<PAGE>
As filed with the Securities and Exchange Commission on September 28, 2000
Registration No. 333-34546
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 6 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DOCENT, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<C> <S> <C>
Delaware 7372 77-0460705
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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2444 Charleston Road
Mountain View, California 94043
(650) 934-9500
(Address, including zip code and telephone number, including area code,
of registrant's principal executive offices)
---------------
DAVID R. ELLETT
Chairman, President and Chief Executive Officer
Docent, Inc.
2444 Charleston Road
Mountain View, California 94043
(650) 934-9500
(Name, address, including zip code and telephone number, including area code,
of agent for service)
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Copies to:
<TABLE>
<S> <C>
Stephen M. Wurzburg, Esq. Kenneth R. Lamb, Esq.
Elisa Lowy, Esq. Stan Sze, Esq.
Pillsbury Madison & Sutro LLP Gibson, Dunn & Crutcher LLP
2550 Hanover Street One Montgomery Street
Palo Alto, CA 94304 Telesis Tower, Suite 2600
(650) 233-4500 San Francisco, CA 94104
(415) 393-8200
</TABLE>
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Approximate date of proposed sale to the public: As soon as practicable
after the effective date of this Registration Statement.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
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 statement number of the earlier
effective registration statement for the same offering. [_]
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 statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Section 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement of the earlier effective registration statement for the
same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title of each class of Proposed maximum Proposed Amount of
securities to be Number of shares offering price maximum aggregate registration
registered to be registered(1) per share(2) offering price(2) fee(3)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock............ 9,200,000 $11.00 $101,200,000 $24,288
</TABLE>
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(1) Includes 1,200,000 shares which the Underwriters have the option to
purchase to cover overallotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of
1933.
(3) All of this fee has been paid previously.
---------------
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 of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is declared effective. This +
+preliminary prospectus is not an offer to sell these securities and we are +
+not soliciting an offer to buy these securities in any jurisdiction where the +
+offer to sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated September 28, 2000
[LOGO of Docent Inc.]
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8,000,000 Shares
Common Stock
--------------------------------------------------------------------------------
This is the initial public offering of Docent, Inc. We are offering 8,000,000
shares of our common stock. We anticipate that the initial public offering
price will be between $9.00 and $11.00 per share. We have applied to list our
common stock on the Nasdaq National Market under the symbol "DCNT."
Investing in our Common Stock involves risks. See "Risk Factors" beginning on
page 7.
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.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Docent
<S> <C> <C> <C>
Per Share $ $ $
Total $ $ $
</TABLE>
We have granted the underwriters the right to purchase up to 1,200,000
additional shares to cover over-allotments.
Deutsche Banc Alex. Brown
Dain Rauscher Wessels
Thomas Weisel Partners LLC
The date of this prospectus is , 2000
<PAGE>
Description of Graphics:
Set forth on the front page before you open the gatefold is the Docent logo in
the center of the page.
Set forth on the inside front gatefold cover are graphics depicting the
following: Across the top is the Docent logo with a caption for the graphics
shown on the page. The caption says, "Revolutionizing the Way Organizations
Learn and Exchange Knowledge." The gatefold includes a gear graphic on the left
and, on the right, a text description followed by 3 bullets.
On the left gatefold, there are four connected gears which are representative
of Docent's customers including a green gear for the enterprise customers, a
yellow gear for content providers, a blue gear for professional communities and
a red center gear which represents Docent. Arrows are used to depict the
connection between each constituent. Resellers, another constituent, are
represented by a large purple gear that is behind the gear graphic. There is
text above and below the gear model. The label at the top is as follows: "B2B
Platform for Building Knowledge Exchange eHubs."
On the right gatefold, in the center of the page, there is a text description
as follows: "Docent Provides Software Products and Services to Facilitate the
Exchange of Knowledge Among Enterprises, Content Providers and Professional
Communities." Below it, there are three bulleted definitions. First bullet
states: "Content Providers are Companies that Develop and Sell Educational
Material." Second bullet states: "Professional Communities are a Group of
Individuals such as Sales People or Insurance Agents Communicating Online."
Third bullet states: "Enterprises are Large Organizations."
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in our common stock. You should carefully read the
entire prospectus, including "Risk Factors" and the financial statements,
before making an investment decision.
OUR BUSINESS
We provide infrastructure software products and services that enable the
exchange of knowledge within and among large organizations, educational content
providers, and online professional communities. Our innovative Internet-based
software platform for knowledge exchange goes beyond the online delivery of
educational content, commonly known as eLearning, by offering an array of
value-added features. Our Docent Enterprise software provides the
infrastructure that enables our customers to create and operate knowledge
exchange electronic marketplaces, which we also refer to as knowledge exchange
eHubs. Our solution provides the following benefits to our customers:
. Enterprises, or large organizations, can easily create and manage
educational content that has been tailored to their specific
requirements. They are also able to deliver this customized content to
each individual user as and when requested. Enterprises can identify,
for each of their users, the skill areas that need improvement and help
enhance each user's competency level. This enables our customers to
assess the effectiveness of their educational programs and can provide
enterprises with a measurable impact on business results;
. Educational content providers, or companies that develop educational
material, can rapidly and cost-effectively generate additional revenue
by bringing their offerings online and by participating in knowledge
exchange electronic marketplaces; and
. Online professional communities, such as a group of salespeople or
consultants communicating through the Internet, can generate additional
revenue by offering their members a broad range of educational content
from multiple sources as well as skill assessment and performance
tracking. This group is our newest and, presently, our smallest customer
group.
In today's highly competitive knowledge-based economy, it is critical to be
able to rapidly disseminate information to people throughout the extended
enterprise, which includes an organization's employees, suppliers,
distributors, customers and business partners. These enterprises require a
flexible and easily accessible platform that enables the exchange of knowledge
throughout the extended enterprise. Docent Enterprise, the software which our
customers use to create and operate functionally rich knowledge exchange eHubs,
is designed on a standards-based, open, flexible and scalable architecture
allowing for easy implementation and customization. Our solutions are
accessible by users through standard Web browsers and support large numbers of
individual users and member organizations. Through our solution our customers
can also manage a wide range of enhanced eCommerce processes such as online
course registration and multiple payment options.
Since inception, we have generated, and expect to continue generating, all of
our revenue through the sale of our Docent Enterprise software product and
related services. We market Docent Enterprise primarily through our direct
sales force. More recently, we have commenced marketing Docent Enterprise
through our strategic partners as well, and have
3
<PAGE>
generated only a small amount of revenue to date from these efforts. Our
business model anticipates that our revenue will be increasingly dependent on
our strategic relationships with Hewlett-Packard, Andersen Consulting and
SmartForce, as well as our relationships with our other strategic partners. Our
sales efforts to date have been targeted at the technology, financial and
business services, and healthcare industries. We have generated substantial
losses to date, and expect to continue generating substantial losses in the
foreseeable future. Since January 1, 1999, we have recognized revenue from over
90 customers and business partners. In addition, as of September 22, 2000, we
have contracts with another 15 customers and business partners from which we
expect to receive revenue in the future. Our customers and business partners
from whom we recognized at least $25,000 of revenue during the twelve months
ended June 30, 2000, include Andersen Consulting, Ariba, Arthur Andersen,
Autodesk, Baxter Pharmaceutical Products, Harvard Business School Publishing,
Miller Heiman, Pitney-Bowes, Portera, Qwest Communications and Schering-Plough.
Other significant customers and business partners include AXA Insurance, Dun &
Bradstreet, FT Knowledge, Hewlett Packard, Lucent Technologies and Merrill
Lynch. We have received several awards and recognition for our industry
leadership and product capabilities, including the Crossroads 2000 A-List
Award, and we were one of several companies to receive the 1999 Product of the
Year Award from Call Center Solutions Magazine. We were also recognized in PC
Week Magazine (November 16, 1999) with the best score among the seven learning
management systems evaluated, and in brandon-hall.com's Integrated Learning
Systems report (February 2000) as the "Best Integrated Learning System" and the
"Best Solution for the Sales Organization." We do not know whether all of our
competitors were included in the comparisons for which we received awards.
Our principal executive offices are located at 2444 Charleston Road, Mountain
View, California 94043. Our telephone number at that location is (650) 934-
9500.
Our trademarks used in this prospectus, as to which we claim common law
trademark rights, include Docent, Docent Enterprise, Docent Desktop, Docent
Mobile, Docent Learning Management Server and Docent Content Delivery Server.
All other trademarks appearing in this prospectus are the property of their
respective owners. We do not currently have any U.S. registrations of these
trademarks, although we have pending applications in some instances. The
trademark "Docent" may not be registerable in the U.S. for use with our
software due to an existing registration by a third party.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by
Docent........................ 8,000,000 shares
Common stock to be outstanding
after the offering............ 39,811,451 shares
Use of proceeds................ For general corporate purposes, including working
capital. In addition, we may use a portion of the
proceeds potentially for acquisition opportunities
that we anticipate may arise in the future.
Proposed Nasdaq National Market
Symbol......................... DCNT
</TABLE>
The number of shares outstanding upon completion of this offering is based on
shares outstanding as of September 1, 2000. This number assumes the conversion
into common stock of all of our convertible preferred stock outstanding on June
30, 2000 and 2,598,875 shares of Series F convertible preferred stock which
were issued during August and September 2000, on a one-to-one basis at a
weighted average price per share of $2.65. This number excludes:
. 4,730,105 shares of common stock issuable upon exercise of options
outstanding as of September 1, 2000 with an average exercise price of
$2.66;
. 6,000,000 shares of common stock reserved for future issuances under our
2000 Omnibus Equity Incentive Plan;
. 1,500,000 shares of common stock reserved for future issuances under our
2000 Employee Stock Purchase Plan; and
. 3,313,530 shares of common stock subject to outstanding warrants to
purchase common stock and convertible preferred stock as of September 1,
2000 with an average exercise price of $6.68.
5
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenue:
License...................... $ 335 $ 297 $ 141 $ 41 $ 663
Services and maintenance..... 60 244 651 131 1,801
------- ------- -------- ------- --------
Total revenue.............. 395 541 792 172 2,464
Costs and expenses............. 1,948 7,004 19,457 6,124 37,727
Loss from operations........... (1,553) (6,463) (18,665) (5,952) (35,263)
Net loss....................... (1,505) (6,434) (18,713) (6,024) (35,000)
Net loss attributable to common
stockholders.................. (1,505) (6,434) (20,067) (6,024) (44,614)
Net loss per share attributable
to common stockholders:
Basic and diluted............ $ (0.55) $ (2.24) $ (5.19) $ (1.67) $ (9.99)
Weighted average shares
outstanding................. 2,717 2,869 3,868 3,607 4,464
Pro forma net loss per share
(unaudited):
Basic and diluted............ $ (1.10) $ (1.64)
Weighted average shares
outstanding................. 17,013 24,633
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 2000
(unaudited)
-----------------------------------
Pro Forma As
Actual Pro Forma(1) Adjusted(2)
-------- ----------- ------------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................. $ 23,413 $42,207 $114,307
Working capital........................... 18,773 37,567 109,667
Total assets.............................. 29,634 48,428 120,528
Notes payable and capital lease
obligations, noncurrent portion.......... 1,036 1,036 1,036
Convertible preferred stock............... 64,010 -- --
Total stockholders' equity (deficit)...... (42,938) 39,866 111,966
</TABLE>
--------
(1) The pro forma column gives effect to the issuance in August and September
2000 of 2,598,875 shares of our Series F convertible preferred stock, which
raised net proceeds of approximately $18.8 million, and the conversion of
all our preferred stock outstanding as of June 30, 2000, and of our Series
F convertible preferred stock, into common stock upon the closing of this
offering.
(2) The pro forma as adjusted column also reflects the receipt of the net
proceeds from the sale of 8,000,000 shares of common stock offered by us at
an assumed initial public offering price of $10.00 per share and the
application of the net proceeds from the offering, after deducting
underwriting discounts and commissions and estimated offering expenses.
----------------
Unless otherwise indicated, all information in this prospectus assumes:
. that the underwriters have not exercised their option to purchase
additional shares;
. conversion of all shares of preferred stock into shares of common stock
upon completion of this offering; and
. the filing of an amended and restated certificate of incorporation upon
completion of this offering to increase our authorized common stock and
decrease our authorized preferred stock.
6
<PAGE>
RISK FACTORS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from the results
anticipated in these forward-looking statements as a result of several factors,
including those set forth below and in other sections of the prospectus. In
addition to the other information in this prospectus, you should carefully
consider the following risk factors in evaluating us, our business and our
prospects before you purchase any of our common stock. All of the significant
risks that we have identified are disclosed below. If any of the following
risks, actually occur, our results of operation and financial condition would
suffer significantly.
Risks Related to Our Business
Our limited operating history subjects us to risks encountered by early stage
companies and some of these risks are increased because we operate in a new and
rapidly evolving market.
Because of our limited operating history, you must consider the risks,
uncertainties and difficulties frequently encountered by companies in their
early stages of development, particularly companies in new and rapidly evolving
markets such as the market for Web-based knowledge exchange products.
We have not been in business long enough to use our operating history as a
reliable aid in predicting trends specific to our company, which impairs our
ability to make accurate business plans. Since the market for Web-based
knowledge exchange products is rapidly evolving, our operating history will be
less relevant to future performance than the operating history of a company in
an industry which is not subject to rapid change. In addition, since the market
for knowledge exchange products is new, we are limited in our ability to refer
to industry trends as reliable predictors and to react to these trends. These
limitations make it more difficult for us to anticipate the need for new
products as the market for knowledge exchange products changes, thus increasing
our vulnerability to competition. As a result, we may either fail to increase,
or suffer a decrease in, our market share, resulting in a decrease in our
revenue. We may also need to decrease our sales price in order to be
competitive. This could lead to a decrease in our revenue, gross margins and
profits.
We have a history of losses, expect future losses and may never achieve
profitability.
We have experienced losses in each quarter since our inception. We incurred
net losses of $1.5 million in fiscal 1997, $6.4 million in fiscal 1998, $18.7
million in fiscal 1999 and $35.0 million in the six months ended June 30, 2000.
Our accumulated deficit as of June 30, 2000 was $67.4 million. During fiscal
years 2000 and 2001, we expect significantly greater losses than in fiscal
1999. We plan to significantly increase our operating expenses to market, sell
and support our eHub solutions, build our internal infrastructure and hire
additional personnel. We expect that our research and development expenses will
also increase significantly. In addition, we plan to make significant
investments in developing relationships with current and potential eHub
constituents and with strategic partners. If we do not realize the revenue that
we anticipate from these investments, we may never achieve profitability. If we
do not become profitable within a time frame expected by public market analysts
or investors, the market price of our common stock will likely decline
significantly. Even if we do achieve profitability, we may not be able to
sustain or increase profitability on a quarterly or annual basis in the future,
which would also likely cause the market price of our common stock to decline.
