we granted the
following options to certain executive officers in 2004 and 2005:
•
In February 2005, we granted Michael M. Gordon an option to
purchase 250,000 shares of our common stock at an exercise
price of $0.40 per share.
•
In February 2005, we granted Nathan F. Raciborski an option to
purchase 500,000 shares of our common stock at an exercise
price of $0.40 per share.
•
In February 2005, we granted William Rinehart an option to
purchase 275,000 shares of our common stock at an exercise
price of $0.40 per share.
•
In October 2005, we granted Eric W. Gabler an option to purchase
100,000 shares of our common stock at an exercise price of
$0.40 per share.
•
In October 2005, we granted Louis A. Greco III an option to
purchase 70,000 shares of our common stock at an exercise
price of $0.40 per share.
Employment and
Change of Control Agreements with Executive Officers
We have entered into employment and change of control
arrangement with certain of our executive officers as described
under the caption “Management — Employment
Agreements and Change of Control Arrangements.”
Indemnification
of Officers and Directors
Upon completion of this offering, our amended and restated
certificate of incorporation and bylaws will provide that we
will indemnify each of our directors and officers to the fullest
extent permitted by the Delaware General Corporation Law.
Further, prior to completion of this offering, we intend to
enter into indemnification agreements with each of our directors
and officers. For further information, see
“Management — Limitations of Liability and
Indemnification Matters.”
Policies and
Procedures for Related Party Transactions
As provided by our audit committee charter, our audit committee
must review and approve in advance any related party
transaction. All of our directors, officers and employees are
required to report to our audit committee any such related party
transaction prior to its completion. Prior to the creation of
our audit committee, our full board of directors reviewed
related party transactions. Each of the related party
transactions described above that were submitted to our board of
directors were approved by disinterested members of our board of
directors after disclosure of the interest of the related party
in the transaction.
The following table sets forth certain information with respect
to the beneficial ownership of our common stock as of
December 31, 2006 and as adjusted to reflect the sale of
the shares of our common stock in this offering, for:
•
each person known by us to beneficially own more than 5% of our
outstanding shares of common stock;
•
each of our named executive officers;
•
each of our directors;
•
all of our directors and executive officers as a group; and
•
each selling stockholder.
Beneficial ownership is determined in accordance with the rules
of the SEC and generally includes voting or investment power
with respect to securities. Except as indicated in the footnotes
to this table and pursuant to state community property laws, we
believe, based on the information furnished to us, that the
persons named in the table have sole voting and investment power
with respect to all shares reflected as beneficially owned by
them. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, shares of
common stock that could be issued upon the exercise of
outstanding options held by that person that are currently
exercisable or exercisable within 60 days of
December 31, 2006 are considered outstanding. These shares,
however, are not considered outstanding when computing the
percentage ownership of any other person. Percentage of
ownership is based on 44,514,964 shares of our common stock
outstanding on December 31, 2006, assuming conversion of
all shares of convertible preferred stock,
and shares
of common stock to be outstanding after completion of this
offering. This table assumes no exercise of the
underwriters’ over-allotment option. Beneficial ownership
representing less than 1% is denoted with an asterisk (*).
Unless otherwise indicated, the address for each of the
stockholders in the table below is
c/o Limelight
Networks, Inc., 2220 W. 14th Street, Tempe, Arizona85281.
Shares
Shares
Beneficially Owned Prior to Offering
Being
Shares
Beneficially Owned After Offering
Beneficial
Owner
Number
Percent
Offered
Number
Percent
5% Stockholders
GS Capital Partners Entities(1)
20,181,661
45.3
%
Oak Investment Partners XII,
Limited Partnership(2)
All directors and executive
officers as a group (14 persons)(13)
36,193,069
81.2
Other Selling
Stockholders
(1)
Funds affiliated with or managed by Goldman, Sachs &
Co. are GS Capital Partners V Fund, L.P.
(10,626,855 shares of Series B Preferred Stock), GS
Capital Partners V Offshore Fund, L.P. (5,489,391 shares of
Series B Preferred Stock), GS Capital Partners V
Institutional, L.P. (3,644,102 shares of Series B
Preferred Stock) and GS Capital Partners V
GmbH & Co. KG (421,313 shares of Series B
Preferred Stock) (the “Goldman Sachs Funds”). Voting
and dispositive power for the shares held by GS Capital
Partners V Fund, L.P. is held by its general partner
GSCP V Advisors, L.L.C., which disclaims beneficial
ownership of the shares held by GS Capital Partners V
Fund, L.P. except to the extent of its pecuniary interest
therein, if any. Voting and dispositive power for the shares
held by GS Capital Partners V Offshore Fund, L.P. is
held by its general partner GSCP V Offshore Advisors,
L.L.C., which disclaims beneficial ownership of the shares held
by GS Capital Partners V Offshore Fund, L.P. except to
the extent of its pecuniary interest therein, if any. Voting and
dispositive power for the shares held by GS Capital
Partners V Institutional, L.P. is held by its general partner
GS Advisors V., L.L.C., which disclaims beneficial
ownership of the shares held by GS Capital Partners V
Institutional, L.P. except to the extent of its pecuniary
interest therein, if any. Voting and dispositive power for the
shares held by GS Capital Partners V GmbH &
CO. KG is held by its managing limited partner
GS Advisors V., L.L.C., which disclaims beneficial
ownership of the shares held by GS Capital Partners V
GmbH & CO. KG except to the extent of its pecuniary
interest therein, if any. Goldman, Sachs & Co. is a
direct and indirect, wholly owned subsidiary of The Goldman
Sachs Group, Inc. and is an underwriter of this offering.
Goldman, Sachs & Co. is an investment manager of
GSCP V Advisors, L.L.C., GSCP V Offshore Advisors,
L.L.C. and GS Advisors V., L.L.C. The Goldman Sachs
Group, Inc., and certain affiliates, including Goldman,
Sachs & Co. and the Goldman Sachs Funds, may be deemed
to directly or indirectly beneficially own an aggregate of
20,181,661 shares of Series B Preferred Stock which
are owned directly or indirectly by the Goldman Sachs Funds. The
general partner, managing general partner or managing limited
partner of the Goldman Sachs Funds are affiliates of the Goldman
Sachs Group, Inc. and Goldman, Sachs & Co. The Goldman
Sachs Group, Inc., Goldman, Sachs & Co. and the Goldman
Sachs Funds and their general partner, managing general partner
or managing limited partner share voting and investment power
with certain of their respective affiliates. The Goldman Sachs
Group, Inc. and Goldman, Sachs & Co. each disclaim
beneficial ownership of the shares held by the Goldman Sachs
Funds, except to the extent of its pecuniary interest therein,
if any. The address of each of the GS Capital Partners
entities is c/o Goldman Sachs & Co., One
New York Plaza, 38th Floor, New York, NY10004, Attn:
Ben Adler.
(2)
The names of the parties who share power to vote and share power
to dispose of the shares held by Oak Investment Partners XII,
Limited Partnership are Fredric W. Harman, Bandel L. Carano, Ann
H. Lamont, and Edward F. Glassmeyer, all of whom are executive
managing members of Oak Associates XII, LLC, the General
Partner of Oak Investment Partners XII, Limited Partnership.
Each such individual disclaims beneficial ownership of the
securities held by such partnership in which such individual
does not have a pecuniary interest. The address of Oak
Investment Partners XII, L.P. is 525 University
Avenue, Suite 1300, Palo Alto, CA94301, Attn: Fredric W.
Harman.
Nathan F. Raciborski is a trustee of, and holds voting and
dispositive power for the shares held by, the Nathan Raciborski
Grantor Retained Annuity Trust Dated October 17, 2006.
(4)
Includes 2,310,207 shares of common stock held by the
Nathan Raciborski Grantor Retained Annuity Trust dated
October 17, 2006, 1,125,000 shares of common stock
held by Nathan Raciborski and 163,053 shares of common
stock held by Cocoon Capital LLC. Nathan F. Raciborski is a
trustee of the Nathan Raciborski Grantor Retained Annuity Trust
dated October 17, 2006 and a member manager of Cocoon
Capital LLC. Mr. Raciborski holds voting and dispositive
power for the shares held by the Nathan Raciborski Grantor
Retained Annuity Trust Dated October 17, 2006 and for
the shares held by Cocoon Capital LLC. Mr. Raciborski
disclaims beneficial ownership of the shares held by Cocoon
Capital LLC, except to the extent of his pecuniary interest
therein.
(5)
Includes 1,384,867 shares of common stock held by Michael
and Lauren Gordon, 50,000 shares of common stock held by
Thunder Road Capital LLC, 75,000 shares of common stock
held by the Buttercup Irrevocable Trust, 75,000 shares of
common stock held by the Dandelion Irrevocable Trust,
75,000 shares of common stock held by the Sunshine
Irrevocable Trust, 75,000 shares of common stock held by
the Tiger Irrevocable Trust and 75,000 shares of common
stock held by the Tigerlily Irrevocable Trust. Michael M. Gordon
is a managing member of Thunder Road Capital LLC and a trustee
of the Buttercup Irrevocable Trust, Dandelion Irrevocable Trust,
Sunshine Irrevocable Trust, Tiger Irrevocable Trust and
Tigerlily Irrevocable Trust. Mr. Gordon holds voting and
dispositive power for the shares held by Thunder Road Capital
LLC, the Buttercup Irrevocable Trust, the Dandelion Irrevocable
Trust, the Sunshine Irrevocable Trust, the Tiger Irrevocable
Trust and the Tigerlily Irrevocable Trust. Mr. Gordon
disclaims beneficial ownership of the shares held by Thunder
Road Capital LLC, except to the extent of his pecuniary interest
therein, and of the shares held by the Buttercup Irrevocable
Trust, the Dandelion Irrevocable Trust, the Sunshine Irrevocable
Trust, the Tiger Irrevocable Trust and the Tigerlily Irrevocable
Trust.
(6)
Includes 2,000,001 shares of common stock held by the Allan
Kaplan Grantor Retained Annuity Trust Dated
October 17, 2006, 625,000 shares of common stock held
by Allan Kaplan and 163,053 shares of common stock held by
Cocoon Capital LLC. Allan M. Kaplan is a trustee of the Allan
Kaplan Grantor Retained Annuity Trust dated October 17,2006 and a managing member of Cocoon Capital LLC.
Mr. Kaplan holds voting and dispositive power for the
shares held by the Allan Kaplan Grantor Retained Annuity
Trust Dated October 17, 2006 and for the shares held
by Cocoon Capital LLC. Mr. Kaplan disclaims beneficial
ownership of the shares held by Cocoon Capital LLC, except to
the extent of his pecuniary interest therein.
(7)
Includes 2,360,871 shares of common stock held by the
Rinehart Family Trust dated May of 1999. William H. Rinehart is
a trustee of the Rinehart Family Trust dated May of 1999.
Mr. Rinehart holds voting and dispositive power for the
shares held by the Rinehart Family Trust dated May of 1999.
(8)
Includes 10,743 shares issuable upon exercise of options
that are exercisable within 60 days of December 31,2006.
(9)
Includes 23,450 shares issuable upon exercise of options
that are exercisable within 60 days of December 31,2006.
(10)
See footnote (1) above. Joseph H. Gleberman is a managing
director of Goldman, Sachs & Co. Mr. Gleberman
holds voting and dispositive power for the shares held by GS
Capital Partners V Fund, L.P., GS Capital Partners V Offshore
Fund, L.P., GS Capital Partners V Institutional, L.P. and GS
Capital Partners V GmbH & Co. KG. Mr. Gleberman
disclaims beneficial ownership of the shares held by GS Capital
Partners V Fund, L.P., GS Capital Partners V Offshore Fund,
L.P., GS Capital Partners V Institutional, L.P. and GS Capital
Partners V GmbH & Co. KG except to the extent of his
pecuniary interest therein.