7
<PAGE>
Fluctuations in our quarterly revenue and other operating results may cause our
stock price to decline.
We believe that quarter-to-quarter comparisons of our revenue and other
operating results are not meaningful and should not be relied on as indicators
of our future performance. As a consequence of quarterly revenue fluctuations
our financial results may fall short of the expectations of public market
analysts or investors. If this occurs, the price of our common stock would
likely drop.
In order to promote future growth, we expect to continue to expend
significant sums in all areas of our business, particularly in our sales and
marketing operations. Because the expenses associated with these activities
must be incurred well in advance of our generating revenue from these
activities, we may be unable to reduce spending quickly enough to offset any
unexpected shortfall in revenue growth or any decrease in revenue levels. In
addition, our revenue will need to increase in order to keep up with the
increase in our expenses. As a result, our revenue and other operating results
will likely vary significantly from quarter to quarter. These variances may
cause our stock price to fluctuate, increasing the volatility of a
stockholder's investment in our common stock.
We seek to develop a significant number of sales prospects, but we cannot
predict when individual customer orders will close. Our base of customers is
small, as is the number of additional customer agreements we enter into each
quarter. Accordingly, our inability to enter into new customer agreements or
the deferral or cancellation of a small number of anticipated large customer
orders in any quarter could result in a significant shortfall in revenue for
that quarter and future quarters.
Our direct sales cycle is lengthy and requires considerable investment with no
assurance of when we will generate revenue from our efforts, if at all.
The period between our initial contact with a potential customer and that
customer's purchase of our products and services is lengthy, typically
extending from four to six months. The delay or failure to complete sales in a
particular quarter could reduce our revenue in that quarter, as well as
subsequent quarters over which revenue for the sale would likely be recognized.
If our sales cycle unexpectedly lengthens in general or for one or more large
orders, it would negatively affect the timing of our revenue and our revenue
growth would be harmed. If we were to experience a delay of several weeks on a
large order, it could impede our ability to meet our forecasts and investor
expectations for a given quarter. A customer's decision to purchase our
products and services requires an initial decision to replace or expand
existing knowledge exchange mechanisms, involves a significant allocation of
resources and is influenced by a customer's budgetary cycles. To successfully
sell our products and services, we generally must educate our potential
customers regarding the use and benefits of our products and services, which
can require significant time, capital and other resources. Although we must
expend and allocate these resources prior to completing a sales transaction, we
may never generate any revenue from these activities. In addition, many of our
potential customers are large enterprises that generally take longer than
smaller organizations to make significant business decisions. Any failure to
meet investor expectations for a given quarter would likely cause the price of
our common stock to decline.
We have generated only limited revenue from content providers; however, we must
generate significant revenue from them in the future to be successful and
achieve profitability.
We currently have agreements with some content providers to use our solutions
and to provide our customers with their content. However, this content first
needs to be converted and customized into a form that can be used with our
technology. This conversion process can
8
<PAGE>
take several months to complete and few of our content providers have completed
the process. Even though a content provider may have agreed to provide our
customers with content using our solutions, we may discover problems in the
conversion process because the content does not, either for technical reasons
or because of the nature of the content, convert well into our solutions. This
would require us to modify the original plan for converting the content. We
have not yet learned of any material problems in the conversion process.
However, due to the nascent nature of our industry and associated technologies,
and the fact that only a small number of our content providers have completed
the conversion process, we anticipate that we may encounter one or more content
providers who have material problems with the conversion process. Since we do
not generate meaningful royalty revenue from our content providers until after
the conversion process is complete and the content has been sold to end users,
any modifications made during the conversion process will likely result in
delaying or reducing our revenue. In addition, although we have agreements from
our content providers to convert their content for use with our solutions, the
content providers may choose not to complete the conversion process themselves
based on their own business or technical reasons. Our agreements with content
providers do not require that they complete the conversion process. Therefore,
we may never generate meaningful royalty revenue from these content providers.
We have generated only limited revenue from resellers; however we must generate
significant revenue from them in the future to be successful and achieve
profitability.
We have generated revenue from only a few of our resellers, which are
companies that purchase our products and maintenance services and resell them
to their customers. In order to be successful, we must increase and train our
reseller sales force and enter into relationships with more resellers. The
resellers will require time to learn about our products and services so that
they may effectively resell and implement them. A significant portion of our
future revenue is dependent on our success in attracting new resellers and the
motivation and ability of our existing and future resellers to sell and
implement our products and services. If we are unable to attract additional
resellers who would generate significant revenue for us, our revenue will not
meet our expectations.
We anticipate that a substantial portion of our future revenue will depend
primarily on a small number of large sales. If we fail to complete one or more
of these sales, our revenue will decrease.
Historically, a significant portion of our revenue has been generated from
and concentrated in a small number of customers. In fiscal year 1999, sales to
Impiric, a division of Young & Rubicam, accounted for 27% of our revenue. In
fiscal year 1998, sales to Veritas Software accounted for 26%, sales to Sun
Microsystems accounted for 13% and sales to Lucent Technologies accounted for
12% of our revenue. No customers during the first six months of 2000 accounted
for ten percent of our revenue. Our operating results may be harmed if we are
not able to complete one or more substantial sales to any large customers or if
we are unable to collect accounts receivable from any of our large customers in
any future period.
If we are unable to develop and maintain relationships with third party hosting
service providers, our operating results will be harmed.
In order to provide uninterrupted service to those of our customers that
require hosting services, we need to have adequate and stable relationships
with high quality third party hosting service providers. If we fail to develop
and maintain these relationships, or if the third party hosting service
providers provide poor quality services, our application service provider
services will be interrupted and our revenue will be adversely affected.
9
<PAGE>
Our revenue may be adversely affected if we fail to change our revenue model
from one based on one-time sales to one based on multi-year, royalty-bearing
license and service agreements.
Historically, we have generated a significant portion of our revenue from
one-time sales to customers which did not generate significant revenue after we
completed the initial sale and implementation of our product. This required us
to identify and sell to new customers, or identify new demand for our products
and services from our existing customers, in order to continue to generate
revenue. Through royalty-bearing license agreements and hosting services, we
are trying to change our business model so that we are able to achieve
consistent or increased revenue from our customers after the initial sale of
our products and services. If we are unable to effect this change to the degree
necessary to make us less dependent on revenue generated from one-time sales to
customers, our revenue will be less consistent than it would if derived from
royalty-bearing license agreements. Further, without a consistent revenue
stream generated from royalty-bearing license agreements, we will have fewer
revenue sources to insulate us against periods when we may fail to close sales
of our products to one-time customers.
Our lack of product diversification means that any decline in price or demand
for our products and services would seriously harm our business.
Our Docent Enterprise software products and services have accounted for
substantially all of our historical revenue and are expected to do so for the
foreseeable future. Consequently, a decline in the price of, or demand for, the
Docent Enterprise products or services, or their failure to achieve broad
market acceptance, would seriously harm our business.
Our eHub strategy is unproven and may not be successful, in which case our
business would be seriously harmed.
We need to establish and enhance our products and services so that they are
attractive to enterprises, content providers and professional communities. The
concept of eHubs is new as a business model and our success depends on a
significant number of our potential customers adopting this concept,
implementing our products and engaging in the knowledge exchange process
through our eHubs. We, together with our customers, may not be able to
effectively operate the knowledge exchange process, both in terms of technical
performance as well as commercial viability. To date, we have only a limited
number of customers. If we are unable to execute this business strategy
effectively, or if eHubs are not widely adopted as a means for knowledge
exchange, our revenue will be negatively impacted.
If we lose key personnel, or are unable to attract and retain additional
management personnel, we may not be able to successfully grow and manage our
business.
We believe that our future success will depend upon our ability to attract
and retain our key management personnel including David R. Ellett, our
Chairman, President and Chief Executive Officer, David Mandelkern, our
Executive Vice President and Chief Technology Officer, and the other members of
our executive team. These employees are not subject to employment contracts. We
may not be successful in retaining our key employees in the future or in
attracting and assimilating replacement or additional key personnel. Any
failure in retaining and attracting management personnel may impair our ability
to rapidly grow and manage our business.
10
<PAGE>
We intend to significantly increase the number of our personnel within the next
12 months and failure to find sufficient qualified candidates would
significantly impair our ability to continue our rapid growth.
We have increased the number of our employees from approximately 55 full-time
employees on December 31, 1998 to approximately 87 full-time employees on
December 31, 1999. As of August 31, 2000, we had 205 full-time employees. We
intend to significantly increase the number of our personnel over the next
twelve months. Our future success and our ability to expand our operations will
depend in large part on our ability to recruit and retain additional qualified
technical, and sales and marketing personnel. Competition for these types of
employees is intense due to the limited number of qualified professionals and
the high demand for them, particularly in the San Francisco Bay Area where our
headquarters are located. Failure to attract, assimilate and retain qualified
personnel, particularly technical, and sales and marketing personnel, would
have a material adverse effect on our business and potential growth.
Difficulties we may encounter in managing our growth could adversely affect our
results of operations.
We have experienced and are experiencing a period of rapid and substantial
growth, which has placed a serious strain on our managerial, administrative and
financial personnel and our internal infrastructure. To manage the expected
growth of our operations and personnel, we will be required to improve existing
and implement new operational, financial and management controls, reporting
systems and procedures. We may not be able to install adequate management
information and control systems in an efficient and timely manner and our
current or planned personnel systems, procedures and controls may not be
adequate to support our future operations. In addition, we may have difficulty
providing adequate implementation and maintenance services to our customers
because we may not have enough personnel trained to provide these services. If
we are unable to manage growth effectively, we will not be able to capitalize
on attractive business opportunities.
Furthermore, to accommodate our rapid personnel growth, we may require a new
facility in Silicon Valley within the next twelve months, which may involve
significant expenses in today's tight real estate market. If we are unable to
locate one facility to accommodate all of our personnel, we may have to
disperse our employees across multiple facilities. The existence of multiple
facilities may diminish our productivity and management effectiveness.
Intense competition in our market segment could impair our ability to grow and
to achieve profitability.
The market for our products and services is intensely competitive, dynamic
and subject to rapid technological change. We expect the intensity of the
competition and the pace of change to increase in the future. The relatively
low barriers to entry in the eLearning market, a segment of the overall market
in which we compete, will encourage competition from a variety of established
and emerging companies. Competitors vary in size and in the scope and breadth
of the products and services offered. We encounter competition with respect to
different aspects of our solution from a variety of sources, including:
. companies which provide software and services to address specific
components of knowledge exchange platform solutions;
. companies that sell online and traditional educational materials, or
learning content, over the Internet;
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. existing or potential customers or strategic partners who develop in-
house solutions, including traditional learning programs; and
. enterprise software vendors who could develop their products to include
learning content offerings.
Many of our competitors have longer operating histories, substantially
greater financial, technical, marketing or other resources, or greater name
recognition than we do. As a result, our competitors may be able to respond
more quickly than we can to new or emerging technologies and changes in
customer requirements. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any one of which
would seriously harm our business. Our current and potential competitors may
develop and market new technologies that render our existing or future products
and services obsolete, unmarketable or less competitive. Our current and
potential competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with other learning solution providers,
thereby increasing the availability of their services to address the needs of
our current and prospective customers. We may not be able to compete
successfully against our current and future competitors and competitive
pressures that we encounter may seriously harm our business.
We have generated only limited revenue from our international operations, and
our inability to expand internationally would limit our growth prospects.
Although we have generated only limited revenue from international operations
to date, our ability to expand our international presence and operations is a
key component of our growth strategy. Conducting business outside of the United
States subjects us to many of the same risks that other companies face in these
circumstances, as well as other risks which are peculiar to our business such
as:
. a need to translate our software user interfaces and content that is not
locally developed;
. the need to find new content providers to satisfy different cultural
requirements in regional markets;
. the need for larger markets to support the increased cost of tailoring
our business model, products and services to a local market; and
. the need for additional software development to fully support multi-byte
languages such as Chinese and Japanese.
We might not successfully market, sell or distribute our products and
services in foreign markets due to one or more of the factors listed above,
and, consequently, our revenue and future growth may be negatively affected.
Our market is subject to rapid technological change and if we fail to
continually enhance our products and services, our revenue and business would
be harmed.
We must continue to enhance and improve the performance, functionality and
reliability of our products and services. The software and electronic commerce
industries are characterized by rapid technological change, changes in user
requirements and preferences, frequent new product and services introductions
embodying new technologies, and the emergence of new industry standards and
practices that could render our products and services obsolete. In the past, we
have discovered that some of our customers desire additional performance and
functionality not currently offered by our products. Our success will depend,
in part, on our ability to internally develop and license leading technologies
to enhance our existing products
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and services, to develop new products and services that address the
increasingly sophisticated and varied needs of our customers, and to respond to
technological advances and emerging industry standards and practices on a cost-
effective and timely basis. If we are unable to adapt our products and services
to changing market conditions, customer requirements or emerging industry
standards, we may not be able to increase our revenue and expand our business.
We must develop relationships with leading content providers that meet the
needs of our customers or our business will suffer.
To be successful in implementing our eHub strategy, we must enter into
agreements with content providers to provide us with content. Even if we are
successful in entering into these agreements, our ability to provide content to
our enterprise and professional community customers depends in large part on
our content providers' willingness and ability to frequently update course
material, develop new content as the underlying subject matter changes and
customize generic content provided for our enterprise and professional
community customers. In order for us to generate significant revenue from the
content provided to us by our content providers, the content providers must
also provide content that has widespread appeal. If the content providers fail
to complete their work in a timely or professional manner, we will be unable to
meet customer expectations and our reputation will be harmed.
We do not have exclusive arrangements with our content providers and some of
these providers may offer their content to our competitors in addition to, or
instead of, offering their content to us.
We do not have exclusive arrangements with any of our content providers. Each
content provider is free to use the content for its own purposes or to sell it
to another company, including competitors of ours. The availability of the same
content from multiple sources may result in increased competition and reduced
margins. We typically enter into agreements with our content providers for
three-year terms. At the end of the three-year term, the content provider may
choose not to renew in which case we would no longer be able to offer its
content.
Our business strategy and future success is dependent on our ability to develop
relationships and enter into agreements with professional communities to
promote, use and participate in our eHub solutions.
Our eHub business model is new among our three customer constituencies,
comprised of large enterprises, content providers and professional communities.
However, we have the least experience with professional communities and
currently only have a small number of these customers. This model may not gain
broad acceptance among professional communities in the industries where we have
concentrated our sales and marketing efforts to date, or in any new industries
where we may later focus our efforts. Further, even if the model does gain
acceptance among professional communities, it may not generate sufficient
revenue to be profitable, and our profitability would thus be adversely
affected.
If Hewlett-Packard, Andersen Consulting or SmartForce change the focus of its
business or fail to comply with the terms of its agreements with us, our
revenue will be harmed.
Our business model is dependent on developing additional revenue through our
strategic alliances with Hewlett-Packard, Andersen Consulting and SmartForce.
If one or more of these companies no longer wishes to develop business in the
knowledge exchange market, we will not materially benefit from our strategic
alliance with that company. In addition, if one or
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more of these companies breaches its strategic alliance agreement with us, we
may lose the potential for additional revenue. In addition, we will need to
devote a substantial number of our personnel, as well as our financial
resources, to developing and maintaining our relationships with these partners
and to servicing new customers we acquire as a result of these relationships.
Focusing our resources on these partnerships will impair our ability to develop
revenues from direct sales and other sources, making us more dependent on our
relationships with these partners. Therefore, if one or more of these
relationships terminates, we could suffer a significant decrease in our
revenue.
Our expansion into new target industries depends on our ability to recruit new
eHub members in those industries.
Unless we develop a critical mass of customers in all three customer
constituencies in any new industry, our eHub solution may not achieve broad
acceptance within that industry and our ability to generate revenue from that
field would be impaired. Our strategy involves both improving the depth of our
content offerings in our current industries of technology, financial and
business services, and healthcare, and expanding into new industries. Our
ability to expand our content beyond our current three industries may require
us to locate and enter into agreements with additional content providers who
would meet the needs of the constituents in each new industry. Any expansion
beyond our current three industries would also require us to recruit enterprise
and professional community customers in these new industries. If we are unable
to meet any of these requirements, we may not be successful in expanding beyond
our current industries. Any failure to expand our content offerings to increase
the depth of offerings in our current three industries or to enter into new
industries could constrain our revenue growth and harm our future prospects.
Our products sometimes contain errors and by releasing products containing
defects, our business and reputation may be harmed.
Our revenue may also decrease if previously undetected errors or performance
problems in our existing or future products are discovered in the future or
known errors considered minor by us are considered serious by our customers.
Complex software products such as ours often contain unknown and undetected
errors or performance problems. Many defects are frequently found during the
period immediately following introduction and initial delivery of new products
or enhancements to existing products. Although we attempt to discover and
resolve all errors before delivery, we have discovered errors in our products
after release to our customers. These errors or performance problems could
result in lost revenue or delays in customer acceptance and may harm our
business and reputation. We have not lost a customer or had a claim filed
against us as a result of an error in our software, nor have we incurred any
material costs in order to remedy an error other than the ordinary costs
incurred in developing and testing our product. Although there may be
problematic errors in our products, currently we do not know of any
contingencies in remedying errors in our products.
If third parties claim that we infringe on their patents or other intellectual
property rights, it may result in costly litigation or require us to make
royalty payments.
Third parties may claim that our current or future products or services
infringe their patent, copyright, trademark or other intellectual property
rights. Currently, third parties have registered Docent or a variant as a
trademark in the United States and in some jurisdictions outside the United
States for use with goods or services which could be construed to overlap those
offered by Docent. Although these third parties have not initiated formal
infringement proceedings or any formal challenges to our use of the Docent
trademark, any claims, with or without merit, could cause costly litigation
that could consume significant management time.
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In addition, another third party has recently claimed that course offerings on
our website infringe on its patent. Although this third party has offered us
the ability to license this patent, it has not yet disclosed the terms for the
license. If this third party's claim of infringement and its patent are valid,
we may be required to license the patent on terms that may or may not be
favorable, or be forced to alter our website or software products, either of
which results may adversely affect our revenue. As the number of product and
service offerings in our market increases and functionalities increasingly
overlap, companies such as ours may become increasingly subject to intellectual
property infringement claims. Third party intellectual property infringement
claims also might require us to enter into royalty or license agreements. If
required, we may not be able to obtain these royalty or license agreements, or
obtain them on terms favorable, or even acceptable, to us in which case we
would have to pay damages for our prior use of the intellectual property and
cease using the intellectual property involved in the future. This could
adversely affect our business. For example, if the intellectual property was a
trademark, we could be required to cease using a trademark which could involve
a loss of goodwill, as well as the possibility of a damage award and temporary
disruption during a transition to other trademarks.
We may not be able to adequately protect our intellectual property, and our
competitors may be able to offer similar products and services which would harm
our competitive position.
Our success depends upon our intellectual property. We rely primarily on
copyright, trademark and trade secret laws, confidentiality procedures and
contractual provisions to establish and protect our intellectual property.
These mechanisms provide us with only limited protection. We do not hold any
patents and currently have no patent applications pending. Although our
application to register Docent as a trademark in the United States for services
has been allowed, and we will proceed to registration once the statement of use
and the specimens are accepted, the U.S. Trademark Office has refused to allow
us to register Docent as a trademark in the United States for use with our
software due to an existing registration by a third party, a decision which we
intend to appeal. As a result, unless we prevail on the appeal or subsequently
succeed on a petition to cancel the registration of this mark, Docent will not
be registrable as a trademark in the U.S. in connection with our software.
As part of our confidentiality procedures, we enter into non-disclosure
agreements with our employees. Despite these precautions, third parties could
copy or otherwise obtain and
use our technology without authorization, or develop similar technology
independently. Furthermore, effective protection of intellectual property
rights is unavailable or limited in some foreign countries. Our protection of
our intellectual property rights may not provide us with any legal remedy
should our competitors independently develop similar technology, duplicate our
products and services, or design around any intellectual property rights we
hold.
We do not have a disaster recovery plan or back-up system, and a disaster or
break-down could severely damage our operations.
We currently do not have a disaster recovery plan in effect and do not have
fully redundant systems for our services at an alternate site. A disaster or
break-down could severely harm our business because our services could be
interrupted for an indeterminate length of time, thereby reducing our revenue
and possibly increasing our costs if we need to obtain a substitute means for
delivering our product and services. Our operations depend upon our ability to
maintain and protect our computer systems in our principal facilities in
Mountain View, California, which are located on or near known earthquake fault
zones. Although these systems are designed to be fault tolerant, they are
vulnerable to damage from fire, floods, earthquakes, power loss,
telecommunications failures and other events.
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Additionally, we do not carry sufficient business insurance to compensate us
for our losses that could occur. Similarly, disasters or break-downs affecting
eHub participants or the companies which provide our hosting services could
negatively affect our business to the extent their systems are involved in
supporting other eHub participants.
We rely on third party software incorporated in our product, and errors in this
software or our inability to continue to license this software in the future
would decrease our revenue and increase our costs.
Our product incorporates third party software, and we expect to incorporate
additional software as we broaden our product and services. The operation of
our product would be impaired if errors occur in the third party software that
we incorporate, and we may incur additional costs to repair or replace the
defective software. It may be difficult for us to correct any errors in third
party software because the software is not within our control. Accordingly, our
revenue would decrease and our costs would increase in the event of any errors
in this software. Furthermore, it may be difficult for us to replace any third
party software if a vendor seeks to terminate our license to the software.
Our revenue would decrease and our costs would increase if we fail to
adequately integrate acquired businesses.
As part of our overall business strategy, we continually evaluate and may
pursue acquisitions of complementary businesses or technologies that would
provide additional product or service offerings, additional industry expertise
or an expanded geographic presence. We may not be able to locate attractive
opportunities or acquire any we locate on favorable terms. Any future
acquisition could result in the use of significant amounts of cash, potentially
dilutive issuances of equity securities, the incurrence of debt or amortization
of expenses related to goodwill and other intangible assets, which would reduce
our earnings. In addition, acquisitions involve numerous risks, including:
. difficulties in the assimilation of the operations, technologies,
products and personnel of the acquired company;
. the diversion of management's attention from other business concerns;
. risks of entering markets in which we have no or limited prior
experience; and
. the potential loss of key employees of the acquired company.
Our stock price may fluctuate substantially, and our stock price may decrease.
Prior to this offering, there has been no public market for shares of our
common stock. An active public trading market may not develop following
completion of this offering or, if developed, may not be sustained. The initial
public offering price of the shares of our common stock will be determined by
negotiation between us and representatives of the underwriters. This price will
not necessarily reflect the market price of our common stock following this
offering. Subsequent to the closing of the initial public offering, changes in
revenue and earnings estimates or recommendations by securities analysts who
may follow our stock may cause fluctuations in our stock price.
In addition, stock prices for many companies in the technology and emerging
growth sectors have experienced wide fluctuations that have often been
unrelated to the operating performance of such companies. Such factors and
fluctuations, as well as general economic, political and market conditions, may
materially reduce the market price of our common stock.
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An increase in our stock-based compensation expenses will result in an
additional charge against our operating results.
In connection with the issuance of common stock and the granting of stock
options and warrants to our employees and non-employees, we incurred stock-
based compensation expense in the amount of $18.5 million for the six months
ended June 30, 2000, $4.5 million for the year ended December 31, 1999 and
$266,000 for the year ended December 31, 1998. The amortization of the
remaining deferred stock-based compensation is expected to result in additional
charges to operations as follows: $6.3 million in the six months ending
December 31, 2000; $7.1 million in 2001; $3.8 million in 2002; $2.1 million in
2003; and $557,000 in 2004. These amortization expenses have the effect of
increasing our operating expenses, which may, in turn, result in a decrease in
our stock price.
Risks Related to Our Industry
Our revenue may decrease if use of the Web in the markets we target does not
grow as projected.
The use of the Web as a means to connect enterprises, content providers and
professional communities, is integral to our business model. However, the use
of the Web as a means of transacting business is relatively new and has been
accepted by a limited number of customers in the markets we have targeted. The
failure of the Web to continue to develop as a commercial or business medium or
of significant numbers of enterprises, content providers and professional
communities to transact business and collaborate online would harm our revenue
and earnings. The acceptance and use of the Web to transact business and
collaborate is dependent upon a number of factors, such as:
. the relative ease of conducting business on the Web;
. improvements in the efficiencies of conducting commerce on the Web;
. the resolution of concerns about transaction security and information
privacy; and
. taxation of transactions on the Web.
A breach of Internet commerce security measures could reduce demand for our
products and services which would in turn result in a reduction in our revenue.
A requirement of the continued growth of Web-based, business-to-business
electronic commerce is the secure transmission of confidential information over
public networks. Failure to prevent security breaches into our products or our
customers' networks, or well publicized security breaches affecting the
Internet in general, could significantly harm our growth and revenue. Advances
in computer capabilities, new discoveries in the field of cryptography, or
other developments may result in a compromise or breach of the algorithms we
use to protect content and transactions or our products or within our
customers' networks or proprietary information in our databases. Anyone who is
able to circumvent our security measures could misappropriate proprietary and
confidential information or could cause interruptions in our operations. We may
be required to expend significant capital and other resources to protect
against such security breaches or to address problems caused by security
breaches. Concerns over the security of the Internet and other online
transactions and the privacy of users may also deter people from using the
Internet to conduct transactions that involve transmitting confidential
information.
We may become subject to government regulation and legal uncertainties that
could reduce demand for our products and services or increase the cost of doing
business.
Other than regulations applicable to businesses generally, export control
laws and laws or regulations directly applicable to Internet commerce, we are
not currently subject to direct
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regulation by any domestic or foreign governmental agency. However, due to the
increasing popularity and use of the Internet, it is possible that a number of
laws and regulations may become applicable to us or may be adopted in the
future with respect to the Internet covering issues such as:
. user privacy and encryption;
. taxation;
. content;
. libel;
. right to access personal data;
. copyrights;
. distribution, including import and export; and
. characteristics and quality of services.
The applicability of existing laws to the Internet governing these areas is
uncertain. The vast majority of these laws were adopted prior to the broad
commercial use of the Internet and related technologies. As a result, they do
not contemplate or address the unique issues of the Internet and related
technologies. Changes to these laws intended to address these issues, including
some recently proposed changes, could create uncertainty in the Internet
marketplace. Uncertainty in the application of existing laws could reduce
demand for our services or increase the cost of doing business due to increased
costs of litigation or increased service delivery costs, which could in turn
reduce our revenue.
A failure to expand and improve the infrastructure of the Web could constrain
the functionality of our products and services.
The recent growth in Web traffic has caused frequent periods of decreased
performance and if Internet usage continues to grow rapidly, the Internet
infrastructure may not be able to support this growth and reliability may
decline, thus impairing our operations and reducing our revenue. If outages or
delays on the Internet increase in frequency or duration, overall Internet
usage including usage of our products and services could grow more slowly or
decline. Our ability to increase the speed and scope of our services to
customers is ultimately limited by the speed and reliability of both the
Internet and our customers' internal networks. Consequently, the emergence and
growth of the market for our products and services depend upon improvements
being made to the entire Internet as well as to our individual customers'
networking infrastructures to alleviate overloading and congestion. If these
improvements are not made, the ability of our customers to use our products and
services will be hindered and our revenue may suffer.
In an economic downturn, our customers may cut down on spendings in new
products and services, which would adversely affect our revenue.
Our product and services require that our customers make a sizable initial
investment in order to generate benefits from our product over time. Thus, in
an economic downturn, our enterprise customers may cut back the resources
devoted to knowledge exchange products and services, and in particular new
products and services such as ours, before they cut back on other products and
services, harming our revenue to a greater degree than the revenue of companies
with different products and services.
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Risks Related to This Offering
Investors will be relying on our management's judgment regarding the use of
proceeds from this offering, and the manner in which our management chooses to
use the proceeds may not result in a net tangible benefit to us, resulting in a
decrease in our stock price.
We do not have a definitive quantified plan with respect to the use of the
net proceeds of this offering and have not committed any of these proceeds to
any particular purpose apart from working capital and general corporate
purposes. Accordingly, our management will have broad discretion with respect
to the use of the net proceeds from this offering and investors will be relying
on the judgment of our management regarding the application of these proceeds.
The manner in which our management may choose to use the proceeds of this
offering may not result in a tangible increase in our value, and our stock
price may therefore decrease. Some of the uses we currently anticipate include
expansion of our sales and marketing operations, increased spending in the
areas of research and development and customer support, broadening our
operational and administrative infrastructure, the leasing of additional
facilities and for working capital and other general corporate purposes. We may
also use a portion of the proceeds for strategic alliances and acquisitions.
These investments may not yield a favorable return, which in turn may adversely
affect the stock price.
Our executive officers, directors and large stockholders can exert control over
us to the detriment of minority stockholders.
After this offering, our executive officers, directors and stockholders
holding more than 5% of our outstanding common stock, all of whom are
identified in the section of this prospectus titled "Principal Stockholders,"
will together control approximately 59% of our outstanding common stock, taking
into account the outstanding shares they owned as of September 1, 2000. As a
result, these stockholders, if they act together, will be able to control our
management and affairs and all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership may have the effect of delaying
or preventing a change in control. The delay or prevention of a change in
control may be unfavorable to a minority shareholder by reducing our stock
price.