(11)
See footnote (2) above. Fredric W. Harman has voting and
dispositive power for the shares held by Oak Investment Partners
XII, Limited Partnership. Mr. Harman disclaims beneficial
ownership of the securities held by such partnership in which he
does not have a pecuniary interest.
See footnote (1) above. Peter J. Perrone is a vice
president of Goldman, Sachs & Co. Mr. Perrone does
not hold voting or dispositive power for the shares held by GS
Capital Partners V Fund, L.P., GS Capital Partners V Offshore
Fund, L.P., GS Capital Partners V Institutional, L.P. and GS
Capital Partners V GmbH & Co. KG. Mr. Perrone
disclaims beneficial ownership of the shares held by GS Capital
Partners V Fund, L.P., GS Capital Partners V Offshore Fund,
L.P., GS Capital Partners V Institutional, L.P. and GS Capital
Partners V GmbH & Co. KG except to the extent of his
pecuniary interest therein.
(13)
Includes an aggregate of 34,193 shares issuable upon
exercise of options that are exercisable within 60 days of
December 31, 2006.
We are authorized to issue 100,000,000 shares of common
stock, $0.001 par value, and 5,000,000 shares of
undesignated preferred stock, $0.001 par value.
Common
Stock
Assuming the conversion of each outstanding share of preferred
stock into one share of common stock upon the closing of this
offering, as of December 31, 2006, we had
44,514,964 shares of common stock outstanding that were
held of record by approximately 64 stockholders.
The holders of common stock are entitled to one vote per share
on all matters to be voted upon by the stockholders. Subject to
preferences that may be applicable to any outstanding preferred
stock, the holders of common stock are entitled to receive
ratably any dividends that may be declared from time to time by
the board of directors out of funds legally available for that
purpose. In the event of our liquidation, dissolution or winding
up, the holders of common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to
prior distribution rights of preferred stock then outstanding.
The common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding
shares of common stock are fully paid and nonassessable, and the
shares of common stock to be issued upon the closing of this
offering will be fully paid and nonassessable.
Preferred
Stock
Upon the closing of this offering, our board of directors will
have the authority, without action by our stockholders, to
designate and issue up to 5,000,000 shares of preferred
stock in one or more series. The board of directors may also
designate the rights, preferences and privileges of each series
of preferred stock, any or all of which may be greater than the
rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock
upon the rights of holders of the common stock until the board
of directors determines the specific rights of the holders of
the preferred stock. However, these effects might include:
•
restricting dividends on the common stock;
•
diluting the voting power of the common stock;
•
impairing the liquidation rights of the common stock; and
•
delaying or preventing a change in control of our company
without further action by the stockholders.
We have no present plans to issue any shares of preferred stock.
Warrants
As of December 31, 2006, a warrant to purchase a total of
65,390 shares of our common stock was issued and
outstanding at an exercise price of $0.22 per share. This
warrant will expire upon the closing of this offering unless
exercised prior to such date.
Registration
Rights
Following this offering, the holders of 29,960,170 shares
of common stock issuable upon conversion of preferred stock or
their permitted transferees are entitled to rights with respect
to registration of these shares under the Securities Act of
1933, as amended. These rights are provided under the terms of
our amended and restated investor rights agreement. Under these
registration rights, holders of the then outstanding registrable
securities may require on two occasions that we
register their shares for public resale. Such registration
requires the election of the holders of registrable securities
holding at least 25% of such registrable securities. We are
obligated to register these shares only if the requesting
holders request the registration of the number of registrable
securities with an anticipated offering price of at least
$10,000,000. In addition, holders of registrable securities
holding at least 5% of such registrable securities may require
that we register their shares for public resale on
Form S-3
or similar short-form registration, if we are eligible to use
Form S-3
or similar short-form registration, and the value of the
securities to be registered is at least $5,000,000. If we elect
to register any of our shares of common stock for any public
offering, the holders of registrable securities are entitled to
include shares of common stock in the registration. However, we
may reduce the number of shares proposed to be registered in
view of market conditions, provided that we may not reduce the
number of registrable securities included in any such
registration below 20% of the total number of shares included in
such offering (except for a registration relating to our initial
public offering, from which all registrable securities may be
excluded). We will pay all expenses in connection with any
registration described herein, other than underwriting discounts
and commissions. These rights will terminate five years after
the closing of this offering and prior to then, any holder shall
cease to have registration rights once that holder may sell all
of its registrable securities under Rule 144 during any
three-month period.
Our amended and restated certificate of incorporation and our
amended and restated bylaws contain certain provisions that
could have the effect of delaying, deferring or discouraging
another party from acquiring control of us. These provisions and
certain provisions of Delaware law, which are summarized below,
are expected to discourage coercive takeover practices and
inadequate takeover bids. These provisions are also designed, in
part, to encourage persons seeking to acquire control of us to
negotiate first with our board of directors. We believe that the
benefits of increased protection of our potential ability to
negotiate more favorable terms with an unfriendly or unsolicited
acquirer outweigh the disadvantages of discouraging a proposal
to acquire us.
Undesignated
Preferred Stock
As discussed above, our board of directors has the ability to
issue preferred stock with voting or other rights or preferences
that could impede the success of any attempt to change control
of us. These and other provisions may have the effect of
deterring hostile takeovers or delaying changes in control or
management of our company.
Limits on
Ability of Stockholders to Act by Written Consent or Call a
Special Meeting
Our amended and restated certificate of incorporation provides
that our stockholders may not act by written consent, which may
lengthen the amount of time required to take stockholder
actions. As a result, a holder controlling a majority of our
capital stock would not be able to amend our bylaws or remove
directors without holding a meeting of our stockholders called
in accordance with our bylaws.
In addition, our amended and restated bylaws provide that
special meetings of the stockholders may be called only by the
chairperson of the board, the chief executive officer or our
board of directors. Stockholders may not call a special meeting,
which may delay the ability of our stockholders to force
consideration of a proposal or for holders controlling a
majority of our capital stock to take any action, including the
removal of directors.
Requirements
for Advance Notification of Stockholder Nominations and
Proposals
Our amended and restated bylaws establish advance notice
procedures with respect to stockholder proposals and the
nomination of candidates for election as directors, other than
nominations made by or at the direction of our board of
directors or a committee of our board of directors. These
provisions may have the effect of precluding the conduct of
certain business at a meeting if the proper
procedures are not followed. These provisions may also
discourage or deter a potential acquirer from conducting a
solicitation of proxies to elect the acquirer’s own slate
of directors or otherwise attempting to obtain control of our
company.
Board
Classification
Our board of directors is divided into three classes, one class
of which is elected each year by our stockholders. The directors
in each class will serve for a three-year term. For more
information on the classified board, see
“Management — Board of Directors.” Our
classified board may tend to discourage a third party from
making a tender offer or otherwise attempting to obtain control
of us, because it generally makes it more difficult for
stockholders to replace a majority of the directors.
No Cumulative
Voting
Our amended and restated certificate of incorporation and
amended and restated bylaws do not permit cumulative voting in
the election of directors. Cumulative voting allows a
stockholder to vote a portion or all of its shares for one or
more candidates for seats on the board of directors. Without
cumulative voting, a minority stockholder may not be able to
gain as many seats on our board of directors as the stockholder
would be able to gain if cumulative voting were permitted. The
absence of cumulative voting makes it more difficult for a
minority stockholder to gain a seat on our board of directors to
influence our board’s decision regarding a takeover.
Amendment of
Charter Provisions
The amendment of the above provisions of our amended and
restated certificate of incorporation requires approval by
holders of at least two-thirds of our outstanding capital stock
entitled to vote generally in the election of directors.
Delaware
Anti-Takeover Statute
We are subject to the provisions of Section 203 of the
Delaware General Corporation Law regulating corporate takeovers.
In general, Section 203 prohibits a publicly held Delaware
corporation from engaging, under certain circumstances, in a
business combination with an interested stockholder for a period
of three years following the date the person became an
interested stockholder unless:
•
prior to the date of the transaction, our board of directors
approved either the business combination or the transaction
which resulted in the stockholder becoming an interested
stockholder;
•
upon completion of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
calculated as provided under Section 203; or
•
at or subsequent to the date of the transaction, the business
combination is approved by our board of directors and authorized
at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least two-thirds
of the outstanding voting stock which is not owned by the
interested stockholder.
Generally, a business combination includes a merger, asset or
stock sale or other transaction resulting in a financial benefit
to the interested stockholder. An interested stockholder is a
person who, together with affiliates and associates, owns or,
within three years prior to the determination of interested
stockholder status, did own 15% or more of a corporation’s
outstanding voting stock. We expect the existence of this
provision to have an anti-takeover effect with respect to
transactions our board of directors does not approve in advance.
We also anticipate that Section 203 may also discourage
attempts that might result in a premium over the market price
for the shares of common stock held by stockholders.
The provisions of Delaware law and the provisions of our amended
and restated certificate of incorporation and amended and
restated bylaws, could have the effect of discouraging others
from attempting hostile takeovers and, as a consequence, they
might also inhibit temporary fluctuations in the market price of
our common stock that often result from actual or rumored
hostile takeover attempts. These provisions might also have the
effect of preventing changes in our management. It is possible
that these provisions could make it more difficult to accomplish
transactions that stockholders might otherwise deem to be in
their best interests.
Transfer Agent
and Registrar
Our transfer agent and registrar for our common stock
is .
Listing
We have applied to list our common stock for quotation on the
Nasdaq Global Market under the trading symbol “LLNW.”
Immediately prior to this offering, there has been no public
market for our stock. We cannot predict the effect, if any, that
market sales of shares or the availability of shares for sale
will have on the market price prevailing from time to time.
Furthermore, since only a limited number of shares will be
available for sale shortly after the offering because of
contractual and legal restrictions on resale described below,
sales of our common stock in the public market after the
restrictions lapse as described below, or the perception that
those sales may occur, could cause the prevailing market price
to decrease or to be lower than it might be in the absence of
those sales or perceptions.
Upon completion of this offering, we will have
outstanding shares
of common stock. Of these shares,
all shares
of common stock being sold in this offering, plus any additional
shares sold upon exercise of the underwriters’
over-allotment option, will be freely tradable, other than by
any of our “affiliates” as defined in Rule 144(a)
under the Securities Act, without restriction or registration
under the Securities Act. All remaining shares were issued and
sold by us in private transactions and are eligible for public
sale if registered under the Securities Act or sold in
accordance with Rule 144 or Rule 701 under the
Securities Act. These remaining shares are “restricted
securities” within the meaning of Rule 144 under the
Securities Act.
Lock-up
Agreements
In connection with this offering, we and our officers,
directors, and holders of [all] of our common stock have agreed
with the underwriters, subject to certain exceptions, not to
dispose of, hedge or lend any of our common stock or securities
convertible into or exchangeable for shares of common stock
during the period from the date of this prospectus continuing
through the date 180 days after the date of this
prospectus, except with the prior written consent of Goldman,
Sachs & Co. This agreement is subject to certain
exceptions and does not apply to the issuance by us of shares
under any existing employee benefit plans.
The 180-day
restricted period described in the preceding paragraph will be
automatically extended if: (1) during the last 17 days
of the
180-day
restricted period we issue an earnings release or announce
material news or a material event; or (2) prior to the
expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
15-day
period following the last day of the
180-day
period, in which case the restrictions described in the
preceding paragraph will continue to apply until the expiration
of the
18-day
period beginning on the issuance of the earnings release of the
announcement of the material news or material event.
Rule 144
In general, under Rule 144, as currently in effect, a
person who owns shares that were acquired from us or an
affiliate of us at least one year prior to the proposed sale is
entitled to sell upon expiration of the
lock-up
agreements described above, within any three-month period
beginning 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of:
•
1% of the number of shares of common stock then outstanding,
which will equal
approximately shares
immediately after this offering; or
•
the average weekly trading volume of the common stock during the
four calendar weeks preceding the filing of a notice on
Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of
sale provisions and notice requirements and to the availability
of current public information about us. Rule 144 also
provides that our affiliates who sell shares of our common stock
that are not restricted shares must nonetheless comply with the
same restrictions applicable to restricted shares with the
exception of the holding period requirement.
Under Rule 144(k), a person who is not deemed to have been
one of our affiliates for purposes of the Securities Act at any
time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least
two years, including the holding period of any prior owner other
than our affiliates, is entitled to sell such shares without
complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, “144(k) shares” may be
sold immediately upon the completion of this offering.
Rule 701
In general, under Rule 701 as currently in effect, any of
our employees, directors, consultants or advisors who purchases
or purchased shares from us in connection with a compensatory
stock or option plan or other written agreement in a transaction
that was completed in reliance on Rule 701 and which
complied with the requirements of Rule 701 is eligible to
resell such shares 90 days after the effective date of this
offering in reliance on Rule 144, but without compliance
with certain restrictions, including the holding period,
contained in Rule 144.
Stock
Options
We intend to file a registration statement on
Form S-8
under the Securities Act covering 11,608,822 shares of our
common stock subject to options outstanding or reserved for
issuance under our stock plans and shares of our common stock
issued upon the exercise of options by employees. We expect to
file this registration statement as soon as practicable after
this offering. In addition, we intend to file a registration
statement on
Form S-8
or such other form as may be required under the Securities Act
for the resale of shares of our common stock issued upon the
exercise of options that were not granted under Rule 701.
We expect to file this registration statement as soon as
permitted under the Securities Act. However, the shares
registered on
Form S-8
will be subject to volume limitations, manner of sale, notice
and public information requirements of Rule 144 and will
not be eligible for resale until expiration of the
lock-up
agreements to which they are subject.
Registration
Rights
We have granted demand registration rights, rights to
participate in offerings that we initiate and
Form S-3
registration rights to our preferred stockholders. For a further
description of these rights, see “Description of Capital
Stock — Registration Rights.”
We, the selling stockholders and the underwriters named below
have entered into an underwriting agreement with respect to the
shares being offered. Subject to certain conditions, each
underwriter has severally agreed to purchase the number of
shares indicated in the following table. Goldman,
Sachs & Co., Morgan Stanley & Co.
Incorporated, Jefferies & Company, Inc., Piper
Jaffray & Co. and Friedman, Billings, Ramsey &
Co., Inc. are the representatives of the underwriters.
Underwriters
Number
of Shares
Goldman, Sachs & Co.
Morgan Stanley & Co.
Incorporated
Jefferies & Company, Inc.
Piper Jaffray & Co.
Friedman, Billings,
Ramsey & Co., Inc.
Total
The underwriters are committed to take and pay for all of the
shares being offered, if any are taken, other than the shares
covered by the option described below unless and until this
option is exercised.
If the underwriters sell more shares than the total number set
forth in the table above, the underwriters have an option to buy
up to an
additional shares
from us or the selling stockholders to cover such sales. They
may exercise that option for 30 days. If any shares are
purchased pursuant to this option, the underwriters will
severally purchase shares in approximately the same proportion
as set forth in the table above.
The following tables show the per share and total underwriting
discounts and commissions to be paid to the underwriters by us
and the selling stockholders. Such amounts are shown assuming
both no exercise and full exercise of the underwriters’
option to
purchase
additional shares.
Paid by the
Company
No
Exercise
Full
Exercise
Per Share
$
$
Total
$
$
Paid by the
Selling Stockholders
No
Exercise
Full
Exercise
Per Share
$
$
Total
$
$
Shares sold by the underwriters to the public will initially be
offered at the initial public offering price set forth on the
cover of this prospectus. Any shares sold by the underwriters to
securities dealers may be sold at a discount of up to
$ per share from the initial
public offering price. Any such securities dealers may resell
any shares purchased from the underwriters to certain other
brokers or dealers at a discount of up to
$ per share from the initial
public offering price. If all the shares are not sold at the
initial public offering price, the representatives may change
the offering price and the other selling terms.
We and our officers, directors, and holders of substantially all
of our common stock, including the selling stockholders, have
agreed with the underwriters, subject to certain exceptions, not
to dispose of or hedge any of our common stock or securities
convertible into or exchangeable for shares of common stock
during the period from the date of this prospectus continuing
through the date 180 days after the date of this
prospectus, except with the prior written consent of Goldman,
Sachs & Co. This
agreement does not apply to any existing employee benefit plans.
See “Shares Available for Future Sale” for a
discussion of certain transfer restrictions.
The 180-day
restricted period described in the preceding paragraph will be
automatically extended if: (1) during the last 17 days
of the
180-day
restricted period we issue an earnings release or announce
material news or a material event; or (2) prior to the
expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
15-day
period following the last day of the
180-day
period, in which case the restrictions described in the
preceding paragraph will continue to apply until the expiration
of the
18-day
period beginning on the issuance of the earnings release of the
announcement of the material news or material event.
Prior to the offering, there has been no public market for the
shares. The initial public offering price will be negotiated
among us and the representatives. Among the factors to be
considered in determining the initial public offering price of
the shares, in addition to prevailing market conditions, will be
our historical performance, estimates of our business potential
and earnings prospects, an assessment of our management and the
consideration of the above factors in relation to market
valuation of companies in related businesses.
We have applied to have our common stock approved for listing on
the Nasdaq Global Market under the symbol “LLNW.”
In connection with the offering, the underwriters may purchase
and sell shares of common stock in the open market. These
transactions may include short sales, stabilizing transactions
and purchases to cover positions created by short sales. Short
sales involve the sale by the underwriters of a greater number
of shares than they are required to purchase in the offering.
“Covered” short sales are sales made in an amount not
greater than the underwriters’ option to purchase
additional shares from us or the selling stockholders. The
underwriters may close out any covered short position by either
exercising their option to purchase additional shares or
purchasing shares in the open market. In determining the source
of shares to close out the covered short position, the
underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to
the price at which they may purchase additional shares pursuant
to the option granted to them. “Naked” short sales are
any sales in excess of such option. The underwriters must close
out any naked short position by purchasing shares in the open
market. A naked short position is more likely to be created if
the underwriters are concerned that there may be downward
pressure on the price of the common stock in the open market
after pricing that could adversely affect investors who purchase
in the offering. Stabilizing transactions consist of various
bids for or purchases of common stock made by the underwriters
in the open market prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing
transactions, as well as other purchases by the underwriters for
their own accounts, may have the effect of preventing or
retarding a decline in the market price of our common stock, and
together with the imposition of the penalty bid, may stabilize,
maintain or otherwise affect the market price of our common
stock. As a result, the price of our common stock may be higher
than the price that otherwise might exist in the open market. If
these activities are commenced, they may be discontinued at any
time. These transactions may be effected on the Nasdaq Global
Market, in the
over-the-counter
market or otherwise.
Each of the underwriters has represented and agreed that:
(a) it has only communicated or caused to be communicated
and will only communicate or cause to be communicated an
invitation or inducement to engage in investment activity
(within the meaning of section 21 of FSMA) to persons who
have professional experience in matters relating to investments
falling within Article 19(5) of the Financial Services and
Markets Act 2000
(Financial Promotion) Order 2005 or in circumstances in which
section 21 of FSMA does not apply to us; and
(b) it has complied with, and will comply with all
applicable provisions of FSMA with respect to anything done by
it in relation to the shares in, from or otherwise involving the
United Kingdom.
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a
“Relevant Member State”), each underwriter has
represented and agreed that with effect from and including the
date on which the Prospectus Directive is implemented in that
Relevant Member State (the “Relevant Implementation
Date”) it has not made and will not make an offer of shares
to the public in that Relevant Member State prior to the
publication of a prospectus in relation to the shares which has
been approved by the competent authority in that Relevant Member
State or, where appropriate, approved in another Relevant Member
State and notified to the competent authority in that Relevant
Member State, all in accordance with the Prospectus Directive,
except that it may, with effect from and including the Relevant
Implementation Date, make an offer of Shares to the public in
that Relevant Member State at any time:
(a) to legal entities which are authorized or regulated to
operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities;
(b) to any legal entity which has two or more of
(1) an average of at least 250 employees during the last
financial year; (2) a total balance sheet of more than
€43,000,000 and (3) an annual net turnover of more
than €50,000,000, as shown in its last annual or
consolidated accounts;
(c) to fewer than 100 natural or legal persons (other than
qualified investors as defined in the Prospectus Directive)
subject to obtaining the prior consent of the representatives
for any such offer; or
(d) in any other circumstances which do not require the
publication by the issuer of a prospectus pursuant to
Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an
“offer of shares to the public” in relation to any
shares in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and the shares to be offered so as to enable an
investor to decide to purchase or subscribe the shares, as the
same may be varied in that Relevant Member State by any measure
implementing the Prospectus Directive in that Relevant Member
State and the expression Prospectus Directive means Directive
2003/71/EC
and includes any relevant implementing measure in each Relevant
Member State.
The shares may not be offered or sold by means of any document
other than (i) in circumstances which do not constitute an
offer to the public within the meaning of the Companies
Ordinance (Cap.32, Laws of Hong Kong), or (ii) to
“professional investors” within the meaning of the
Securities and Futures Ordinance (Cap.571, Laws of Hong Kong)
and any rules made thereunder, or (iii) in other
circumstances which do not result in the document being a
“prospectus” within the meaning of the Companies
Ordinance (Cap. 32, Laws of Hong Kong), and no advertisement,
invitation or document relating to the shares may be issued or
may be in the possession of any person for the purpose of issue
(in each case whether in Hong Kong or elsewhere), which is
directed at, or the contents of which are likely to be accessed
or read by, the public in Hong Kong (except if permitted to do
so under the laws of Hong Kong) other than with respect to
shares which are or are intended to be disposed of only to
persons outside Hong Kong or only to “professional
investors” within the meaning of the Securities and Futures
Ordinance (Cap. 571, Laws of Hong Kong) and any rules made
thereunder.
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the
offer or sale, or invitation for subscription or purchase, of
the shares may not be circulated or distributed, nor may the
shares be offered or sold, or be made the subject of an
invitation for subscription or purchase, whether directly or
indirectly, to persons in Singapore other than (i) to an
institutional investor under Section 274 of the Securities
and Futures Act, Chapter 289 of Singapore (the
“SFA”), (ii) to a relevant person, or any person
pursuant to Section 275(1A), and in accordance with the
conditions, specified in Section 275 of the SFA or
(iii) otherwise pursuant to, and in accordance with the
conditions of, any other applicable provision of the SFA.
Where the shares are subscribed or purchased under
Section 275 by a relevant person which is: (a) a
corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom is an accredited investor; or (b) a trust (where the
trustee is not an accredited investor) whose sole purpose is to
hold investments and each beneficiary is an accredited investor,
shares, debentures and units of shares and debentures of that
corporation or the beneficiaries’ rights and interest in
that trust shall not be transferable for 6 months after
that corporation or that trust has acquired the shares under
Section 275 except: (1) to an institutional investor
under Section 274 of the SFA or to a relevant person, or
any person pursuant to Section 275(1A), and in accordance
with the conditions, specified in Section 275 of the SFA;
(2) where no consideration is given for the transfer; or
(3) by operation of law.
The securities have not been and will not be registered under
the Securities and Exchange Law of Japan (the “Securities
and Exchange Law”) and each underwriter has agreed that it
will not offer or sell any securities, directly or indirectly,
in Japan or to, or for the benefit of, any resident of Japan
(which term as used herein means any person resident in Japan,
including any corporation or other entity organized under the
laws of Japan), or to others for re-offering or resale, directly
or indirectly, in Japan or to a resident of Japan, except
pursuant to an exemption from the registration requirements of,
and otherwise in compliance with, the Securities and Exchange
Law and any other applicable laws, regulations and ministerial
guidelines of Japan.