Sales of shares eligible for future sale after this offering could cause our
stock price to decline.
We will have 39,811,451 shares of common stock outstanding upon the
completion of this offering, assuming no exercise of outstanding options or
warrants. If our stockholders sell substantial amounts of our common stock,
including shares issued upon the exercise of outstanding options and warrants,
in the public market following this offering, the market price of our common
stock could fall. Such sales also might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. Of these 39,811,451 shares outstanding upon completion of
this offering, all of the shares sold in this offering will be freely tradable.
The remaining shares of common stock outstanding after this offering will be
available for sale in the public market as follows:
<TABLE>
<CAPTION>
Date of Availability for Sale Number of Shares
----------------------------- ----------------
<S> <C>
At the date of this prospectus.......................... 8,000,000
181 days after the date of effectiveness of the
registration statement................................. 25,493,099
Periodically thereafter................................. 6,318,352
</TABLE>
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The anti-takeover provisions in our charter documents could adversely affect
the rights of the holders of our common stock.
Our board of directors could choose not to negotiate with a potential
acquiror that it did not feel was in our strategic interests. If the potential
acquiror was discouraged from offering to acquire us or prevented from
successfully completing a hostile acquisition by the anti-takeover measures,
you could lose the opportunity to sell your shares at a favorable price.
Upon the closing of this offering, our Certificate of Incorporation and
Bylaws will contain provisions that could make it harder for a third party to
acquire us without the consent of our board of directors. For example, if a
potential acquiror were to make a hostile bid for us, the acquiror would not be
able to call a special meeting of stockholders to remove our board of directors
or act by written consent without a meeting. In addition, our board of
directors will have staggered terms that makes it difficult to remove them all
at once. The acquiror would also be required to provide advance notice of its
proposal to remove directors at an annual meeting. The acquiror also will not
be able to cumulate votes at a meeting, which will require the acquiror to hold
more shares to gain representation on the board of directors than if cumulative
voting were permitted.
Our board of directors also has the ability to issue preferred stock, which
would significantly dilute the ownership of a hostile acquiror. In addition,
Section 203 of the Delaware General Corporation Law limits business combination
transactions with 15% stockholders that have not been approved by the board of
directors. These provisions and other similar provisions make it more difficult
for a third party to acquire us without negotiation. These provisions apply
even if some stockholders consider the offer to be beneficial.
The liquidity of our common stock is uncertain since it has not been publicly
traded.
There has not been a public market for our common stock. We cannot predict
the extent to which investor interest in our company will lead to the
development of an active, liquid trading market. Active trading markets
generally result in lower price volatility and more efficient execution of buy
and sell orders for investors. The initial public offering price for the shares
will be determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that would prevail in a liquid
trading market.
If we need additional financing, we may not obtain the required financing on
favorable terms and conditions.
We require substantial working capital to fund our business. We have had
significant operating losses and negative cash flow from operations since
inception and expect this to continue for the foreseeable future. We expect to
use the net proceeds of this financing primarily to expand sales and marketing
activities, fund research and development, fund continued operations, and
possibly make future acquisitions. We currently anticipate that our available
cash resources, combined with the net proceeds from this offering, will be
sufficient to meet our anticipated working capital and capital expenditure
requirements without needing to raise additional capital in the foreseeable
future. However, if we are unable to meet our working capital and capital
expenditure requirements with the net proceeds from this offering and from our
revenue, we will need to raise additional funds earlier. In addition, we may
need to raise additional funds in order to respond to business contingencies
which may include the need to:
. fund more rapid expansion, including acquisitions;
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. fund additional marketing expenditures;
. develop new or enhance existing products and services;
. enhance our operating infrastructure;
. hire additional personnel;
. respond to competitive pressures; or
. acquire complementary businesses or necessary technologies.
If additional funds are raised through the issuance of equity or convertible
debt securities, the percentage ownership of our stockholders will be reduced,
stockholders may experience additional dilution and these newly issued
securities may have rights, preferences or privileges senior to those of
existing stockholders, including those acquiring shares in this offering.
Additional financing may not be available on terms favorable to us, or at all.
If adequate funds are not available or are not available on acceptable terms,
our ability to fund our operations, take advantage of unanticipated
opportunities, develop or enhance our products and services or otherwise
respond to competitive pressures would be significantly limited.
Market prices of Internet and technology companies have been highly volatile
and the market for our stock may be volatile as well.
The stock market has experienced significant price and trading volume
fluctuations and the market prices of technology companies generally and
Internet-related companies particularly, have been extremely volatile. Recent
initial public offerings by technology companies have been accompanied by
exceptional share price and trading volume changes in the first days and weeks
after the securities were released for public trading. Investors may not be
able to resell their shares at or above the initial public offering price. In
the past, following periods of volatility in the market price of a public
company's securities, securities class action litigation has often been
instituted against that company. Such litigation could result in substantial
costs and a diversion of management's attention and resources.
New investors will suffer immediate and substantial dilution in the tangible
net book value of their stock.
We expect the initial public offering price to be substantially higher than
the net tangible book value per share of the common stock. The pro forma net
tangible book value of a share of common stock prior to this offering is $1.29
per share and the price per share paid by promoters, officers, and directors,
assuming exercise of their options, is $0.80 per share. Assuming an initial
public offering price of $10.00 per share and no exercise of the underwriters'
over-allotment option, the net tangible book value on shares of common stock
will be only $2.88. Thus our new investors would suffer dilution of $7.12.
Additional dilution may be incurred if holders of stock options, whether
currently outstanding or subsequently granted, including members, officers, and
directors, exercise their options or if warrant holders exercise their warrants
to purchase common stock. For example, there is an immediate dilution of $9.20
per share in comparing the price paid by new investors to the price paid or
payable by our officers, directors, promoters, and affiliated persons for their
stock and to exercise their outstanding options.
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Special Note Regarding Forward-Looking Statements and Industry Data
This prospectus includes forward-looking statements. These forward-looking
statements are not historical facts, and are based on current expectations,
estimates and projections about our industry, our beliefs and our assumptions.
Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks"
and "estimates," and variations of these words and similar expressions, are
intended to identify forward-looking statements. In addition, examples of the
kinds of forward-looking statements in this prospectus include statements
regarding the following:
(1) our ability to compete effectively in our industry,
(2) our plans to enhance our existing product and services,
(3) our plans to expand the use of our product and services within the
applications and industries we currently target and within new
applications and industries,
(4) our plans to add additional eHub members and strategic partners,
(5) our plans to expand internationally,
(6) our expectations of expanding our technical, and sales and marketing
personnel, and technology, management and facilities infrastructure,
and
(7) our business strategies and plans.
These statements are only predictions, are not guarantees of future performance
and are subject to risks, uncertainties and other factors, some of which are
beyond our control and difficult to predict and could cause actual results to
differ materially from those expressed or forecasted in the forward-looking
statements. These risks and uncertainties include those described in "Risk
Factors" and elsewhere in this prospectus. Except as required by law, we
undertake no obligation to update any forward-looking statement, whether as a
result of new information, future events or otherwise.
22
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the 8,000,000 shares being offered by
us at an assumed initial public offering price of $10.00 per share, after
deducting estimated underwriting discounts and commissions and estimated
offering expenses, are estimated to be approximately $72.1 million, or
approximately $83.3 million if the underwriters' over-allotment option is
exercised in full.
We do not have specific uses committed for the net proceeds of this offering.
The size of the offering has been determined primarily based upon our desire to
raise a sufficient amount of capital to afford to us significant business
flexibility in the future.
The principal purposes of this offering are:
. to obtain additional working capital;
. to create a public market for our common stock;
. to facilitate future access by Docent to public equity markets; and
. to enhance our ability to use our stock to make future acquisitions due
to the fact that our shares will be publicly traded. We may use a
portion of the net proceeds to acquire or invest in complementary
businesses. Examples include companies that have additional products we
could provide to our customers or technologies that would enhance our
current product offerings, or companies that could expand our services
to additional geographic regions. However, we are not presently
contemplating any acquisitions, and we have no current agreements or
commitments with respect to any such acquisition.
We will have broad discretion in the way we use the net proceeds.
DIVIDEND POLICY
The payment of dividends is within the discretion of our board of directors.
Our ability to pay any future dividends will depend on our earnings, operating
and financial condition, projected capital requirements and restrictions under
our credit facilities. In this regard, our credit facility with Silicon Valley
Bank restricts our ability to declare cash dividends without the consent of
Silicon Valley Bank. Notwithstanding the foregoing, we have never declared or
paid any cash dividends on shares of our capital stock and do not intend to do
so at any time in the foreseeable future.
23
<PAGE>
CAPITALIZATION
The following table sets forth the following information:
. our actual capitalization as of June 30, 2000;
. our pro forma capitalization as of that date after giving effect to the
issuance in August and September 2000 of 2,598,875 shares of our Series
F convertible preferred stock raising net proceeds of approximately
$18.8 million and the conversion of all outstanding shares of
convertible preferred stock into 24,710,135 shares of common stock upon
completion of this offering; and
. our pro forma capitalization as adjusted to reflect the receipt of the
net proceeds from our sale of 8,000,000 shares of common stock at an
assumed initial public offering price of $10.00 per share in this
offering, less underwriting discounts and commissions and estimated
offering expenses payable by us.
<TABLE>
<CAPTION>
As of June 30, 2000
(unaudited)
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands except for share
and per share data)
<S> <C> <C> <C>
Notes payable and capital lease obligations,
noncurrent.................................... $ 1,036 $ 1,036 $ 1,036
-------- ------- --------
Convertible preferred stock; $0.001 par value
27,283,816 shares authorized; 22,111,260
shares issued and outstanding actual; none
issued and outstanding pro forma and pro forma
as adjusted................................... 64,010 -- --
-------- ------- --------
Stockholders' equity (deficit):
Common stock; $0.001 par value, 38,800,000
shares authorized, 6,230,429 shares issued and
outstanding actual; 30,940,564 shares issued
and outstanding pro forma and
38,940,564 shares issued and outstanding pro
forma as adjusted............................. 6 31 39
Additional paid-in capital..................... 44,511 127,290 199,382
Receivables from stockholders.................. (201) (201) (201)
Unearned stock-based compensation.............. (19,883) (19,883) (19,883)
Accumulated deficit............................ (67,371) (67,371) (67,371)
-------- ------- --------
Total stockholders' equity (deficit)........... (42,938) 39,866 111,966
-------- ------- --------
Total capitalization........................... $ 22,108 $40,902 $113,002
======== ======= ========
</TABLE>
This table does not include:
. 4,470,420 shares subject to outstanding options as of June 30, 2000 at a
weighted average exercise price per share of $2.03;
. 6,000,000 shares of common stock reserved for future issuances under our
2000 Omnibus Equity Incentive Plan;
. 1,500,000 shares of common stock reserved for future issuances under our
2000 Employee Stock Purchase Plan;
. 3,291,921 shares of common stock subject to outstanding warrants at a
weighted average exercise price per share of $6.67 as of June 30, 2000;
. the issuance between July 1, 2000 and September 1, 2000 of 870,887
shares of common stocks to service providers and pursuant to exercise of
options; and
. the amendment to our certificate of incorporation upon completion of
this offering to increase our authorized common stock and to decrease
our authorized preferred stock.
Upon completion of this offering, each outstanding share of convertible
preferred stock will convert into one share of common stock.
24
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 2000, was approximately
$39.9 million or $1.29 per share of common stock. This represents the amount of
our tangible assets reduced by the amount of our total liabilities and divided
by the total number of shares of our common stock outstanding assuming (i) the
conversion of all our outstanding shares of preferred stock as of June 30, 2000
into 22,111,260 shares of common stock; and (ii) the issuance in August and
September 2000 of 2,598,875 shares of Series F convertible preferred stock for
net proceeds of approximately $18.8 million and the conversion of these shares
into common stock. After giving effect to the sale of the 8,000,000 shares of
our common stock offered hereby at an assumed initial public offering price of
$10.00 per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses, our net tangible book value at
June 30, 2000 would have been $112.0 million, or $2.88 per share. This
represents an immediate increase in net tangible book value to existing
stockholders of $1.59 per share and an immediate dilution to new investors of
$7.12 per share. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $10.00
Pro forma net tangible book value per share as of June 30,
2000....................................................... $1.29
Increase per share attributable to new investors............ $1.59
-----
Pro forma net tangible book value per share after this
offering..................................................... 2.88
------
Net tangible book value dilution per share to new investors... $ 7.12
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 2000, the
differences between the number of shares of common stock purchased from us, the
total consideration paid and the average price per share paid by the existing
stockholders and by the new public investors (based upon an assumed initial
public offering price of $10.00 per share and before deducting estimated
underwriting discounts and commissions and estimated offering expenses):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 30,940,564 79% $ 81,848,000 51% $ 2.64
New public investors...... 8,000,000 21 80,000,000 49 10.00
---------- --- ------------ ---
Total................... 38,940,564 100% $161,848,000 100% 4.16
========== === ============ ===
</TABLE>
The above tables assume no exercise of stock options or warrants outstanding
as of June 30, 2000 and gives effect to the issuance in August and September
2000 of 2,598,875 shares of Series F convertible preferred stock and the
conversion of these shares and all shares of our preferred stock outstanding as
of June 30, 2000 into common stock upon completion of this offering. As of June
30, 2000, there were options outstanding to purchase a total of 4,470,420
shares of common stock at a weighted average exercise price of $2.03 per share
under our 1997 Stock Option Plan, and 3,291,921 shares of common stock subject
to outstanding warrants at a weighted average exercise price per share of
$6.67. There are also 7,500,000 shares of common stock reserved for issuance in
the future under our stock plans for our employees and consultants. See
"Capitalization," "Management--Compensation Plans" and Notes 8 and 9 of Notes
to Consolidated Financial Statements.
Over the past five years, our officers, directors, promoters and affiliated
persons, excluding venture capital funds of which the directors are partners,
have purchased 4,710,873 shares of common stock and currently own options,
warrants or other rights to acquire 886,479 shares of our common stock. The
total effective cash contribution for these
25
<PAGE>
purchases, calculated as though all options, warrants or rights to purchase the
shares of common stock have been exercised, is equal to $4,472,578. This equals
an average per share price of $0.80. The gross proceeds expected to be raised
from this offering, not including any overallotment option exercise, is
$80,000,000, which equals $10.00 per share. This represents an immediate
dilution to new investors of $9.20 per share as compared to the total effective
cash contribution of purchases by our officers, directors, promoters and
affiliated persons.
26
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read
together with the consolidated financial statements and related notes,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the other information contained in this prospectus. The
statement of operations data set forth below with respect to the years ended
December 31, 1997, 1998 and 1999 and the balance sheet data at December 31,
1998 and 1999 are derived from and are qualified by reference to, the audited
consolidated financial statements included elsewhere in this prospectus. The
selected balance sheet data at December 31, 1997 are derived from the audited
balance sheet not included herein.