The underwriters will not execute sales in discretionary
accounts without the prior written specific approval of the
customer.
We and the selling stockholders estimate that the total expenses
of the offering, excluding underwriting discounts and
commissions, will be approximately $2.4 million.
We have agreed to indemnify the several underwriters against
certain liabilities, including liabilities under the Securities
Act of 1933.
In July 2006, we completed the sale of our Series B
preferred stock to certain investors, after which sale certain
entities affiliated with Goldman, Sachs & Co., the
co-lead underwriter for this offering, held approximately 45% of
the outstanding shares of our capital stock. Accordingly, this
offering will be made in compliance with the applicable
provisions of Rule 2720 of the Conduct Rules of the
National Association of Securities Dealers, Inc. Rule 2720
requires that the initial public offering price can be no higher
than that recommended by a “qualified independent
underwriter,” as defined by the NASD. Morgan
Stanley & Co. Incorporated has served in that capacity
and performed due diligence investigations and reviewed and
participated in the preparation of the registration statement of
which this Prospectus forms a part. Morgan Stanley &
Co. Incorporated is expected to receive compensation from us for
such role.
Certain of the underwriters and their respective affiliates
have, from time to time, performed, and may in the future
perform, various financial advisory and investment banking
services for us, for which they received or will receive
customary fees and expenses.
The validity of the shares of common stock offered hereby will
be passed upon for us by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California. Certain
legal matters in connection with this offering will be passed
upon for the underwriters by Simpson Thacher & Bartlett
LLP, Palo Alto, California. Certain members of, and investment
partnerships comprised of members of, and persons associated
with, Wilson Sonsini Goodrich & Rosati own an aggregate
of 15,026 shares of our common stock.
Ernst & Young LLP, independent registered public
accounting firm, has audited our consolidated financial
statements at December 31, 2005 and 2006, and for each of
the three years in the period ended December 31, 2006, as
set forth in their report. We have included our financial
statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP’s
report, given on their authority as experts in accounting and
auditing.
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act with respect to the shares of common
stock we are offering. The registration statement, including the
attached exhibits and schedules, contains additional relevant
information about us and our common stock. This prospectus does
not contain all of the information set forth in the registration
statement and the exhibits and schedules thereto. The rules and
regulations of the SEC allow us to omit from this prospectus
certain information included in the registration statement.
For further information about us and our common stock, you may
inspect a copy of the registration statement and the exhibits
and schedules to the registration statement without charge at
the offices of the SEC at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain copies of all or any
part of the registration statement from the Public Reference
Section of the SEC, 100 F Street, N.E., Washington, D.C.
20549 upon the payment of the prescribed fees. You may obtain
information on the operation of the Public Reference Room by
calling the SEC at
1-800-SEC-0330.
The SEC maintains a Web site at www.sec.gov that contains
reports, proxy and information statements and other information
regarding registrants like us that file electronically with the
SEC. You can also inspect our registration statement on this Web
site.
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Limelight Networks, Inc.
We have audited the accompanying consolidated balance sheets of
Limelight Networks, Inc. as of December 31, 2005 and 2006,
and the related consolidated statements of operations,
stockholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2006. These
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based upon our audits.
We conducted our audits 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. We were not engaged to perform an
audit of the Company’s internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also 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.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Limelight Networks, Inc. at
December 31, 2005 and 2006, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2006, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial
statements, Limelight Networks, Inc. changed its method of
accounting for share-based payments in accordance with Statement
of Financial Accounting Standards No. 123 (revised
2004) on January 1, 2006.
Accounts receivable, net of
reserves of $328 and $1,204 at December 31, 2005 and 2006,
respectively
4,273
16,626
Income taxes receivable
—
3,317
Deferred income taxes
157
362
Prepaid expenses and other current
assets
940
3,011
Total current assets
6,906
30,927
Property and equipment, net
11,986
41,784
Investment in marketable securities
355
285
Deferred income taxes
—
173
Other assets
336
759
Total assets
$
19,583
$
73,928
Liabilities and
stockholders’ equity
Current liabilities:
Accounts payable
$
3,138
$
6,419
Accounts payable, related parties
362
781
Line of credit
1,000
—
Notes payable to related party,
current portion
195
—
Credit facilities, current portion
1,950
2,938
Capital lease obligations, current
portion
289
245
Other current liabilities
1,799
6,511
Total current liabilities
8,733
16,894
Credit facilities, less current
portion (net of discount of $71 and $470 in 2005 and 2006,
respectively)
8,606
20,410
Capital lease obligations, less
current portion
203
5
Other long-term liabilities
30
30
Deferred income taxes
188
—
Total liabilities
17,760
37,339
Commitments and contingencies
Stockholders’ equity:
Series A convertible preferred
stock, $0.001 par value; 4,614,000 shares authorized;
4,614,000 and 3,380,200 shares issued and outstanding at
December 31, 2005 and 2006, respectively (liquidation
preference: $733 at December 31, 2006)
4
3
Series B convertible preferred
stock, $0.001 par value; 28,700,000 shares authorized;
26,579,970 shares issued and outstanding at December 31,2006 (liquidation preference: $260,000 at December 31, 2006)
—
27
Common stock, $0.001 par
value; 80,100,000 authorized; 23,409,138 and 14,554,794 shares
issued and outstanding at December 31, 2005 and 2006,
respectively
Limelight Networks, Inc (the Company) is a provider of
high-performance content delivery network services. The Company
delivers content for traditional and emerging media companies,
or content providers, including businesses operating in the
television, music, radio, newspaper, magazine, movie, videogame
and software industries. The Company has operated in the Phoenix
metropolitan area since 2001 and elsewhere throughout the United
States since 2003. The Company began international operations in
2004. The consolidated financial statements include the accounts
of the Company and its subsidiaries all of which are wholly
owned. All significant intercompany transactions have been
eliminated.
2.
Summary of
Significant Accounting Policies and Use of Estimates
Revenue
Recognition
The Company recognizes service revenues in accordance with the
Securities and Exchange Commission’s Staff Accounting
Bulletin No. 104, Revenue Recognition, and the
Financial Accounting Standards Board’s (FASB) Emerging
Issues Task Force Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables. Revenue
is recognized 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 assessment as to that customer’s ability to pay
for the services provided. 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 customer’s unpaid
invoices and ceases recognizing revenue for continued services
provided until cash is received.
The Company primarily derives revenue from the sale of content
delivery 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 on a calendar month
basis and provide the rate at which the customer must pay for
actual usage above the monthly minimum. For these services, the
Company 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 customer’s usage of the
Company’s services exceed the monthly minimum, the Company
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 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 arrangements.
When the Company enters into such arrangements, each element is
accounted for separately over its respective service period or
at the time of delivery, provided that there is objective
evidence of fair value for the separate elements. 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, and
other revenue recognition criteria has been satisfied.
To date the Company has not licensed, but in the future may
license, software under perpetual and term license agreements.
In such case, the Company would 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, the Company
would 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, be deferred and
subsequently recognized when delivered. The difference between
the total arrangement fee and the amount deferred for the
undelivered elements would be recognized as revenue related to
the delivered elements, if all other revenue recognition
criteria of
SOP 97-2
are met.
The Company also sells services through a reseller channel.
Assuming all other revenue recognition criteria are met, revenue
from reseller arrangements is recognized over the term of the
contract, based on the reseller’s contracted non-refundable
minimum purchase commitments 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. The Company records revenue under
these agreements on a net or gross basis depending upon the
terms of the arrangement in accordance with
EITF 99-19
Recording Revenue Gross as a Principal Versus Net as an
Agent.The Company typically records revenue gross when it
has risk of loss, latitude in establishing price, credit risk
and is the primary obligor in the arrangement.
From time to time, the Company enters into contracts to sell
services or to license technology to unrelated companies at or
about the same time we enter into contracts to purchase products
or services from the same companies. If the Company concludes
that these contracts were negotiated concurrently, the Company
records as revenue only the net cash received from the vendor.
For certain non-cash arrangements whereby the Company provides
rack space and bandwidth services to several companies in
exchange for advertising the Company records barter revenue and
expense if the services are objectively measurable. The various
types of advertising include radio, Website, print and signage.
The Company recorded barter revenue and expense of approximately
$319,000, $531,000 and $670,000 for 2004, 2005 and 2006,
respectively.
The Company may from time to time resell licenses or services of
third parties. Revenue for these transactions is recorded 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 service. If these conditions are present, the Company
recognizes revenue when all other revenue recognition criteria
are satisfied.
Cash and Cash
Equivalents
The Company considers all highly liquid debt instruments
purchased with a remaining maturity of three months or less at
the date of acquisition to be cash equivalents.
Investments in
Marketable Securities
The Company accounts for its investments in equity securities
under FASB’s Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in
Debt and Equity Securities. Management determines the
appropriate classification of such securities at the time of
purchase and reevaluates such classification as of each balance
sheet date. Realized gains and losses and declines in value
judged to be other than temporary are determined based on the
specific identification method and would be reported in the
statements of operations; there have been no such realized
losses.
At December 31, 2006, the Company had only one investment
security. The Company’s investment in this publicly traded
equity security is classified as
available-for-sale.
Available-for-sale
investments are initially recorded at cost and periodically
adjusted to fair value through comprehensive income. The equity
investment is included in other assets in the Company’s
accompanying
consolidated balance sheets and is carried at fair value. The
Company periodically reviews its investments for
other-than-temporary
declines in fair value based on the specific identification
method and writes down investments to their fair value when an
other-than-temporary
decline has occurred.
Accounts
Receivable
Trade accounts receivable are recorded at the invoiced amounts
and do not bear interest. The Company records reserves against
its accounts receivable balance for service credits and for
doubtful accounts. The related charges are included as a
component of general and administrative expenses.
The Company’s 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 typically relate to
customer disputes and billing adjustments and are recorded as a
reduction of revenues. Decreases to the reserve are the result
of actual credits being issued to customers, causing a
corresponding reduction in accounts receivable.
The allowance for doubtful accounts is based upon a review of
customer accounts receivable where the Company no longer
believes the customer has the ability to pay outstanding
balances. The Company performs ongoing 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 deferral
of revenue until the Company receives consistent payments.
Estimates are used in determining both of these reserves and are
based upon the Company’s review of outstanding balances on
a customer specific, account-by-account basis.
Reserves against accounts receivable consist of the following
(In thousands):
Property and equipment are carried at cost less accumulated
depreciation or amortization. Depreciation and amortization are
computed using the straight-line and accelerated methods over
the assets’ estimated useful lives of the applicable asset.
Network equipment
3 years
Computer equipment
3 years
Furniture and fixtures
3-5 years
Other equipment
3-7 years
Leasehold improvements are amortized over the shorter of the
asset’s estimated useful life or the respective lease term.
Maintenance and repairs are charged to expense as incurred.
Long-Lived
Assets
The Company reviews its long-lived assets for impairment
annually and whenever events or circumstances indicate that the
carrying amount of an asset may not be fully recoverable. The
Company would recognize an impairment loss if the sum of the
expected long-term undiscounted cash flows that the long-lived
asset is expected to generate is less than the carrying amount
of the long-lived asset being evaluated. The Company treats any
write-downs as permanent reductions in the carrying amounts of
the assets. The Company believes the carrying amounts of its
assets at December 31, 2005 and 2006 are fully realizable
and has not recorded any impairment losses.
The Company leases office space in various locations. At the
inception of each lease, the Company evaluates the property to
determine whether the lease will be accounted for as an
operating or a capital lease. The term of the lease used for
this evaluation includes renewal option periods only in
instances where the exercise of the renewal option can be
reasonably assured and failure to exercise the option would
result in an economic penalty.