The selected consolidated financial data as of June 30, 2000 and for the six
months ended June 30, 1999 and 2000 are derived from our unaudited consolidated
financial statements, which in the opinion of our management include only
normal recurring adjustments, which we consider necessary for a fair
presentation of our financial position and results of operations for these
periods. Operating results for the six months ended June 30, 2000 are not
necessarily indicative of the results expected for the full year. The six month
data should be read in conjunction with our unaudited consolidated financial
statements included in this prospectus.
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
-------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- -------- ------- --------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenue:
License........................ $ 335 $ 297 $ 141 $ 41 $ 663
Services and maintenance....... 60 244 651 131 1,801
------- ------- -------- ------- --------
Total revenue................ 395 541 792 172 2,464
------- ------- -------- ------- --------
Costs and expenses:
Cost of license................ 35 23 29 4 10
Cost of services and
maintenance (exclusive of
stock-based compensation of
$0 and $78 in 1998 and 1999
and $2 and $139 (unaudited)
for the six months ended
June 30, 1999 and 2000)..... 18 750 1,201 460 3,173
Research and development
(exclusive of stock-based
compensation of $3 and $517
in 1998 and 1999 and $92 and
$926 (unaudited) for the six
months ended June 30, 1999
and 2000)................... 653 2,242 2,482 1,049 1,856
Sales and marketing (exclusive
of stock-based compensation
of $22 and $3,030 in 1998
and 1999 and $339 and
$15,614 (unaudited) for the
six months ended June 30,
1999 and 2000).............. 718 2,491 8,890 3,465 11,676
General and administrative
expenses (exclusive of
stock-based compensation of
$241 and $909 in 1998 and
1999 and $46 and $1,848
(unaudited) for the six
months ended June 30, 1999
and 2000)................... 524 1,232 2,321 667 2,485
Stock-based compensation....... -- 266 4,534 479 18,527
------- ------- -------- ------- --------
Total costs and expenses..... 1,948 7,004 19,457 6,124 37,727
------- ------- -------- ------- --------
Loss from operations......... (1,553) (6,463) (18,665) (5,952) (35,263)
Interest income and other
expense, net................... 48 29 (48) (72) 263
------- ------- -------- ------- --------
Net loss..................... (1,505) (6,434) (18,713) (6,024) (35,000)
Deemed dividend and accretion on
convertible preferred stock.... -- -- (1,354) -- (9,614)
------- ------- -------- ------- --------
Net loss attributable to
common stockholders......... $(1,505) $(6,434) $(20,067) $(6,024) $(44,614)
======= ======= ======== ======= ========
Net loss per share attributable
to common stockholders:
Basic and diluted.............. $ (0.55) $ (2.24) $ (5.19) $(1.67) $ (9.99)
======= ======= ======== ======= ========
Weighted average common shares
outstanding................... 2,717 2,869 3,868 3,607 4,464
======= ======= ======== ======= ========
Pro forma net loss per share
(unaudited):
Basic and diluted.............. $ (1.10) $ (1.64)
======== ========
Weighted average common shares
outstanding................... 17,013 24,633
======== ========
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
-------------------------- As of June
1997 1998 1999 30, 2000
------- ------- -------- -----------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............. $ 2,113 $ 2,968 $ 12,773 $ 23,413
Working capital....................... 1,906 1,862 9,938 18,773
Total assets.......................... 2,504 4,183 15,302 29,634
Notes payable and capital lease
obligations, noncurrent.............. -- 162 1,117 1,036
Convertible preferred stock........... 3,867 10,615 33,288 64,010
Total stockholders' deficit........... (1,700) (8,024) (23,330) (42,938)
</TABLE>
The following information has been extracted from the financial records of
Stanford Testing Systems, Inc., our predecessor company, for the years ended
December 31, 1995 and 1996, and is unaudited:
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------
1995 1996
------- -------
(in thousands)
<S> <C> <C>
Statement of Operations Data:
Total revenue................................................. $ 231 $ 244
Net loss...................................................... (43) (174)
<CAPTION>
As of
December 31,
---------------
1995 1996
------- -------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Total assets.................................................. $ 76 $ 90
Long-term liabilities......................................... 84 252
</TABLE>
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and the other financial information
together with the consolidated financial statements and related notes included
elsewhere in this prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of various factors, including those set forth under "Risk Factors,"
"Business" and elsewhere in this prospectus.
Overview
General
Docent was incorporated in June 1997 to enhance and market the corporate
online learning products initially developed by Stanford Testing Systems.
Stanford Testing Systems had primarily marketed test preparation, assessment
and educational content products to the academic market. In June 1997,
immediately prior to its merger into Docent, the test preparation, assessment
and educational content assets of Stanford Testing Systems, as well as its
tradename, were provided to affiliates of Docent, who subsequently sold them to
an unaffiliated third party. From these origins, Docent has developed its
current knowledge exchange eHub platform. During 1997, approximately $88,000,
or 22%, of Docent's revenue was derived from Stanford Testing Systems sales
prior to June 1997 in the academic market.
Sources of Revenue and Revenue Recognition
We generate revenue from the sale of our products and services to our
knowledge exchange eHub constituents, which are enterprises, content providers
and professional communities, and from our reseller partners. To date, we have
primarily generated revenue from direct sales to our domestic enterprise
customers.
Enterprise customers have the option of purchasing licenses for the Docent
Enterprise software or alternatively using our Application Service Provider
offerings. Our license agreements are time-based or perpetual. Our time-based
licenses require license holders to pay a monthly fee, which is based on the
number of participants and includes maintenance and support. Our perpetual
licensees pay an initial fee based on the number of participants and may enter
into annual maintenance contracts that include the right to receive periodic
upgrades, error corrections, and telephone and Web-based support. Our
Application Service Provider offerings allow enterprise customers to host their
knowledge exchange solutions on our servers. We charge an initial set-up fee
plus an ongoing monthly fee, which includes access to telephone and Web-based
support. Customers with perpetual or time-based licenses can also outsource the
hosting of their system on our servers for a monthly fee.
In conjunction with the licensing of our Docent Enterprise software, we offer
professional services in areas such as implementation and training. In the
future, we expect to act as a reseller of third party content to our enterprise
customers and to receive commission revenue on these sales. To date, most of
our enterprise customer revenue has been based on perpetual software licenses
and professional services.
We typically sign multi-year royalty agreements with our content providers to
deliver their content over the Web. Under these agreements, we receive a
minimum annual payment and a percentage of the revenue they receive in excess
of the minimum payment for content which they or third parties, such as
resellers or professional communities described below, provide
29
<PAGE>
to customers. For that minimum payment, we provide our software and application
hosting. In the first year of the agreement, as part of the minimum payment, we
also provide professional services such as marketing, implementation and
training. During subsequent years, these services are available for an
additional fee. To date, almost all of our revenue from content providers has
consisted of the minimum annual payments.
We have generated small amounts of revenue to date, and expect to generate
additional revenue, from professional communities in two ways: directly from
the professional community and indirectly from content providers. We typically
sign multi-year royalty agreements with our professional community customers
under which we receive a minimum annual payment. For that minimum payment, we
provide our software and application hosting. In the first year of the
agreement as part of the minimum payment, we also provide professional services
in areas such as marketing, implementation and training. During subsequent
years, these professional services are available for an additional fee. Because
the professional communities usually provide their members with access to
content from our content providers, our content providers would receive revenue
which is included in the calculation of the royalties we are entitled to
receive from our content providers as described above. In late 1999, we entered
into our first agreements with these professional communities and almost all of
our revenue to date from them has consisted of minimum annual payments.
We generate revenue from our reseller partners who purchase our products and
maintenance services along with content from our content providers and resell
them to their customers. To date, resellers have typically sold both perpetual
licenses to our software and annual maintenance agreements. They usually
provide additional professional services themselves, but may also resell some
of our professional services. Generally, they receive a discount from our list
prices. When they resell content from our content providers, our content
providers would receive revenue that is included in the calculation of the
royalties we are entitled to receive from our content providers as described
above. We have only recently entered into agreements with reseller partners and
have received little revenue to date from them.
In accordance with the American Institute of Certified Public Accountants
("AICPA") Statement of Position 97-2, as amended we recognize revenue from
licensing of our software if all of the following conditions are met:
. There is persuasive evidence of an arrangement;
. We have delivered the product to the customer;
. Collection of the fees is probable; and
. The amount of the fee to be paid by the customer is fixed or
determinable.
For arrangements involving customer acceptance, revenue recognition is
deferred until the earlier of the end of the acceptance period or until written
notice of acceptance is received from the customer.
For arrangements involving significant modification and customization of our
software product, we recognize revenue using the percentage-of-completion
method. However, where there are customer acceptance clauses which we do not
have an established history of meeting or which are not considered to be
routine, we recognize revenue when the arrangement has been completed and
accepted by the customer.
For arrangements which include multiple elements, such as product license,
maintenance and support, hosting and professional services, we allocate revenue
to all undelivered elements, usually maintenance and support, hosting and
professional services, based on
30
<PAGE>
objective evidence of the fair value of those elements. Fair value is specific
to us and represents the price for which we sell each element separately. Any
amount remaining is allocated to the delivered elements, generally only the
product license, and recognized as revenue when the conditions discussed above
are met.
We recognize revenue from fees for ongoing maintenance and support ratably
over the period of the maintenance and support agreement, which is generally
one year. We recognize revenue allocated to, or fees generated from, the
separate selling of professional services as the related services are
performed. Fees associated with hosting services, including any initial set-up
fee, are recognized ratably over the period of the hosting agreement, which is
generally one year.
For arrangements with our content providers, the minimum fee is allocated
among the separate elements, including professional services and hosting, based
on the fair value of each of these elements. Any minimum royalty amount is
recognized as revenue ratably over the period in which it is earned, which is
generally one year. Any royalty over and above the minimum is recognized upon
receipt of a revenue report from the content provider.
Revenue from sales through resellers are recognized upon sale to end users
provided all the conditions for revenue recognition set forth above have been
met.
Customer billings which have not been recognized as revenue in accordance
with the above policies are shown on the balance sheet as deferred revenue.
Costs and expenses
Our cost of license revenue includes the cost of manuals and product
documentation, production media and shipping costs. Our cost of service and
maintenance revenue includes salaries and related expenses of our professional
services organization and charges related to hosting activities and other third
party services.
Research and development, sales and marketing, and general and administrative
expense categories include direct costs such as salaries, employee benefits,
travel and entertainment, and allocated communication, information technology,
rent and depreciation. Sales and marketing expenses also include sales
commissions and expenditures related to public relations, advertising, trade
shows and marketing campaigns. General and administrative expenses also include
costs such as legal and financial services fees.
Stock-based compensation consists of two components. The first component is
amortization of unearned stock-based compensation recorded in connection with
stock option grants to our employees. This amount represents the difference
between the deemed fair value of our common stock for accounting purposes on
the date these stock options were granted and the exercise price of those
options. This amount is included as a component of stockholders' equity and is
being amortized on an accelerated basis by charges to operations over the
vesting period of the options, consistent with the method described in
Financial Accounting Standards Board Interpretation No. 28. The second
component is the fair value of common stock and other equity instruments issued
to non-employees in exchange for services. We use the Black-Scholes pricing
model to estimate the fair value of other equity instruments granted to non-
employees.
History of Losses
We have incurred significant costs to develop our technology and products and
for our engineering, sales, marketing, professional services and administration
departments. As a
31
<PAGE>
result, we have incurred significant losses since inception and as of June 30,
2000, had an accumulated deficit of $67.4 million. We believe our success is
contingent on increasing our customer and partner base, continually enhancing
our Docent Enterprise product and expanding the number of our eHub members. We
intend to continue to invest heavily in sales, marketing, research and
development, and administrative personnel and infrastructure. We therefore
expect to continue to incur substantial operating losses for the foreseeable
future.
Results of Operations
Six Months Ended June 30, 2000 and 1999
Revenue
Total revenue increased $2.3 million, from $172,000 for the six months ended
June 30, 1999 to $2.5 million for the six months ended June 30, 2000. The
increase in revenue was primarily attributable to increases in the number of
customers and revenue per customer. The growth in our customer base is
primarily due to the increased market acceptance of our product and an increase
in the size of our sales and marketing organization. The growth in revenue per
customer is a reflection of the evolution of our business strategy toward
focusing on larger enterprise opportunities.
Total license revenue increased $622,000, from $41,000 for the six months
ended June 30, 1999 to $663,000 for the six months ended June 30, 2000. The
increase in revenue was primarily attributable to increases in the number of
customers and revenue per customer described above.
Total service and maintenance revenue increased $1.7 million, from $131,000
for the six months ended June 30, 1999 to $1.8 million for the six months ended
June 30, 2000. The increase in revenue was primarily attributable to increases
in the number of customers and revenue per customer described above. To a
lesser extent, the increase was due to the cumulative effect of renewals of
annual maintenance agreements.
In the six months ended June 30, 2000, no customer accounted for sales
greater than 10% of total revenue. In the six months ended June 30, 1999, sales
to Microsoft accounted for 29% and sales to Veritas accounted for 11% of our
revenue.
Costs and Expenses
Cost of license revenue has not materially changed for the six-month periods
ended June 30, 1999 and 2000, and consisted primarily of the fixed costs of
delivering the software. Cost of service and maintenance revenue increased $2.7
million, or 590%, from the six months ended June 30, 1999 to the six months
ended June 30, 2000, due to increases in personnel in our professional services
organization.
Research and development. Research and development expenses increased
$807,000, or 77%, from the six months ended June 30, 1999 to the six months
ended June 30, 2000. The increase was primarily attributable to increases in
the number of research and development personnel. To date, all software
development costs have been expensed in the period incurred. We believe that
continued investment in research and development is critical to attaining our
strategic objectives and, as a result, we expect research and development
expenses to increase significantly in future periods.
Sales and marketing. Sales and marketing expenses increased $8.2 million, or
237%, from the six months ended June 30, 1999 to the six months ended June 30,
2000. The increase
32
<PAGE>
was primarily attributable to an increase in the number of employees in our
sales and marketing organizations. Expenses relating to sales and marketing
personnel increased $6.5 million from the six months ended June 30, 1999 to the
six months ended June 30, 2000. Expenses relating to marketing activities
including advertising, trade shows, promotional materials and public relations,
increased $1.7 million from the six months ended June 30, 1999 to the six
months ended June 30, 2000. We believe our sales and marketing expenses will
continue to increase in absolute dollar amounts in future periods as we expect
to continue to expand our sales and marketing efforts.
General and administrative. General and administrative expenses increased
$1.8 million, or 273%, from the six months ended June 30, 1999 to the six
months ended June 30, 2000. The increase was primarily attributable to an
increase in administrative employees and in the amount of outside professional
service fees. Expenses relating to general and administrative personnel
increased $1.4 million from the six months ended June 30, 1999 to the six
months ended June 30, 2000. Fees for outside professional services, such as
attorneys and accountants, increased $449,000 from the six months ended June
30, 1999 to the six months ended June 30, 2000. We believe general and
administrative expenses will continue to increase in absolute dollars, as we
expect to add personnel to support our expanding operations, incur additional
costs related to the growth of our business and assume the responsibilities of
a public company.
Stock-based compensation. In connection with the issuance of common stock and
the granting of stock options and warrants to our employees and non-employees,
we recorded stock-based compensation totaling approximately $43.0 million as of
June 30, 2000. Stock-based compensation expense relating to the common stock,
options and warrants was $18.5 million for the six months ended June 30, 2000
and $479,000 for the six months ended June 30, 1999. As of June 30, 2000, we
had an aggregate of $19.9 million of deferred stock-based compensation to be
amortized.
The amortization of the remaining deferred stock-based compensation is
expected to result in additional charges to operations as follows: $6.3 million
in the remaining six months ending December 31, 2000; $7.1 million in 2001;
$3.8 million in 2002; $2.1 million in 2003; and $557,000 in 2004.
During the six months ended June 30, 2000, we issued warrants to third
parties to purchase up to 2,446,932 shares of Series E convertible preferred
stock and 200,000 shares of common stock as incentives to enter into strategic
partnership agreements with us. In connection with the issuance of these
warrants we recorded an inducement charge of $12.9 million in sales and
marketing, which is included in the $18.5 million charge, above.
Interest income and other expense, net
Interest income and other expense, net consists of interest income, interest
expense and other non-operating expenses. Interest income and other expense,
net increased $335,000 from the six month period ended June 30,1999 to the six
month period ended June 30, 2000. Both interest income and expense increased
from the six months ended June 30, 1999 to the six months ended June 30, 2000.
Interest income increased from a higher average invested cash proceeds from
financing activities. This was partially offset by increased interest expense
related to equipment loans, the proceeds of which were primarily used to
purchase computer equipment and office furniture.
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Years Ended December 31, 1999, 1998 and 1997
Revenue
Total revenue increased $251,000, or 46%, from 1998 to 1999, and $146,000, or
37%, from 1997 to 1998. The increase in revenue from 1998 to 1999 was primarily
attributable to an increase in revenue per customer reflecting the evolution of
our business strategy toward focusing on larger enterprise opportunities. The
increase in deferred revenue on our balance sheet from $501,000 as of December
31, 1998, to $1.1 million as of December 31, 1999, also reflects this shift in
focus. The increase in revenue from 1997 to 1998 was primarily attributable to
an increase in the number of customers and partly attributable to an increase
in revenue per customer.
Total license revenue decreased $156,000, or 53%, from 1998 to 1999, and
$38,000, or 11%, from 1997 to 1998. This decline in license revenue was
attributable to an increase in revenue from multiple element enterprise
agreements as compared to one-time perpetual license sales. In accordance with
our revenue recognition policy, a larger portion of revenue is initially
allocated to the service elements of these multiple element agreements, and as
a result our license revenue from the agreements is less.
Our service and maintenance revenue increased $407,000, or 167%, from 1998 to
1999, and $184,000, or 307%, from 1997 to 1998. The increase in revenue in both
years was primarily attributable to the increase in the number of larger
enterprise agreements described above, which typically include large service
components. Under our revenue recognition policy, a larger portion of revenue
is initially allocated to the service elements of these agreements. To a lesser
extent, the increase was due to the cumulative effect of renewals of annual
maintenance agreements.
In 1999, sales to Impiric, a division of Young & Rubicam, accounted for 27%
of our revenue. In 1998, sales to Veritas Software accounted for 26%, sales to
Sun Microsystems accounted for 13% and sales to Lucent Technologies accounted
for 12% of our revenue. In 1997, sales to Sun Microsystems accounted for 13% of
our revenue.
Costs and Expenses
Cost of license revenue remained relatively constant in 1999, 1998 and 1997
and consisted primarily of the fixed costs of delivering the software. Cost of
service and maintenance revenue increased $451,000, or 60%, from 1998 to 1999,
and increased $732,000 to $750,000 in 1998, from $18,000 in 1997, due to
increases in personnel in our professional services organization.
Research and development. Research and development expenses increased
$240,000, or 11%, from 1998 to 1999, and $1.6 million, or 243%, from 1997 to
1998. The increases were primarily attributable to increases in the number of
research and development personnel. To date, all software development costs
have been expensed in the period incurred. We believe that continued investment
in research and development is critical to attaining our strategic objectives
and, as a result, we expect research and development expenses to increase
significantly in future periods.
Sales and marketing. Sales and marketing expenses increased $6.4 million, or
257%, from 1998 to 1999, and $1.8 million, or 247%, from 1997 to 1998. The
increase from 1998 to 1999 was primarily attributable to an increase in the
number of employees in our sales, marketing and professional services
organizations, as well as the costs associated with the establishment of sales
offices in additional domestic and international locations. Expenses relating
to sales and
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marketing personnel increased $4.4 million from $1.4 million in 1998 to $5.8
million in 1999. Expenses relating to marketing activities, including trade
shows, promotional materials and public relations, increased $640,000 from
$528,000 in 1998 to $1.2 million in 1999. In 1999 and 1998, our professional
services organization split its efforts between the performance of service and
maintenance work for customers and the development of new customers. As a
result, expenses of $1.4 million and $150,000 associated with the professional
services organization were charged to sales and marketing expense for 1999 and
1998, respectively. The $1.8 million increase in sales and marketing expenses
from 1997 to 1998 was primarily attributable to an increase in the number of
employees in our sales and marketing organizations. We believe our sales and
marketing expenses will continue to increase in absolute dollar amounts in
future periods as we expect to continue to expand our sales and marketing
efforts.
General and administrative. General and administrative expenses increased
$1.1 million, or 88%, from 1998 to 1999, and $708,000, or 135%, from 1997 to
1998. The increase from 1999 to 1998 was primarily attributable to an increase
in administrative employees and in the amount of recruitment and outside
professional services fees. Expenses relating to general and administrative
personnel increased $460,000 from $926,000 in 1998 to $1.4 million in 1999.
Recruitment fees increased $332,000 from $15,000 in 1998 to $347,000 in 1999.
Fees for outside professional services, such as attorneys and accountants,
increased $192,000 from $156,000 in 1998 to $348,000 in 1999. The $708,000
increase in general and administrative expenses from 1997 to 1998 was primarily
attributable to an increase in administrative employees and outside
professional services fees. We believe general and administrative expenses will
continue to increase in absolute dollars, as we expect to add personnel to
support our expanding operations, incur additional costs related to the growth
of our business and assume the responsibilities of a public company.
Stock-based compensation. In connection with the issuance of common stock and
the granting of stock options and warrants to our employees and non-employees,
we recorded stock-based compensation totaling approximately $11.8 million as of
December 31, 1999. Stock-based compensation expense relating to the common
stock, options and warrants was $4.5 million for the year ended December 31,
1999 and $266,000 for the year ended December 31, 1998. As of December 31,
1999, we had an aggregate of $7.2 million of deferred compensation to be
amortized.
Interest income and other expense, net
Interest income and other expense, net consists of interest income, interest
expense and other non-operating expenses. The $77,000 decrease in interest and
other expense, net from 1998 to 1999 is attributable to interest expense
related to equipment loans, the proceeds of which were primarily used to
purchase computer equipment and office furniture, partially offset by interest
income from average invested cash proceeds from financing activities. The
$19,000 decrease in interest and other expense, net from 1997 to 1998 is
attributable to increased interest expense related to equipment loans.
Provision for Income Taxes
We incurred operating losses for all periods from inception through December
31, 1999 and therefore have not recorded a provision for income taxes. We have
recorded a valuation allowance for the full amount of our net deferred tax
assets.
As of December 31, 1999, we had net operating loss carry-forwards for federal
tax purposes of approximately $16.1 million and for state tax purposes of
approximately $15.7 million. These federal and state tax loss carry-forwards
are available to reduce future taxable income and expire at various dates
beginning 2012. Under the provisions of the Internal Revenue Code, certain
substantial changes in our ownership may limit the amount of net operating loss
carry-forwards that could be utilized annually in the future to offset taxable
income.
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Liquidity and Capital Resources
Since inception, we have funded our operations primarily through the sale of
equity securities, through which we have raised net proceeds of $58.5 million
through June 30, 2000. As of June 30, 2000, we had approximately $23.4 million
of cash and cash equivalents and outstanding equipment leases and notes payable
of $2.3 million.
Cash used in operating activities was $14.2 million in the six months ended
June 30, 2000, $13.0 million in 1999, $5.5 million in 1998 and $1.3 million in
1997. The cash used during these periods was primarily attributable to net
losses of $35.0 million during the six months ended June 30, 2000, $18.7
million during 1999, $6.4 million during 1998 and $1.5 million in 1997. During
the first six months of 2000, and the years 1999 and 1998, these net losses
required lower cash use due to non-cash compensation charges related to various
equity instruments granted to employees and non-employees. Total expenses in
relation to these grants were $18.5 million in the six months ended June 30,
2000, $4.5 million in 1999 and $266,000 in 1998.
In addition, changes in operating assets and liabilities generated cash of
$1.9 million in the six months ended June 30, 2000, $774,000 in 1999, $427,000
in 1998 and $194,000 in 1997. The increases during the periods primarily were
the result of increases in accounts payable, accrued liabilities and deferred
revenue offset by increases in accounts receivable and prepaid expenses as we
expanded our business.
Investment in property and equipment, excluding equipment acquired under
capital leases, was $1.8 million in the six months ended June 30, 2000,
$611,000 in 1999, $486,000 in 1998 and $242,000 in 1997.
Cash provided by financing activities was $26.6 million during the six months
ended June 30, 2000, $23.5 million in 1999, $6.9 million in 1998 and $3.6
million in 1997, resulting primarily from net proceeds from the sale of
convertible preferred stock and, to a lesser extent, from bank borrowings.
These amounts were partially offset by payments on capital lease obligations
and notes payable of $441,000 in the six months ended June 30, 2000, $745,000
in 1999 and $59,000 in 1998.
As of June 30, 2000, we did not have any material commitments for capital
expenditures. Our principal commitments consisted of obligations of $3.7
million under operating leases and $206,000 under capital leases.
During August and September, 2000, we issued 2,598,875 shares of Series F
convertible preferred stock at $7.52 per share. We intend to use the
approximately $18.8 million of net proceeds for working capital. The holders of
Series F convertible preferred stock are entitled to receive dividends of
$0.752 per share annually before we may pay dividends to the holders of common
stock. The holders of Series F convertible preferred stock are also entitled to
receive a payment of $7.52 per share (plus all declared and unpaid dividends)
in the event of a merger, consolidation, sale or dissolution of us prior to
payments being made to holders of other series of preferred stock and common
stock. After payment has been made to the other series of preferred stock, the
holders of Series F convertible preferred stock, participating with the holders
of common stock and the holders of Series D and Series E convertible preferred
stock, are entitled to receive additional payments until the holders of Series
F convertible preferred stock have received an aggregate payment of $22.56 per
share. After the holders of Series F convertible preferred stock receive an
aggregate payment of $22.56 per share, they will not be entitled to additional
payments. The Series F convertible preferred stock converts one-to-one into
common stock subject to anti-dilution protection using various formulas in the
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event of most sales of securities by us at less than $7.52 per share. The
Series F convertible preferred stock may, at the option of a holder at any time
prior to redemption, be converted into common stock and converts automatically
into common stock upon an initial public offering at a price per share in
excess of $8.00 and with gross proceeds to us in excess of $35 million. The
holders of Series F convertible preferred stock may request that we redeem up
to one-third of the then-outstanding shares of Series F convertible preferred
stock in equal installments in August 2004, 2005 and 2006.
We currently anticipate that our available cash resources, combined with the
net proceeds from our offering, will be sufficient to meet our presently
anticipated working capital, capital expenditure and business expansion
requirements for at least 12 months after the date of this prospectus. However,
we may need to raise additional funds prior to this date to support a more
rapid expansion, develop new or enhanced applications and services, respond to
competitive pressures, acquire complementary businesses or technologies, or
take advantage of unanticipated opportunities.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes a new model for accounting for derivatives and hedging activities
and supercedes and amends a number of existing accounting standards. SFAS No.
133 requires that all derivatives be recognized in the balance sheet at their
fair market value and the corresponding derivative gains or losses be either
reported in the statement of operations or as a deferred item depending on the
type of hedge relationship that exists with respect of such derivatives. In
July 1999, the Financial Accounting Standards Board issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133. SFAS No. 137 deferred the effective
date until the year beginning after June 30, 2000. In June 2000, the Financial
Accounting Standards Board issued SFAS No. 138, Accounting for Derivative
Instruments and Hedging Activities--An Amendment of FASB Statement No. 133.
SFAS No. 138 amends the accounting and reporting standards for certain
derivatives and hedging activities such as net settlement contracts, foreign
currency transactions and intercompany derivatives. The Company will adopt SFAS
No. 133 in its quarter ending March 31, 2001. To date, the Company has not
engaged in derivative or hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements,"
which provides guidance on the recognition, presentation and disclosure of
revenue in financial statements filed with the SEC. SAB 101 outlines the basic
criteria that must be met to recognize revenue and provides guidance for
disclosure related to revenue recognition policies. We have complied with the
guidance in SAB 101 for all periods presented.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 ("FIN 44") "Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25". FIN 44 clarifies the
application of Opinion No. 25 for (a) the definition of employee for purposes
of applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The adoption of certain of the provisions of FIN 44 prior to March 31, 2000 did
not have a material impact on the financial
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statements. Management does not expect that the adoption of the remaining
provisions will have a material effect on the financial statements.
In various areas, including revenue recognition and stock-based compensation,
accounting standards and practices continue to evolve. The SEC is preparing to
issue interpretative guidance relating to SAB 101, and the FASB continues to
address revenue and other related accounting issues. The management of the
Company believes it is in compliance with all of the rules and related guidance
as they currently exist. However, any changes to generally accepted accounting
principles in these areas could impact the Company's accounting for its
operations.
Market and Currency Risk
All of our revenue and capital spending is denominated in U.S. dollars. As of
December 31, 1999, we were exposed to interest rate risk on the balance
outstanding on our equipment loan and subordinated debt facility. The table
below presents principal amounts by expected maturity and the weighed average
interest rates of debt obligations which are sensitive to changes in interest
rates.