The Company records tenant improvement allowances granted under
the lease agreements as leasehold improvements within property
and equipment and within deferred rent.
For leases that contain rent escalation provisions, the Company
records the total rent payable during the lease term, as
determined above, on a straight-line basis over the term of the
lease (including any “rent free” period beginning upon
possession of the premises), and records any difference between
the actual rent paid and the straight-line rent expense recorded
as increases or decreases in deferred rent.
Cost of
Revenue
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 IT professional services, cost of
licenses, depreciation of network equipment used to deliver the
Company’s services, amortization of network-related
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 the
Company 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 the Company rack space for the Company’s 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 Limelight 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 the Company’s servers nor does the Company
recognize as expense the value of the rack space and bandwidth
received at no cost.
Research and
Development and Software Development Costs
The Company charges research and development costs, other than
certain software development costs, to expense as incurred.
Software development costs incurred subsequent to the
establishment of technological feasibility and prior to the
introduction into the Company’s content delivery network
are capitalized and amortized to cost of revenue over the
estimated useful life of the related software. There were no
costs capitalized at December 31, 2005 or 2006, because the
costs incurred from technological feasibility to the
introduction into the network were immaterial.
Income
Taxes
Deferred income tax is accounted for using the liability method
in accordance with SFAS 109, Accounting for Income
Taxes. Deferred tax assets and liabilities are recognized
for the expected future tax benefits and consequences
attributable to temporary differences between the financial
reporting bases of assets and liabilities and their related tax
bases. Deferred tax assets and liabilities are measured using
the enacted tax rates expected to be in effect in the years in
which those temporary differences are expected to be recovered
or settled. A valuation allowance is provided for deferred tax
assets when it is more likely than not that the related benefits
will not be realized.
Basic net income (loss) per share attributed to common
stockholders is computed by dividing the net income (loss)
allocable to common stockholders for the period by the weighted
average number of common shares outstanding during the period as
reduced by the weighted average unvested restricted shares
subject to cancellation by the Company.
Diluted net income (loss) per share attributed to common
stockholders is computed by dividing the net income (loss)
allocable to common stockholders for the period by the weighted
average number of common and potential common shares outstanding
during the period, if the effect of each class of potential
common shares is dilutive. Potential common shares include
restricted common stock and incremental shares of common stock
issuable upon the exercise of stock options and warrants using
the treasury stock method.
Years Ended
December 31
2004
2005
2006
(In thousands,
except per share data)
Historical net income (loss)
per share
Numerator:
Net income (loss)
$
516
$
397
$
(3,713
)
Preferred dividend rights
199
212
—
Net income (loss) allocable to
common stockholders
$
317
$
185
$
(3,713
)
Denominator:
Weighted average common shares
23,125
23,158
17,314
Less: Weighted-average unvested
common shares subject to repurchase
—
—
(253
)
Denominator for basic net income
(loss) per share
23,125
23,158
17,061
Dilutive effect of stock options
and shares subject to repurchase
791
894
—
Dilutive effect of outstanding
stock warrants
2,055
3,323
—
Denominator for diluted net income
(loss) per share
25,971
27,375
17,061
Basic net income (loss) per share
$
0.01
$
0.01
$
(0.22
)
Diluted net income (loss) per share
$
0.01
$
0.01
$
(0.22
)
The following weighted-average outstanding options, common stock
subject to repurchase and common stock warrants were excluded
from the computation of diluted net income (loss) per common
share for the periods presented because including them would
have had an antidilutive effect:
2004
2005
2006
(In
thousands)
Options to purchase common stock
and stock subject to repurchase
—
—
2,326
Stock warrants (as converted basis)
—
15
—
Employee Stock
Option Plan
Prior to January 1, 2006, the Company accounted for
employee stock options pursuant to SFAS, No. 123,
Accounting for Stock-Based Compensation, and
SFAS No. 148, Accounting for Stock-Based
Compensation — Transition and Disclosure. Under
this method, compensation expense was recorded for stock options
granted prior to December 31, 2005 based upon the minimum
value method.
Unamortized deferred stock-based compensation totaled $91,000 at
December 31, 2005, for all option grants made through
December 31, 2005, which is expected to be recognized over
a weighted average period of 2.6 years.
As of January 1, 2006, the Company adopted
SFAS No. 123 (revised 2004) Share-Based
Payment, or SFAS No. 123R. The Company was
required to adopt SFAS No. 123R under the prospective
method, in which nonpublic entities that previously applied
SFAS No. 123 using the minimum-value method, whether
for financial statement recognition or pro forma disclosure
purposes, would continue to account for unvested stock options
outstanding at the date of adoption of SFAS No. 123R
in the same manner as they had been accounted for prior to the
adoption of SFAS No. 123R. That is, since the Company
has been accounting for stock options using the minimum-value
method under SFSA No. 123, it will continue to apply
SFAS No. 123 in future periods to stock options
outstanding at January 1, 2006. SFAS No. 123R
requires measurement of all employee share-based compensation
awards using a fair-value method. The grant date fair value was
determined using the Black-Scholes-Merton pricing model. The
Black-Scholes-Merton valuation calculation requires the Company
to make key assumptions such as future stock price volatility,
expected terms, risk-free rates and dividend yield. The
weighted-average expected term for stock options granted was
calculated using the simplified method in accordance with the
provisions of Staff Accounting Bulletin No. 107,
Share-Based Payment. The simplified method defines the
expected term as the average of the contractual term and the
vesting period of the stock option. The Company has estimated
the volatility rates used as inputs to the model based on an
analysis of similar public companies for which it has data. The
selection of representative companies as well as in evaluating
the available historical volatility data for these companies
requires considerable judgment by the Company.
SFAS No. 123R requires the Company to develop an
estimate of the number of share-based awards which will be
forfeited due to employee turnover. Quarterly changes in the
estimated forfeiture rate may have a significant effect on
share-based compensation, as the effect of adjusting the rate
for all expense amortization after January 1, 2006 is
recognized in the period the forfeiture estimate is changed. If
the actual forfeiture rate is higher than the estimated
forfeiture rate, then an adjustment is made to increase the
estimated forfeiture rate, which will result in a decrease to
the expense recognized in the consolidated financial statements.
If the actual forfeiture rate is lower than the estimated
forfeiture rate, then an adjustment is made to decrease the
estimated forfeiture rate, which will result in an increase to
the expense recognized in the consolidated financial statements.
The risk-free rate is based on the U.S. Treasury yield
curve in effect at the time of grant. The Company has never paid
cash dividends, and does not currently intend to pay cash
dividends, and thus has assumed a 0% dividend yield.
The Company’s options and restricted stock vest based on
service and expense is recognized using the straight-line
attribution method. The Company had approximately
$30.1 million of total unrecognized compensation costs at
December 31, 2006 that are expected to be recognized over a
weight-average period of 2.60 years.
Fair Value of
Financial Instruments
The carrying amounts of cash and cash equivalents approximate
fair value due to the short maturity of those instruments. The
respective fair values of investments are determined based on
quoted market prices, which approximate fair values. The
carrying amounts of accounts receivable, accounts payable and
accrued liabilities reported in the consolidated balance sheets
approximate their respective fair values because of the
immediate or short-term maturity of these financial instruments.
Based on borrowing rates currently available to the Company for
loans with similar terms, the carrying value of the
Company’s long-term debt also approximates fair value.
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those
estimates. Significant areas for which management uses estimates
include revenue recognition, accounts receivable reserves,
income and other taxes, share-based compensation and other
contingent liabilities.
Recently
Issued Accounting Pronouncements
In June 2006, the FASB issued Financial Interpretation No. (FIN)
48, Accounting for Uncertainty in Income Taxes, which
clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in
accordance with SFAS No. 109, Accounting for Income
Taxes. The interpretation prescribes a recognition threshold
and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Company has
not yet determined the impact, if any, of adopting FIN 48
on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurement (SFAS No. 157).
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements, but does not require any new fair value
measurement. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007 and interim periods
within those fiscal years. The Company is in the process of
determining the effect, if any, that the adoption of
SFAS No. 157 will have on the consolidated financial
statements. Because SFAS No. 157 does not require any new
fair value measurements or remeasurements of previously computed
fair values, the Company does not believe the adoption of this
Statement will have a material effect on its results of
operations or financial condition.
On February 15, 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No. 159).
Under this Statement, the Company may elect to report financial
instruments and certain other items at fair value on a
contract-by-contract
basis with changes in value reported in earnings. This election
is irrevocable. SFAS No. 159 provides an opportunity
to mitigate volatility in reported earnings that is caused by
measuring hedged assets and liabilities that were previously
required to use a different accounting method than the related
hedging contracts when the complex provisions of
SFAS No. 133 hedge accounting are not met.
SFAS No. 159 is effective for years beginning after
November 15, 2007.
Early adoption within 120 days of the beginning of the 2007
fiscal year is permissible, provided interim financial statement
for 2007 have not been issued and have adopted
SFAS No. 157. The Company is currently evaluating the
potential impact of adopting this Statement.
3.
Prepaid Expenses
and Other Current Assets
At December 31, prepaid expenses and other current assets
include:
Interest expense on notes payable was approximately $175,000,
$579,000 and $1,433,000 for 2004, 2005 and 2006, respectively.
Credit
Facilities
In April 2005, the Company obtained a $2,750,000 Equipment
Facility from a bank. In July 2005, the agreement was amended to
increase the initial Equipment Facility to $4,750,000. In
October 2005, the Equipment Facility was amended to include an
additional Equipment Facility of $2,500,000.
On November 26, 2006, the Company amended the Equipment
Facility to increase the borrowing capacity to $25,000,000. Also
on November 26, 2006, the Company added a $5 million
unsecured revolving credit facility with the bank for working
capital (“the working capital facility”). Advances
under the Equipment Facility bear interest at a variable rate
ranging between prime plus 0.25% to 1.5% or LIBOR plus 2.25% up
to 3.25% and have a term of 60 months. The working capital
facility bears interest at a variable rate determined by using
either the prime rate plus a margin or the LIBOR rate plus a
margin. The prime rate and LIBOR rate margins range from 0% to
1.5% and 2.0% to 3.25%, respectively.
At December 31, 2005 and 2006, the Company had an aggregate
outstanding balance under the Equipment Facility agreements of
$6,027,000 and $23,818,000, respectively, interest rates on
outstanding draws on the Equipment Facilities ranged from 7.57%
and 7.60% at December 31, 2006. No amounts were outstanding
under the working capital facility at December 31, 2006
In connection with the Credit Facilities, the Company granted
warrants to purchase common stock to the bank that holds the
Equipment Facility. On August 31, 2005, the Company granted
a warrant to purchase 62,500 common shares at an exercise price
of $0.40 per share with a term of seven years. The warrants
were determined to have a fair value at date of grant of $4,750.
On October 20, 2005, in conjunction with an additional
extension of credit the Company issued additional warrants to
purchase 171,875 shares of common stock for an exercise
price of $0.40 per share with a term of seven years. The
warrants were determined to have a fair value at date of grant
of approximately $13,000. On February 24, 2006, the Company
issued additional warrants to purchase 171,875 shares of
common stock for an exercise price of $0.40 per share with
a term of seven years. The warrants were determined to have a
fair value at date of grant of approximately $287,000. The
aggregate warrants to purchase 406,250 common shares were
exercised by the holder in November 2006 and no warrants are
currently outstanding. The fair value amounts computed were
included as an increase to additional paid in capital with the
related debt discount being amortized to interest expense over
the term of the debt. At December 31, 2006, there was
remaining unamortized debt discount of $253,000.
The equipment loans are collateralized by all equipment,
accounts receivable and intangible property of the Company.