<TABLE>
<CAPTION>
Expected Maturity Date
-------------------------
2000 2001 2002 Total
----- ------ ----- ------
(in thousands)
<S> <C> <C> <C> <C>
Equipment loan....................................... $ 137 $ 12 $ -- $ 149
Weighted average interest rate....................... 8.5% 8.5% 8.5% 8.5%
Subordinated debt facility........................... $ 957 $1,080 $ 363 $2,400
Weighted average interest rate....................... 12.2% 12.2% 12.2% 12.2%
</TABLE>
We believe that the fair value of our current borrowings approximates their
carrying value due to the fact that the interest rates charged approximate a
market rate.
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BUSINESS
The Company
We provide infrastructure software products and services that enable the
exchange of knowledge within and among our three groups of customers, which
consist of large enterprises, educational content providers and online
professional communities. Docent Enterprise, our Internet-based knowledge
exchange software platform, goes beyond the simple delivery of learning content
online, commonly known as eLearning. Our software products and services provide
an infrastructure that enables our customers to create and operate an
electronic knowledge exchange marketplace, which we also refer to as a
knowledge exchange eHub. Our solutions provide the following value-added
features and benefits to our customers:
. Enterprises, or large organizations, can easily create and manage
educational content that has been tailored to their specific
requirements. They are also able to deliver this customized content to
each individual user as and when requested. Enterprises can identify,
for each of their users, the skill areas that need improvement and help
enhance each user's competency level. This enables our customers to
assess the effectiveness of their educational programs and can provide
enterprises with a measurable impact on business results;
. Educational content providers, or companies that develop educational
material, can rapidly and cost-effectively generate additional revenue
by bringing their offerings online and by participating in virtual
knowledge exchange electronic marketplaces; and
. Online professional communities, such as a group of salespeople or
consultants communicating through the Internet, can generate additional
revenue by offering their members a broad range of educational content
from multiple sources as well as skill assessment and performance
tracking.
The majority of our revenue has been derived from the software and services
we have sold to our enterprise customers. The majority of the remainder of our
revenue has been derived from our content providers. We have received several
awards and recognition for our industry leadership and product capabilities,
including the Crossroads 2000 A-List Award and we were one of several companies
to receive the 1999 Product of the Year Award from Call Center Solutions
Magazine. We were also recognized in PC Week Magazine (November 16, 1999) with
the best score among the seven learning management systems evaluated, and in
brandon-hall.com's Integrated Learning Systems report (February 2000) as the
"Best Integrated Learning System" and the "Best Solution for the Sales
Organization." We do not know whether all of our competitors were included in
the comparisons for which we received awards. Since January 1, 1999, we have
recognized revenue from over 90 customers and business partners. In addition,
as of September 22, 2000, we have contracts with another 15 customers and
business partners from which we expect to receive revenue in the future. Our
customers and business partners from whom we received at least $25,000 of
revenue during the twelve months ended June 30, 2000 include Andersen
Consulting, Ariba, Arthur Andersen, Autodesk, Baxter Pharmaceutical Products,
Harvard Business School Publishing, Miller Heiman, Pitney-Bowes, Portera, Qwest
Communications and Schering-Plough while other significant customers and
business partners include AXA Insurance, FT Knowledge, Hewlett-Packard, Lucent
Technologies and Merrill Lynch.
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Industry Background
Growth of the Internet as a Business Communication Cooperation and Exchange
Platform
The Internet is rapidly being adopted as a platform for communication and
cooperation among businesses and is fundamentally changing the way companies
operate. This new medium offers businesses the opportunity to streamline
complex business processes, reduce transaction costs, increase process
efficiencies and better serve their customers. Forrester Research concludes
that 93% of firms expect to transact business on the Internet by 2002. In
addition, Forrester Research estimates that business-to-business electronic
commerce, or eCommerce, will grow from $406 billion in 2000 to $2.7 trillion in
2004. Of the total amount in this industry, Forrester Research expects the
electronic marketplace segment to grow from $55 billion in 2000 to $1.4
trillion in 2004.
The rapid growth in business-to-business eCommerce to date has given rise to
Web-based marketplaces which automate communication among buyers and suppliers
and facilitate transactions among businesses. Electronic marketplaces allow
companies to access a broader selection of customers and suppliers, achieve
greater economies of scale and streamline the buy/sell process, reducing many
of the administrative costs associated with transacting business. These basic
electronic marketplaces, however, do not typically provide the integration and
value-added services and features required by industries characterized by a
high level of transaction and process complexity.
New Web-based platforms are emerging which extend the benefits of electronic
marketplaces by integrating decentralized business processes such as training,
procurement, reporting and sophisticated payment processing within companies
and across businesses. These new business platforms are called electronic hubs,
or eHubs. eHubs provide a foundation for seamlessly integrating the
functionality of business process automation and electronic marketplace
solutions. For the first time, these platforms provide effective automation
solutions for industries characterized by product and service customization,
complex business processes, highly interactive design, production and
fulfillment workflows, and significant dependence on information exchange.
Knowledge Exchange
In today's highly competitive knowledge-based economy, people are often the
most significant asset within an organization. Large amounts of information
frequently need to be disseminated among employees, suppliers, distributors,
customers, business partners and service providers, referred to as the extended
enterprise. The ability to rapidly disseminate information to people throughout
the extended enterprise has become mission critical. These extended enterprises
require a flexible and easily accessible knowledge exchange platform that
facilitates the interactions among the different constituents. The pervasive
and interactive characteristics of the Internet are well suited to enabling
this dissemination of knowledge and make eHubs an ideal knowledge exchange
solution. While traditional learning and training methods are one facet of
knowledge exchange within an organization, eHubs offer new capabilities which
overcome the limitations of conventional approaches.
Traditional Learning and Training
Learning activities have historically consisted of classroom-based and
instructor-led training programs. The delivery of learning and training through
traditional instructor-led methods is characterized by a number of limitations
that prevent these methods from facilitating a comprehensive knowledge exchange
process.
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Limitations affecting organizations include:
. Limited scalability. The facility and personnel requirements of
traditional instructor-led methods limit scalability as organizations
become larger and more geographically dispersed.
. High cost. The cost of bringing participants to learning centers or
classrooms is often prohibitive, both in terms of the direct travel
expenses and the indirect opportunity costs associated with removing
individuals from the workplace.
. Inefficient delivery infrastructure. Traditional learning and training
methods are limited by the difficulties associated with disseminating
new content to a large and distributed group of participants. Previous
attempts at technology-delivered learning, such as satellite television,
are limited by the cost and complexity of the delivery infrastructure.
. Limited measurement capabilities. Traditional learning and training
methods lack an easy and automated means to track participants'
performance results, hampering the ability of organizations to measure
the impact and effectiveness of learning on an individual's performance.
Furthermore, organizations have traditionally been unable to link
training activities to relevant business metrics such as increases in
revenue or the reduction of operating costs.
Limitations affecting individual participants include:
. Lack of personalization. Instructor-led programs typically result in a
"one-size-fits-all" experience that is not tailored to the individual
participant. This may result in a learning experience that is over- or
under-inclusive for the individual participant and is not customized for
that participant's learning style.
. Event-oriented learning. Traditional learning has focused on broad
topics delivered at scheduled times and specific locations. Therefore,
participants are precluded from continuous access to specific learning
objects or information on demand.
eLearning
The Internet provides a platform to address the limitations of traditional
learning. Initial implementations of Web-based learning and training, commonly
known as eLearning, use the Web primarily as a delivery platform. eLearning
delivers learning events conveniently and directly to an employee, customer or
supplier at the time and location of their choice, at a low incremental
infrastructure cost and through standard Web browsers. Furthermore, because the
Internet reaches broad and varied market segments, eLearning allows for
economies of scale in what was previously a fragmented and inefficient
environment. The development of eLearning has led to the emergence of three
defined categories of customers:
Enterprises. Many enterprises have realized that eLearning has
significant and measurable advantages over traditional forms of knowledge
delivery and training. These enterprises require a flexible and easily
accessible knowledge exchange platform which facilitates the interaction
among the different constituents. International Data Corporation, or IDC,
projects that the United States corporate eLearning market will grow from
approximately $1.1 billion in 1999 to $11.4 billion in 2003, representing a
79% compound annual growth rate.
Content providers. Companies that sell educational content often are
looking for scalable solutions that enhance their revenue growth
opportunities and leverage their subject matter expertise. These companies
frequently lack the technical and financial
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resources necessary to develop an effective online presence. However, many
content providers recognize that Web-based learning represents a permanent
transformation in their industry to which they must respond or risk the
loss of market share to new entrants. According to IDC, the total United
States corporate market for eLearning content, a subset of the overall
eLearning market, will grow from approximately $735 million in 1999 to
$6.2 billion in 2003, representing a 70% compound annual growth rate.
Professional communities. Individual and small groups of professionals,
such as salespeople, consultants and medical doctors, often have limited
access to the learning resources available to large enterprises. As a
result, these individual or small groups of professionals have joined
online professional communities to facilitate access to these resources.
However, these online communities lack an easy and cost-effective means to
access and retrieve the most relevant learning materials from various
resources and integrate them into a comprehensive learning plan.
Next Generation Knowledge Exchange Solutions
eLearning uses the Web primarily as a delivery platform to increase the
convenience and lower the cost of training. However, eLearning solutions
typically lack a number of features which would provide a more complete and
effective knowledge exchange experience. These features include the ability to
tailor content to individual participants, measure and track
performance, support comprehensive eCommerce, and manage smaller knowledge
objects, which are reusable course components, as opposed to monolithic
courses. The next generation solutions are evolving from a simple delivery
platform into Web-based knowledge exchange eHubs. These eHubs bring together
enterprises, content providers and professional communities into one virtual
marketplace and offer a greater array of features. Each of these constituents
benefits from aggregation, integration, scale and expanded eCommerce
opportunities. Additionally, individual participants benefit from an ongoing
and personalized learning experience. Organizations benefit from greater
efficiencies, more productive employees and higher returns on investments.
The Docent Solution
We provide infrastructure software and services for creating and operating
knowledge exchange eHubs. Using our technology platform and services, our
customers can easily build and customize and run their own knowledge exchange
eHub under their own brand. Our solutions are comprehensive, scalable and
easily adaptable to changing circumstances, allowing our customers to develop
knowledge exchanges that are customized for their existing and evolving
requirements. New eHub participants can be quickly and easily added. Content
providers who are seeking large concentrations of potential customers for their
content are likely to be drawn to the eHub as the number of enterprise and
professional community participants increases. As the number of content
providers increases, enterprise and professional community participants benefit
from a broader selection of content. Online professional communities benefit
from increased traffic on their sites, repeat visits and greater usage times,
commonly referred to as Website "stickiness." Professional communities also
have the opportunity to derive revenue from the additional product and service
offerings available as a result of the greater availability of content.
Docent Enterprise, our software technology platform for building knowledge
exchanges, enables our customers to:
. develop, recommend and manage personalized instruction based on an
individual's skill gaps or competency level in a format we refer to as a
"learning plan;"
. customize and deliver content on demand;
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. measure and aggregate individual results, assess program effectiveness,
and refine profiles and learning plans;
. quantify learning outcomes as they relate to business goals;
. integrate the eHub with other enterprise applications; and
. implement and manage a wide range of eCommerce processes.
Benefits to Enterprises
Greater efficiencies. Our solutions allow large enterprises to increase
operational efficiencies and reduce transaction costs by using the Web to
enhance the information flow in the knowledge exchange process. For
example, new product training can be accomplished online rather than by
sending a marketing team on a product roadshow. The speed and efficiency
with which content is delivered on the Web significantly reduces the time
and cost required to design new learning programs and reduces costs such as
travel expenditures.
More effective knowledge transfer to employees. Our solutions allow
content to be personalized to individual participants' needs and presented
as an integrated learning plan. Individual participants only access the
content they need, when they need it. Each participant's activities are
assessed and results are automatically tracked and measured in our
participant database. This data can be used to further refine the
participant's learning profile, be correlated with other enterprise data to
make further recommendations, demonstrate efficiencies of learning programs
as they relate to business results, and provide guidance for management
decisions.
One-stop knowledge exchange solution. We provide enterprise customers
with broader access to content from third party educational content
providers. Our enterprise customers benefit from a single platform that
easily makes a wide range of content available to a globally dispersed
audience of employees, business partners and customers.
Faster time-to-results. Our solutions can be implemented quickly and
easily. In addition, our software technology platform enables organizations
to rapidly convert and customize existing training material into reusable
knowledge objects for delivery over the Web.
Benefits to Content Providers
New revenue opportunities. Our solutions enable content providers to
realize new revenue streams from the sale of Web-delivered content that is
available continuously and reaches geographically dispersed audiences.
Furthermore, our solutions allow for aggregation and cross-selling of other
providers' content. Since content providers' own brands are promoted across
the knowledge exchange eHubs, they can drive additional Web-based traffic
to their traditional training offerings, and generate repeat business with
more personalized offerings and learning plans. By participating in our
knowledge exchange eHubs, content providers gain access to and leverage
additional distribution channels such as our direct sales force, resale
partners and professional communities with whom we have relationships.
Focus on core competencies. Our product and services enable content
providers to quickly and easily convert their existing content for
deployment on the Web under their own brand. We also offer services to host
their content. These services allow content
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providers to focus on providing quality content, rather than developing new
skills in technology implementation and Web development.
Improved business effectiveness. Our solutions allow content providers to
capture previously unavailable data on participant performance results.
Content providers can analyze and leverage this data to focus their sales
efforts, improve and personalize content, identify new business
opportunities and provide richer client services.
Benefits to Professional Communities
New revenue opportunities. Our solutions provide additional revenue
opportunities to professional communities, our newest and presently our
smallest category of customer. Online professional communities are able to
generate revenue based on a revenue-sharing arrangement with content
providers through which the professional community may receive a sales
commission for the sale of content to its members. They can also drive
additional Web-based traffic to traditional professional community products
and services.
Greater member participation. Our solutions allow professional
communities to provide their members with access to high quality and
relevant content that was previously difficult or costly to obtain. As a
result, professional communities can increase their Website "stickiness."
Improved learning experience. For the individual community members, we
make content from multiple vendors available through a single source for
both online and traditional instructor-led learning. Community members can
thus maintain a record of their learning activities in one location and
integrate multiple courses from multiple vendors into a single
comprehensive learning plan based on their individual needs.
Docent Enterprise, our software technology platform, combined with the
services which we render in conjunction with Docent Enterprise, has been the
source of all of our revenue over the last three fiscal years other than
approximately $88,000 of revenue during the first half of fiscal 1997, as well
as 1996 and 1995 revenue, generated by our predecessor company. We expect that
our Docent Enterprise software and related services will continue to be the
source of our future revenues for the foreseeable future.