Line of
Credit
In August 2005, the Company obtained a line of credit with an
investment fund that was subsequently amended in October 2005.
The amended agreement had a credit limit of $6,500,000 or up to
65% of recurring revenues as measured monthly over a rolling
3-month
period (the Extended Borrowing Base). All loans under the
Extended Borrowing Base are subject to the interest rate of
5.50% over the prime rate. At December 31, 2005, the
Company had a balance of $4,600,000 outstanding. In February
2007, the agreement was amended to increase the credit line to
$7,500,000. There were no balances outstanding on the
arrangement at December 31, 2006.
In conjunction with this agreement, the Company issued warrants
to purchase shares of common stock to the investment fund. On
August 31, 2005, the Company issued warrants to purchase
437,500 shares of common stock for an exercise price of
$0.40 per share, term of 7 years and a determined fair
value at date of grant of approximately $33,000. On
October 28, 2005, warrants to purchase 312,500 common
shares were issued with an exercise price of $0.40 per
share, term of 7 years
and determined fair value at date of grant of approximately
$24,000. On February 24, 2006, warrants to purchase
125,000 shares of common stock were issued with an exercise
price of $0.40 per share, a term of 7 years and
determined fair value at date of grant of approximately
$209,000. The aggregate warrants to purchase 875,000 common
shares were exercised by the holder in November 2006 and no
warrants are currently outstanding. The fair value amounts
computed were included as an increase to additional paid in
capital with the related debt discount amortized to interest
expense over the term of the debt. At December 31, 2006,
there was remaining unamortized debt discount of $217,000.
Bridge
Loan
During March 2005, the Company obtained a short-term loan of
$500,000 which was repaid in April 2005. In consideration for
obtaining the short-term loan, the Company issued warrants to
purchase 87,500 warrants with an exercise price of
$0.40 per share and a determined fair value of $6,650 and
the amount was recorded as interest expense during the period
the loan was outstanding. The warrant was exercised during
December 2005.
Line of
Credit
In addition to its $5,000,000 working Capital Facility and its
$3,500,000 line of credit the Company has a $5,000,000 Line of
Credit with a bank that bears an interest rate of prime plus
0.75% with maturity of October 31, 2009. The borrowing base
on the Line of Credit is computed as 80% of eligible accounts
receivable and contains a letter of credit
sub-limit of
$500,000. At December 31, 2005 and 2006 the outstanding
balance on the line of credit was $1,000,000 and $0,
respectively.
The Line of Credit is collateralized by all equipment, accounts
receivable and intangible property of the Company.
The Company has issued warrants to purchase common stock related
to employee compensation and in connection with various debt
arrangements. Prior to 2004, the Company granted a total of
2,558,700 warrants in exchange for services. The following is a
summary of activity related to warrants granted for the years
ended December 31, 2005 and 2006.
At December 31, 2006, a warrant to purchase 65,390 common
shares at a price of $0.22 per share is the only warrant
remaining outstanding. The warrant expires in 2008.
The Board of Directors has authorized 80,100,000 shares of
$0.001 par value Common Stock. The Company is required to
reserve and keep available out of its authorized but unissued
shares of Common Stock, a sufficient number of shares to effect
the conversion of the Series A Convertible Preferred Stock
outstanding. A total of 29,960,170 shares were reserved for
conversion of Preferred Stock at December 31, 2006. In
addition, 65,390 shares were reserved for outstanding
warrants and 3,709,000 shares were reserved for the
incentive compensation plan at December 31, 2006.
Series A
Convertible Preferred Stock
In September 2003, the Company’s Board of Directors adopted
a resolution designating 5,000,000 shares as Series A
Convertible Preferred Stock (Series A Preferred), and
authorized the issuance of 2,307,000 shares of
$0.001 par value preferred stock. An additional
2,307,000 shares were authorized and issued in January
2004. Proceeds from each issuance were $500,000
At the time of issuance, the holders of record of the
Series A Preferred were entitled to receive, out of funds
legally available, dividends at the annual rate of 10% of the
Series A Preferred price per share, if declared by the
Company’s Board of Directors. In connection with the
conversion of certain Series A Preferred Shares,
Series A Preferred stockholders waived their right to
receive dividends if and when declared. No dividends had been
declared by the Company through date of waiver.
In the event of a liquidation of the Company, the holders of the
Series A Preferred Stock would be entitled to receive on a
pro-rata basis for each share held, in preference to the holders
of the Common Stock, $0.2167 (the issue price) plus any accrued
and unpaid dividends, and a premium equal to 10% of the issue
price per annum, compounded annually. In connection with the
issuance of the Series B Convertible Preferred Shares in
2006, the Company amended the articles of incorporation whereby
all Series Preferred Shares are covered under the set of
terms and conditions as it relates to liquidation, conversion,
redemption and voting rights as described herein. As a part of
this transaction, 1,233,800 shares of Series A
Convertible Preferred shares were converted into common stock.
Series B
Convertible Preferred Stock
In May 2006, the Company’s Board of Directors adopted a
resolution to increase the number of Preferred Shares from
5,000,000 to 33,314,000 and authorized the issuance up to
28,700,000 shares of Series B Preferred Stock
(Series B Preferred). The Company subsequently issued
26,579,970 shares of Series B Preferred for aggregate
proceeds of $130,000,000.
Preferred
Shareholder Rights
Liquidation Preferences — The holders of
the Convertible Preferred Stock would be entitled to receive on
a pro-rata basis for each share held, in preference to the
holders of the Common Stock up to an amount equal to, for the
Series A, the amount of shares outstanding times $0.2167
plus any declared and unpaid dividends; and for the
Series B, the amount of shares outstanding times $9.7818
plus any declared but unpaid dividends. At December 31,2006, the total liquidation preference is $260,733,000.
Conversion to Common Stock — The holders
of Convertible Preferred Stock, at their option, can convert
their shares into common shares on a one for one basis for each
share converted. Each share of Convertible Preferred Stock shall
automatically convert to Common Stock upon the effective
registration statement on
Form S-1
at an initial offering price of at least $14.627 and net
proceeds of at least $40 million.
Voting and Other Rights — Each share of
Convertible Preferred Stock will have one vote for each share of
outstanding stock. In addition, the Convertible Preferred
Shareholders will have the right to appoint four members to the
Company’s seven member board of directors. The Convertible
Preferred directors have approval rights over such things as
sales of securities, hiring of executives, granting of security
interest or transfer or pledge or encumber any assets of the
Company, make acquisitions or change the capital structure of
the Company. Such approved rights are determined based upon a
simple majority of the total preferred shares.
These rights will terminate after the earlier of (i) five
years following the consummation of a registration of the
Company’s stock with the Securities and Exchange
Commission, (ii) with respect to any particular holder with
registration rights, at such time as all securities held by that
stockholder subject to registration rights may be sold pursuant
to Rule 144 under the Securities Act during any
90-day
period, (iii) at such time as the Company consummates a
transaction or series of related transactions deemed to be a
liquidation, dissolution or winding up of the Company pursuant
to the certificate of incorporation, or (iv) at such time
when the Company and the parties to such agreement holding at
least a majority of the registrable securities pursuant to such
agreement agree in writing to terminate the agreement.
Concurrent with the sale of the Series B Preferred, the
Board of Directors authorized the repurchase of up to an
aggregate of 21,000,000 shares of common stock at a price
of $4.89 per share including common shares issued upon
conversion of certain Series A Preferred shares and from
exercises of stock options and warrants. A total of
20,880,000 shares were repurchased for $102,100,000.
The tender offer required a contribution of 10% of total amount
paid to selling shareholders be deposited in an escrow account
to be available to the Company for 18 months to fund any
liabilities that were not estimable at the repurchase date, such
as the patent litigation, and any liabilities associated with
breaches in the representations and warranties made by the
selling shareholders. At December 31, 2006, the Company had
drawn $729,000 against the escrow. The Company intends to make
additional claims against the escrow funds but is not assured of
prevailing and receiving the requested funds.
Reimbursements from the escrow account are recorded as an
increase to Additional Paid-in Capital of the Company.
In connection with the sale of Series B Preferred, the
Board of Directors adopted the 2006 Sales Participation Plan.
The plan calls for an allocation of the net consideration from a
liquidity transaction, excluding an initial public offering, to
unit holders in an amount of 20% of the proceeds in excess of
$125,000,000 up to a maximum of $31.25 million. The purpose
of the program is to provide a means by which the Company’s
employees and consultants may be given a bonus in the event of
certain corporate transactions to provide a retention incentive
to employees. The Plan will terminate upon the effectiveness of
an initial public offering or the conversion of all
Series B Convertible Preferred Stock to common stock. There
have been no such bonus amounts to date.
Incentive
Compensation Plan
The Company maintains an Incentive Compensation Plan (the Plan)
to attract, motivate, retain and reward high-quality executives
and other employees, officers, directors and consultants by
enabling such persons to acquire or increase a propriety
interest in the Company. The Plan is intended to be a qualified
plan under the Internal Revenue Code.
The Plan allows the Company to award stock option grants and
restricted stock to employees, directors and consultants of the
Company. Through December 31, 2006the Company has only
granted awards to employees and directors. The exercise price of
incentive stock options granted under the Plan may not be
granted at less than 100% of the fair market value of the
Company’s common stock on the date of the grant. Stock
options and restricted stock are generally subjected to
4 year vesting with the first 25% of the grant vesting on
the first anniversary date of the grant, with the remainder
vesting monthly thereafter.
In connection with the preparation of the financial statements
necessary for a planned registration of shares with the
Securities and Exchange Commission and based on the preliminary
valuation information presented by the underwriters selected for
the planned offering, the Company reassessed the estimated
accounting fair value of common stock in light of the potential
completion of this offering. The valuation methodology that most
significantly impacted the reassessment of fair value was the
market-based assessment of the valuation of existing comparable
public companies. The methodology also de-emphasized the
$260 million liquidation preference available to preferred
shareholders in the event of a sale of the Company. In
determining the reassessed fair value of the common stock during
2006, the Company determined it appropriate to reassess the
estimate of accounting fair value for periods prior to
December 31, 2006 based on operational achievements in
executing against the operating plan and market trends. Because
of the impact the achievement of unique milestones had on the
valuation during the various points in time before the
reassessment, certain additional adjustments for factors unique
to the Company were considered in the reassessed values
determined for the 12 months ended December 31, 2006,
which impacted valuations throughout the twelve month period
ended December 31, 2006. This included:
2006 —
In July a controlling interest is sold to an investor group led
by Goldman Sachs through the issuance of shares of Series B
Preferred Stock, at a price of $4.89 per share, for total
aggregate consideration of $130 million. As part of the
transaction, the Company repurchased 20,880,000 shares of
common stock for an aggregate net consideration of
$102.1 million.
2006 —
In the fourth quarter the Company appoints both a Chief
Executive Officer and a Chief Financial Officer with past public
company roles in a similar capacity.
2006 —
Revenue growth exceeds 200%, to $64.3 million compared to
revenue in 2005 of $21.3 million.
Based upon the reassessment, the Company determined the
FAS 123R accounting fair value of the options granted to
employees from February 1, 2006 to December 31, 2006
was greater than the initially determined amounts based upon
using a higher fair value input for common stock in the
valuation model for certain of those options.
Based upon the reassessment discussed above, the Company
determined the reassessed accounting fair value of the options
to purchase 5,385,542 shares of common stock granted to
employees during the period from February 1, 2006 to
December 31, 2006 ranged from $1.81 to $9.37 per share.
Stock-based compensation expense for the year ended
December 31, 2006 includes the difference between the
reassessed accounting fair value per share of the common stock
on the date of grant and the exercise price per share and is
amortized over the vesting period of the underlying options
using the straight-line method. There are significant judgments
and estimates inherent in the determination of the reassessed
accounting fair values. For this and other reasons, the
reassessed accounting fair value used to compute the stock-based
compensation expense may not be reflective of the fair market
value that would result from the application of other valuation
methods, including accepted valuation methods for tax purposes.
The following table summarizes the information about stock
options outstanding and exercisable as December 31, 2006:
Options
Outstanding
Options
Exercisable
Weighted
Average
Weighted
Weighted
Remaining
Average
Number of
Average
Contractual
Exercise
Shares
Exercise
Exercise
Price
Number
Live
(Years)
Price
Exercisable
Price
(In
thousands)
(In
thousands)
$0.21
229
6.24
$
0.21
211
$
0.21
$0.40
2,168
8.99
0.40
1,908
0.40
$1.27 - $1.28
300
9.76
1.27
—
1.27
$9.80 - $10.00
570
9.92
9.95
—
9.95
$19.80
500
9.92
19.80
—
19.80
3,767
2,119
The weighted-average grant-date fair value of options granted
during the year ended December 31, 2006 on a per-share
basis was approximately $5.03. The total intrinsic value of the
options exercised during the years ended December 31, 2004,
2005 and 2006 was $0, $77,000 and $41,761,000, respectively. The
aggregate intrinsic value of options outstanding at
December 31, 2006 is $18,236,000.
Beginning on January 1, 2006, and upon the adoption for
SFAS No. 123R, the fair value of each new option
awarded is estimated on the grant date using the
Black-Scholes-Merton model using the assumptions noted in the
following table:
The Company recognizes expense using the straight-line
attribution method. Unrecognized share-based compensation
related to stock options totaled $19,691,000 at
December 31, 2006. The Company expects to amortize unvested
stock compensation related to stock options over a weighted
average period of 1.94 years.
The Company’s expected volatility is derived from
historical volatilities of several unrelated companies within
the Internet services and network industry. Each company’s
historical volatility is weighted based on certain qualitative
factors and combined to produce a single volatility factor used
by the Company. The risk-free interest factor is based on the
U.S. Treasury yield curve in effect at the time of the
grant for zero coupon U.S. Treasury notes with maturities
of approximately equal to each grant’s expected term. The
expected term is calculated using the “short-cut”
method provided in the Securities Exchange Commission’s
Staff Accounting Bulletin No. 107, which takes into
consideration the grant’s contractual life and the vesting
periods. The Company estimates its forfeiture rate based on an
analysis of its actual forfeitures and will continue to evaluate
the adequacy of the forfeiture rate based on actual forfeiture
experience, analysis of employee turnover behavior, and other
factors. The impact from a forfeiture rate adjustment will be
recognized in full in the period of the adjustment. During the
year ended December 31, 2006, the Company recorded
share-based compensation related to stock options under the fair
value requirements of SFAS No. 123R of approximately
$7.4 million.
The Company has also granted restricted stock awards to certain
employees. Restricted stock awards are valued at the deemed fair
value of the Company’s common stock on the date of grant
and the total value of the award is expensed ratably over the
service period of the award. In 2006, the Company granted
1,230,000 shares of restricted stock with a deemed fair
value of $12,166,000.
No restricted stock was granted during 2004 or 2005. Share-based
payment compensation related to all restricted stock awards in
2006 was approximately $1,735,000. At December 31, 2006,
pursuant to SFAS 123R, there was $10,431,000 of total
unrecognized compensation costs related to non-vested
share-based compensation arrangements granted under the
restricted stock plan. That cost is expected to be recognized
over a weighted-average period of 3.83 years.
The Company’s stock option plan contains an “early
exercise” provision. Upon early exercise of the option, the
exercising holder receives restricted common stock. The
restricted stock shares vest over the same period as the
original stock option award. If the restricted stock does not
vest because the required service period is unmet, the Company
has the option to reacquire the restricted common stock for the
lesser of the amount paid to acquire it or the fair value of the
common stock at the call date. During 2006, the Company received
$864,000 in cash resulting from the early exercise of options to
purchase 2,160,629 shares of restricted common stock.
Because the unvested portion of this common stock is subject to
repurchase by the Company, such amount ($610,000 as of
December 31, 2006) has been recorded in other liabilities
in the accompanying consolidated balance sheet.
9.
Related Party
Transactions
In July 2006, an aggregate of 26,579,970 shares of
Series B Preferred was issued at a purchase price of
$4.8909 per share to certain accredited investors in a
private placement transaction. As a result of this transaction,
entities affiliated with Goldman, Sachs & Co., one of
the lead underwriters of the proposed offering discussed in
Note 16, became holders of more than 10% of the
Company’s common stock.
At December 31, 2005, notes payable aggregating
approximately $195,000 were due to related parties. The notes
were paid in 2006. Accrued interest on related party notes was
$76,000 at December 31, 2005, and is included in other
current liabilities in the accompanying consolidated financial
statements.
During 2004, the Company borrowed $925,000 from a related party
and renegotiated certain debt with the related party of
$375,000. Outstanding balances under these related party notes
aggregated approximately $1,098,000 at December 31, 2004,
and included interest at 14% per annum. These notes were
repaid in full in 2005 from proceeds of bank financing.
In February and March, 2005, the Company entered into two
one-year financing leases with a related party to acquire
equipment. Funds provided to the Company under these agreements
totaled approximately $1,240,000, with equipment collateralizing
the agreements. Payments under the two leases aggregated
approximately $114,000 per month, with effective interest
rates of 21.4%. These capital financing leases were repaid in
full in 2005 from proceeds of bank financing.
The Company leases office space from a company owned by two of
the Company’s executives. Rent expense for the lease,
including reimbursement for telecommunication lines, was
approximately $80,000, $26,000 and $20,000 for 2004, 2005 and
2006, respectively.
The Company sells services to several entities owned, in whole
or in part, by several Company executives. Revenue received from
these customers was approximately $167,000, $234,000 and
$275,000 during 2004, 2005 and 2006, respectively.
The Company purchases hardware and equipment from companies
owned by related parties who are officers of the Company.
Hardware and equipment purchased from the entities during 2004,
2005 and 2006 was approximately $2,065,000, $7,400,000 and
$29,900,000, respectively. As of December 31, 2006,
management has been informed by the related parties that there
is no longer an ownership interest in the entities.
The Company paid fees aggregating $154,000 to related parties
during 2004 for providing collateral and guarantees related to
certain debt and leases.
10.
Leases and
Commitments
Operating
Leases
The Company is committed to various noncancelable operating
leases for office space which expire through 2011. Certain
leases contain provisions for renewal options and rent
escalations upon expiration of the initial lease terms. At
December 31, 2006, approximate future minimum lease
payments over the remaining lease periods are as follows:
Year
Amount
(In
thousands)
2007
$
524
2008
485
2009
344
2010
314
2011
68
Total minimum payments
$
1,735
Purchase
Commitments
The Company has long-term commitments for bandwidth usage and
co-location with various networks and ISPs. The following
summarizes minimum commitments for the next five years:
Rent and operating expense relating to these operating lease
agreements and bandwidth and co-location agreements was
approximately $3,802,000, $7,934,000 and $21,383,000 for 2004,
2005 and 2006, respectively.
Capital
Leases
The Company leases certain equipment under capital lease
agreements which expire in 2007 through 2009.
The equipment acquired under these various financing leases is
capitalized using effective interest rates at the inception of
the leases. The cost and accumulated depreciation of the
equipment capitalized under these leases is approximately
$671,000 and $217,000, respectively, at December 31, 2005,
and approximately $726,000 and $541,000, respectively, at
December 31, 2006.
The following is a schedule of the remaining future minimum
lease payments under these leases, together with the present
value of the net minimum lease payments as of December 31,2006.
Year
Amount
(In
thousands)
2007
$
272
2008
5
277
Less: amount representing interest
(27
)
Present value of net minimum lease
obligations
250
Less: current maturities
(245
)
Long-term capital lease obligations
$
5
Interest expense related to capital leases was approximately
$13,000, $314,000 and $66,000 for 2004, 2005 and 2006,
respectively.
Certain lease arrangements with maturities through 2009 were
paid in full by the Company during 2007 and, accordingly, have
been reflected as a current maturity herein.
Litigation
Limelight Networks, Inc is involved in litigation with Akamai
Technologies, Inc. relating to a claim of patent infringement.
The action was filed in July 2006. The suit is in the early
discovery phase and the Company has and will continue to
vigorously defend the suit. While the outcome of this claim
cannot be predicted with certainty, management does not believe
that the outcome of this matter will have a material adverse
effect on the Company’s business. However an unfavorable
outcome could seriously impact the Company’s ability to
conduct its business which, in turn, would have a material
adverse impact on the Company’s results of operations and
financial position.
11.
Concentrations
During 2004 and 2006, the Company had one major customer each
year for which revenue exceeded 10% of total revenues. The
revenues in 2004 and 2006 for these two customers totaled
approximately $1,553,000 and $13,699,000, respectively. There
was no customer from which total revenue exceeded 10% in 2005.
Revenue from
non-U.S. sources
aggregated approximately $1,000,000 and $5,091,000 in 2005 and
2006, respectively. The Company had no revenue from
non-U.S. sources
in 2004.
12.
Income
Taxes
Income (loss) before income taxes consists of the following for
the years ended December 31,
Tax expense (benefit) at the
federal statutory rate — 35%
$
287
$
244
$
(534
)
Share based compensation
—
—
2,619
State income taxes, net of the
federal effect
27
30
53
Contingency reserve
—
44
100
Foreign taxes
—
—
(6
)
Other
(8
)
(18
)
(45
)
Tax provision
$
306
$
300
$
2,187
A substantial portion of the Company’s charge to expense
for share based compensation is not expected to result in tax
deductions to the Company.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax
The Company evaluates the recoverability of its deferred tax
assets and records a valuation allowance when recoverability of
its deferred tax assets is not likely. The Company has not
provided a valuation allowance at December 31, 2005 and
2006 based on its estimate that it is more likely than not that
its deferred tax assets will be realized.
The Company conducts business in various foreign countries.
During 2006, the Company established corporations in a portion
of the foreign countries in which it conducts business. The
Company has not provided United States tax for the profits of
its foreign corporations as such profits are permanently
reinvested outside the United States.
The Company conducts business in various jurisdictions in the
United States and in foreign countries and is subject to
examination by tax authorities. As of December 31, 2006,
the Company is not under examination. The Company maintains tax
reserves to offset potential exposures which may arise upon
examination.
13.
Advertising and
Marketing
Costs associated with advertising are expensed as incurred.
Advertising expenses, which are comprised of Internet, trade
show and publications advertising, were approximately $440,000,
$721,000 and $1,354,000 for 2004, 2005 and 2006, respectively.
14.
401(k)
Plan
Effective January 1, 2004, the Company adopted the
Limelight Networks 401(k) Plan covering effectively all
employees of the Company. The plan is a 401(k) profit sharing
plan in which participating
employees are fully vested in any contributions they make.
Through December 31, 2006, the Company was not obligated to
make matching contributions. No matching contributions were made
by the Company in 2004, 2005 or 2006.
Effective January 1, 2007, the Company amended the plan to
include a Company match. The Company will match employee
deferrals as follows: a dollar-for-dollar match on eligible
employee’s deferral that does not exceed 3% of compensation
for the year and a 50% match on the next 2% of the employee
deferrals. Company employees may elect to reduce their current
compensation by up to 15% or the statutory limit.
15.
Segment
Reporting
The Company operates in on industry segment — content
delivery network services. The Company operates in three
geographic areas — the United States, Europe and Asia
Pacific.
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, establishes standards
for reporting information about operating segments. Operating
segments are defined as components of an enterprise about which
separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision
making group, in deciding how to allocate resources and in
assessing performance. The Company’s chief operating
decision maker is its Chief Executive Officer. The
Company’s Chief Executive Officer reviews financial
information presented on a consolidated basis for purposes of
allocating resources and evaluating financial performance. The
Company has one business activity and there are no segment
managers who are held accountable for operations, operating
results and plans for products or components below the
consolidated unit level. Accordingly, the Company reports as a
single operating segment.
Revenue by geography is based on the location of the server
which delivered the service. The following table sets forth
revenue and long-lived assets by geographic area for the year
ended December 31.
2004
2005
2006
(In
thousands)
Revenue
Domestic revenue
$
11,192
$
20,303
$
59,252
International revenue
—
1,000
5,091
Total revenue
$
11,192
$
21,303
$
64,343
Long-lived Assets
Domestic long-lived assets
$
10,343
$
39,198
International long-lived assets
1,643
2,586
Total long-lived assets
$
11,986
$
41,784
16.
Subsequent
Events
In March 2007, the Company’s Board of Directors authorized
the filing of a registration statement with the
U.S. Securities and Exchange Commission that would permit
the Company to attempt to sell shares of common stock in
connection with a proposed initial public offering.
F-25
No dealer, salesperson or
other person is authorized to give any information or to
represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations.
This prospectus is an offer to sell only the shares offered
hereby, but only under circumstances and in jurisdictions where
it is lawful to do so. The information contained in this
prospectus is current only as of its date.
Through and
including ,
2007 (the 25th day after the date of this prospectus), all
dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer’s obligation to
deliver a prospectus when acting as an underwriter and with
respect to an unsold allotment or subscription.
The following table sets forth all expenses to be paid by the
registrant, other than estimated underwriting discounts and
commissions, in connection with this offering. All amounts shown
are estimates except for the registration fee, the NASD filing
fee and Nasdaq Global Market listing fee.
Amount
to be Paid
SEC registration fee
$
6,179
NASD filing fee
*
Nasdaq Global Market listing fee
*
Printing and engraving
*
Legal fees and expenses
*
Accounting fees and expenses
*
Blue sky fees and expenses
(including legal fees)
*
Transfer agent and registrar fees
*
Miscellaneous
*
Total
$
2,400,000
* To be completed by amendment.
Item 14.
Indemnification
of Officers and Directors.
On completion of this offering, our amended and restated
certificate of incorporation will contain provisions that
eliminate, to the maximum extent permitted by the General
Corporation Law of the State of Delaware, the personal liability
of directors and executive officers for monetary damages for
breach of their fiduciary duties as a director or officer. Our
amended and restated certificate of incorporation and bylaws
will provide that we shall indemnify our directors and executive
officers and may indemnify our employees and other agents to the
fullest extent permitted by the General Corporation Law of the
State of Delaware.
Sections 145 and 102(b)(7) of the General Corporation Law
of the State of Delaware provide that a corporation may
indemnify any person made a party to an action by reason of the
fact that he or she was a director, executive officer, employee
or agent of the corporation or is or was serving at the request
of the corporation against expenses (including attorneys’
fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by him or her in connection with such
action if he or she acted in good faith and in a manner he or
she reasonably believed to be in, or not opposed to, the best
interests of the corporation and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his or
her conduct was unlawful, except that, in the case of an action
by or in right of the corporation, no indemnification may
generally be made in respect of any claim as to which such
person is adjudged to be liable to the corporation.
We have entered into indemnification agreements with our
directors and executive officers, in addition to the
indemnification provided for in our amended and restated
certificate of incorporation and bylaws, and intend to enter
into indemnification agreements with any new directors and
executive officers in the future.
We have purchased and intend to maintain insurance on behalf of
any person who is or was a director or officer of our company
against any loss arising from any claim asserted against him or
her and incurred by him or her in any such capacity, subject to
certain exclusions.
The Underwriting Agreement (Exhibit 1.1 hereto) provides
for indemnification by the underwriters of us and our executive
officers and directors, and by us of the underwriters, for
certain liabilities, including liabilities arising under the
Securities Act.
See also the undertakings set out in response to Item 17
herein.
Item 15.
Recent Sales
of Unregistered Securities.
(a) Since January 1, 2004, we have issued and sold the
following unregistered securities:
1. We sold an aggregate of 4,842,178 shares of our
common stock to employees, consultants and directors for cash
consideration in an aggregate amount of $1,754,818 upon the
exercise of stock options granted under our 2003 Incentive
Compensation Plan.
2. On January 31, 2004, we issued 46,147 shares
of our common stock in connection with an Assignment and License
Agreement.
3. On October 20, 2006 we issued 1,000,000 shares
in connection with a Restricted Stock Award Agreement.
4. On December 1, 2006 we issued 230,000 shares
in connection with a Restricted Stock Award Agreement.
5. On January 14, 2004 we issued 2,307,000 shares
of Series A Preferred Stock for cash consideration of
$499,927 to an accredited investor.
6. On July 12, 2006 we issued 26,579,970 shares
of Series B Preferred Stock for cash consideration of
$129,999,975 to eleven accredited investors.
7. On January 1, 2004 we issued a warrant to purchase
567,480 shares of our common stock in an aggregate amount
of $119,171 to an accredited investor.
8. On December 31, 2004 we issued a warrant to
purchase 14,556 shares of our common stock in an aggregate
amount of $13,100 to an accredited investor.
9. On March 31, 2005 we issued a warrant to purchase
175,000 shares of our common stock in an aggregate amount
of $70,000 to an accredited investor.
10. From August 2005 through February 2006, we issued
warrants to purchase 875,000 shares of our common stock in
an aggregate amount of $350,000 to an accredited investor.
11. From August 2005 through February 2006, we issued
warrants to purchase 406,250 shares of our common stock in
an aggregate amount of $162,500 to an accredited investor.
The sales of the above securities were deemed to be exempt from
registration in reliance on Section 4(2) of the Securities
Act or Regulation D promulgated thereunder as transactions
by an issuer not involving any public offering. All recipients
were either accredited or sophisticated investors, as those
terms are defined in the Securities Act and the regulations
promulgated thereunder. The recipients of securities in each
such transaction represented their intention to acquire the
securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates and other
instruments issued in such transactions. All recipients either
received adequate information about us or had access, through
employment or other relationships, to such information.
(b) Since January 1, 2004, we have granted the
following options to purchase common stock to our employees,
directors and consultants under our 2003 Incentive Compensation
Plan:
1. On April 15, 2004, we granted stock options
covering an aggregate of 50,000 shares of our common stock,
at an exercise price of $0.21 per share and an aggregate
price of $10,500.
2. On April 26, 2004, we granted stock options
covering an aggregate of 20,000 shares of our common stock,
at an exercise price of $0.21 per share and an aggregate
price of $4,200.
3. On February 25, 2005, we granted stock options
covering an aggregate of 1,672,000 shares of our common
stock, at an exercise price of $0.40 per share and an
aggregate price of $668,800.
4. On July 27, 2005, we granted stock options covering
an aggregate of 415,000 shares of our common stock, at an
exercise price of $0.40 per share and an aggregate price of
$166,000.
5. On October 27, 2005, we granted stock options
covering an aggregate of 460,000 shares of our common
stock, at an exercise price of $0.40 per share and an
aggregate price of $184,000.
6. On February 22, 2006, we granted stock options
covering an aggregate of 905,542 shares of our common
stock, at an exercise price of $0.40 per share and an
aggregate price of $362,217.
7. On August 2, 2006, we granted stock options
covering an aggregate of 3,090,000 shares of our common
stock, at an exercise price of $0.40 per share and an
aggregate price of $1,236,000.
8. On September 13, 2006, we granted a stock option to
purchase 5,000 shares of our common stock, at an exercise
price of $0.40 per share and an aggregate price of $2,000.
9. On November 2, 2006, we granted stock options
covering an aggregate of 295,000 shares of our common
stock, at an exercise price of $1.28 per share and an
aggregate price of $377,600.
10. On November 20, 2006, we granted: (i) stock
options covering an aggregate of 20,000 shares of our
common stock, at an exercise price of $1.28 per share and an
aggregate price of $25,600; (ii) a stock option to purchase
500,000 shares of our common stock, at an exercise price of
$9.80 per share and an aggregate price of $4,900,000; and
(iii) a stock option to purchase 500,000 shares of our
common stock, at an exercise price of $19.80 per share and
an aggregate price of $9,900,000.
11. On December 1, 2006, we granted a stock option to
purchase 70,000 shares of our common stock, at an exercise
price of $10.00 per share and an aggregate price of
$700,000.
12. On January 7, 2007, we granted stock options
covering an aggregate of 65,000 shares of our common stock,
at an exercise price of $1.27 per share and an aggregate
price of $82,550.
13. On February 27, 2007, we granted stock options
covering an aggregate of 431,500 shares of our common
stock, at an exercise price of $3.14 per share and an
aggregate price of $1,354,910.
The sales and issuances of securities in the transactions
described above were deemed to be exempt from registration under
the Securities Act of 1933, as amended, in reliance upon
Section 4(2) of the Securities Act of 1933, as amended,
Regulation D promulgated thereunder or Rule 701
promulgated under Section 3(b) of the Securities Act of
1933, as amended, as transactions by an issuer not involving any
public offering or transactions pursuant to compensatory benefit
plans and contracts relating to compensation as provided under
Rule 701. The recipients of securities in each transaction
represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were
affixed to the securities issued in these transactions. All
recipients had adequate access, through their relationship with
the Company, to information about us.
Consent of Ernst & Young
LLP, Independent Registered Public Accounting Firm
23
.2*
Consent of Wilson Sonsini
Goodrich & Rosati, Professional Corporation (included
in Exhibit 5.1)
24
.1
Power of Attorney (see
page II-5
to this registration statement on
Form S-1)
*
To be filed by amendment.
†
Confidential treatment has been requested for portions of this
exhibit. These portions have been omitted from this Registration
Statement and have been filed separately with the Securities and
Exchange Commission.
(b) Financial Statement Schedules.
All schedules have been omitted because the information required
to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
Item 17.
Undertakings.
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification by the registrant for liabilities
arising under the Securities Act may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the provisions described in Item 14 or otherwise, the
registrant has been advised that in the opinion of the
Securities
and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4), or 497(h) under the Securities Act
of 1933, shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and this offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement on
Form S-1
to be signed on its behalf by the undersigned, thereunto duly
authorized, in Tempe, Arizona, on the
22nd
day of March, 2007.
Limelight Networks, Inc.
By:
/s/ Jeffrey
W. Lunsford
Jeffrey W. Lunsford
President, Chief Executive Officer and Chairman
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below hereby constitutes and appoints Jeffrey
W. Lunsford and Matthew Hale, and each of them acting
individually, as his true and lawful
attorneys-in-fact
and agents, each with full power of substitution, for him in any
and all capacities, to sign any and all amendments to this
registration statement (including post-effective amendments or
any abbreviated registration statement and any amendments
thereto filed pursuant to Rule 462(b) increasing the number
of securities for which registration is sought), and to file the
same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange
Commission, granting unto said
attorneys-in-fact
and agents, with full power of each to act alone, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as
fully for all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said
attorneys-in-fact
and agents, or his or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated:
Signature
Title
Date
/s/ Jeffrey
W. Lunsford
Jeffrey
W. Lunsford
President, Chief Executive Officer
and Chairman (principal executive officer)
Consent of Ernst & Young
LLP, Independent Registered Public Accounting Firm
23
.2*
Consent of Wilson Sonsini
Goodrich & Rosati, Professional Corporation (included
in Exhibit 5.1)
24
.1
Power of Attorney (see
page II-5
to this registration statement on
Form S-1)
*
To be filed by amendment.
†
Confidential treatment has been requested for portions of this
exhibit. These portions have been omitted from this Registration
Statement and have been filed separately with the Securities and
Exchange Commission.
Dates Referenced Herein and Documents Incorporated by Reference