Strategy
Our objective is to enhance our position as a provider of enterprise
knowledge exchange eHub solutions by building the most extensive network of
enterprises, content providers and professional communities. The key elements
of our strategy include:
Increase direct sales force and strategic partnerships. Historically, our
revenue has been generated through our direct sales efforts. We plan to
increase our number of direct sales professionals, both domestically and
internationally. In addition, we intend to increase the number of
relationships with strategic partners, resellers and systems integrators.
We intend to work with these parties to accelerate the growth of our global
operations, provide additional customer implementation capabilities, expand
our customer base and increase the number of content providers available
through our eHubs. These relationships allow us to focus on our core areas
of expertise while leveraging the strengths of complementary organizations.
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Penetrate new and existing functional and vertical markets. To date, we
have focused our efforts on sales, service and support organizations within
segments of the technology, financial and business services, and healthcare
industries. We are expanding the use of our products and services to
include additional applications for the extended enterprise, including, for
example, providing certification programs for our customers' reseller and
business partners. In addition, we believe there are significant
opportunities to further penetrate our existing vertical markets and
service new industries. Ultimately, we plan to create an extended network
of interconnected eHubs among these various constituencies both within
vertical markets and across various application areas.
Expand our international presence. Our marketing efforts primarily have
been focused in North America and selected countries in Europe. We believe
that there are significant opportunities for our solutions in Europe and
Asia. We plan to further increase our international presence in order to
take advantage of these opportunities and others as appropriate.
Continue to enhance our products and services capabilities. We plan to
continue to enhance the features and functions of our products and
services. In particular, we plan to focus on enhancing our capabilities in
managing a wide variety of knowledge objects, tailoring content to
individual participants, transaction processing and data analysis. For
instance, we plan to expand our ability to capture and aggregate data from
multiple eHub constituents. This data can be used by all eHub constituents
to further improve their business offerings and create additional revenue
opportunities. In addition, we continually evaluate acquisition
opportunities and may acquire complementary businesses to build a more
comprehensive suite of products and services.
Support industry standards and open architecture. Our solutions are based
on standard Web technologies and an open architecture. Our solutions can be
accessed through standard Internet browsers and do not require any client
software installation by the customer. We believe that our continued
support of industry standards and our open architecture will remain an
attractive feature of our solutions.
Customers
Since January 1, 1999, we have recognized revenue from over 90 customers and
business partners. In addition, as of September 22, 2000, we have contracts
with another 15 customers and business partners from which we expect to receive
revenue in the future. Set forth below is a representative list of our
enterprise customers:
<TABLE>
<CAPTION>
Technology Financial and Business Services Healthcare
---------- ------------------------------- ----------
<C> <C> <S>
Baxter
Autodesk Arthur Andersen Pharmaceutical
Products
Kana Communications AXA Group (G.I.E. Informatique AXA) Incorporated
PSS/World
Micromuse Dun & Bradstreet Medical
Pitney-Bowes Impiric, a division of Young & Rubicam Schering-Plough
Qwest Communications Merrill Lynch
Veritas Software Reed Elsevier
TIAA--CREF
</TABLE>
Our content provider customers include Blessing-White, C3i, Commerce Clearing
House (CCH), eImpax, FT Knowledge, Harvard Business School Publishing, IBT
Financial, Knowledge Impact, Learning Insights, Learning Voyage, Miller Heiman,
SMGnet, Tech Resource Group (TRG) and The Richardson Company.
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Our professional community customers include Ariba, iGeneration, Indus, the
National Association of Manufacturers and Portera.
Revenue from Customers
For the six months ended June 30, 2000, none of our customers accounted for
more than 10% of our revenue. In fiscal year 1999, Impiric, a division of Young
& Rubicam, accounted for 27% of our revenue. In 1998, Veritas Software
accounted for 26%, and Lucent Technologies accounted for 12% of our revenue.
Sun Microsystems accounted for 13% of our revenue in fiscal years 1998 and
1997. Of these four customers, only our agreements with Impiric and Veritas
Software are written. We have incurred substantial losses to date and expect to
continue generating substantial losses in the foreseeable future.
Products and Services
While our products and services address the specific needs of each of the
three key customer categories, there is a large degree of commonality and
overlap between their needs. This has allowed us to use the same underlying
technology for all three groups. Docent products enable the following key
knowledge exchange processes:
Personalized learning plans. We enable our customers to personalize
learning plans based on competency models, job title or classification, or
pre-assessment of participants. Learning plans can reflect historical
success models or other competency models and can direct participants to a
wide variety of learning activities.
Content customization and delivery. We enable our customers to create
new, personalized Web-based courses easily and effectively. Our technology
is based on a standards-based open architecture designed for the Internet
and can be accessed through standard Web browsers. It does not require
proprietary scripting languages, client-side software, applets or plug-ins
and can incorporate any Internet-based multimedia technologies such as Real
Audio and Shockwave. Our technology also allows for the delivery of
information to mobile and wireless communication devices such as cellular
telephones, personal digital assistants and laptop computers.
Performance and program assessment. We provide online assessment for all
learning activities to ensure the successful exchange of knowledge before a
participant proceeds to his or her next objective. All profile information,
activities and results are automatically captured in an individual's
learning plan. In addition, individual results can be aggregated to measure
program effectiveness and the results can be used to further refine future
programs.
Results measurement. Our products permit comprehensive reports on
participant progress based on data stored in our databases. These reports
can be integrated with data from other enterprise applications, showing the
value of our personalized learning programs and our customers' return on
investment.
Facilitation of eCommerce processes. Our customers can collect user
profile information, enroll participants in learning events and collect
payment for courses online. Our solutions provide for enhanced commerce
transactions, including aggregation of purchases from multiple vendors,
cross-selling content between multiple vendors, resale of products through
multiple-tiered distribution channels and extracting value from data
contained in a repository of participant profiles. Our registration
interface can also be used to manage the registration process for all forms
of content, enabling our customers to register participants for both self-
paced and live interactive online and offline events.
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Docent Enterprise
Docent Enterprise, our eHub software platform, consists of four tightly
integrated components: Docent Learning Management Server, Docent Content
Delivery Server, Docent Desktop and Docent Mobile.
. Docent Learning Management Server is the primary system that interfaces
with users for learning management and registration and has been
designed to allow a customer to easily change workflow, add new
capabilities and customize the "look and feel" of their knowledge
exchange eHub;
. Docent Content Delivery Server consists of a rules-based engine that
assembles and presents content files to participants on demand based on
their interaction with the knowledge exchange platform;
. Docent Desktop assists content creators in authoring or converting
courseware for deployment to the Docent Content Delivery Server. Docent
Desktop allows a content creator to build a graphical outline of its
courseware and populate it by importing existing files or creating new
content by launching the third party editor of their choice, such as
Microsoft Word or FrontPage; and
. Docent Mobile provides the capability for users to download content from
a Docent Content Delivery Server and then continue to use the content
after they have disconnected from their network and resynchronize data
and results after they reconnect to their servers.
Application Service Provider Offerings
Our Application Service Provider offerings are designed to provide customers
with a means to implement our solutions quickly and flexibly while reducing the
risks and costs associated with the implementation process. The Application
Service Provider offerings include a hosted technology infrastructure, Docent
application support and continuous management of the hosted services.
Professional Services
Our professional services organization offers our constituents marketing,
implementation, training, and support and maintenance services. We provide
marketing services to assist our constituents in creating highly targeted
marketing plans to launch their comprehensive, online learning programs, or
knowledge exchange solutions. Our implementation services assist our
constituents with integration, content customization and system administration.
We provide customized training through interactive classes and online learning
activities to meet the needs of our customers and business partners. Support
services are available by e-mail, fax, or telephone, both during normal
business hours and on an extended coverage basis. Finally, maintenance services
are provided on an annual contract basis, which includes all software updates,
bug fixes, additional documentation or patches released during the contract
period.
Strategic Relationships
We have recently entered into strategic relationships to market and implement
our knowledge exchange eHub solutions. Although we have generated little
revenue to date from these strategic relationships, these relationships and
alliances are a fundamental element of our strategy to expand the delivery of
our products and services and enter new markets. We are not presently dependent
on our relationships with our strategic partners for our revenue. However, our
business model anticipates that our revenue will be increasingly dependent on
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our strategic partners. The following is a list of some of our existing
strategic partner relationships:
Hewlett-Packard. We have granted Hewlett-Packard, or HP, a non-exclusive
license to our products. The license allows HP to resell our products,
either as part of HP's portfolio of personalized education solutions, or as
part of its own hosted eLearning solutions. In addition, HP has agreed to
co-brand its HP solutions with a "Powered by Docent" logo. As part of the
alliance, HP has granted us the right to resell its hosting and solution
services to our customers in combination with the sale of our products. The
agreement does not require HP to market a minimum quantity of our products.
Our agreement with HP is for three years, terminating, in the absence of a
breach by either party, on December 31, 2002. Upon the termination of the
agreement, the license grant to HP will also terminate; however, licenses
granted to HP's end users will continue.
Andersen Consulting. We have entered into an alliance agreement with
Andersen Consulting, LLP, or AC, with the mutual goals of increasing our
market share and business development efficiency and of improving customer
satisfaction. The alliance agreement also provides for the submission of
joint proposals to potential clients, where either we would be
subcontracting our services to AC or AC would be subcontracting their
services to us. In accordance with the terms of the alliance agreement, we
have also granted AC a non-exclusive, non-transferable and royalty-free
license to use our products to assist AC in connection with its consulting
activities with its clients when such activities support the marketing and
licensing of Docent Enterprise to other third parties. The alliance
agreement is for an initial term of three years, terminating on March 31,
2003, with either party being able to terminate the agreement without cause
on 60 days notice. In addition, we granted AC a warrant for the purchase of
Series E Preferred Stock in connection with the alliance agreement. Under
our alliance with AC, the limit of liability of each of us to the other
shall not exceed one million dollars. Concurrent with the alliance
agreement, the Company entered into a consulting services agreement with AC
pursuant to which the Company committed to purchase at least $2 million of
consulting services from AC prior to March 31, 2002.
Harvard Business School Publishing. We have entered into an alliance
agreement with Harvard Business School Publishing, or HBSP, focused on
creating and delivering management education to corporate customers and
individual managers. The first HBSP products on the Docent platform are
expected to be available online in the third quarter of 2000. The
relationship includes plans for joint marketing and sales activities
including joint advertising and other promotional activities as well as
sales to major target clients. The current agreement with HBSP has an
indefinite term, terminable with or without cause on 30 days written
notice. In addition, we granted HBSP a warrant for the purchase of Series E
Preferred Stock in connection with the alliance agreement.
SmartForce. We have agreed to the principal terms of a strategic
alliance with SmartForce. The alliance includes integrating elements of
Docent Enterprise software into SmartForce's eLearning platform in order to
create a more comprehensive eLearning product for SmartForce. We have also
agreed to enter into a joint marketing agreement with SmartForce for Docent
Enterprise. The strategic alliance agreement would be in effect for an
initial term of three years. After one year, either party would be able to
terminate the agreement with 90-days' notice. Our strategic alliance is
subject to the preparation, negotiation and execution of a definitive
agreement with SmartForce embodying the various elements of our alliance
described above. SmartForce has made an investment in our Series F
Preferred Stock.
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Resale and service partnerships. We also have resale and service
partnerships with Aptech Worldwide, Arinso International, Belle
Productions, Caliber, Cegos, Evisor, General Physics, Internal/External
Communications, Niam TMS, Rapid Learning Deployment, Stoas, and U&I
Learning. Our reselling and service partners may sublicense Docent
Enterprise as a component of their eLearning solution. These partners
receive a percentage of the revenue received from each resale and service
transaction. Our agreements with our resale and service providers typically
have an original term of one to three years, terminable earlier with or
without cause on 60 days notice.
Marketing alliances. We have established a number of marketing alliances
that help provide multiple benefits, including joint sales calls, trade
show promotions, marketing activities and promotions and joint press
releases. We are currently a member of the following partner programs:
Siebel Systems Alliance Program Premier Software Partner, Microsoft Online
Learning Partner, Sun Microsystems Developer Connection Solutions Provider
and SAP Complementary Software Partner. These marketing alliances enhance
brand awareness and increase demand for Docent Enterprise. Our marketing
alliance agreements typically have an original term of one year, terminable
earlier with or without cause on 60 days notice.
Technology alliances. We have also established a number of relationships
and alliances that provide our customers with access to technologies that
are either included as part of our products and services or are used in
conjunction with our platform. Some of these relationships include
technology and marketing alliances with vendors such as Centra, InterWise,
Oracle, Microsoft, Placeware, RealNetworks, and WebEx Communications, Inc.
We intend to increase the number of these types of complementary
partnerships in the future. Our technology alliances improve our reputation
in the industry by allowing us to provide our customers with a more
comprehensive solution. Our technology alliance agreements are typically
for an original term of 1 year, terminable earlier with or without cause on
60 days notice.
Technology, Research and Development
We were incorporated in June 1997 to acquire the corporate online learning
business of Stanford Testing Systems, Inc. This predecessor company, which was
formed in 1994, divested itself of its other academic market assets immediately
before its merger into us. We conducted extensive product improvement and
enhancement of what evolved into our Docent Enterprise software, which was
first released in March 1998. While continuing to refine our software, we have
focused on growing our sales, marketing, and service organizations, enabling us
to position our software as an infrastructure for creating and operating
knowledge exchange eHubs.
Our solutions are designed on a standards-based, open and scalable
architecture, are Web-based and are accessible by users through standard Web
browsers. As a result, our infrastructure supports large numbers of individual
users and member organizations within a single knowledge exchange. The
architecture has been designed to allow for content and results from multiple
organizations to be aggregated easily and delivered to anyone using a variety
of Internet appliances. Our Web-based architecture does not require additional
software to be installed and maintained on each user's computer or other
Internet devices. This allows knowledge exchanges to reach a diverse set of
internal and external participants with minimal deployment and maintenance
costs. Furthermore, the user profiles, assessment results, detailed course
statistics and other types of user activity data are tracked in a central
database in order to analyze usage and participant behavior patterns.
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Our research and development expenses are funded by debt and equity
financings, as well as by revenues. All of our research and development
expenditures are expensed. These expenses accounted for approximately $653,000
in fiscal year 1997; approximately $2,242,000 in fiscal year 1998;
approximately $2,482,000 in fiscal year 1999; and approximately $1,856,000 for
the six months ended June 30, 2000. Our efforts and expenditures in research
and development are devoted to enhancing the functionality of our existing
product, Docent Enterprise, which is currently being shipped and released.
Our solutions are designed to support leading relational database management
systems, including Oracle and Microsoft SQL Server. We support multiple
operating systems and hardware configurations to meet the different needs of
our customers. Our software incorporates third party software in addition to
code which we have created ourselves. Server applications are based on standard
Web server technology and are implemented in C++ with native connectivity to
both the Web server and the database. The multi-tier architecture connects
browser-based applications to application servers and databases through an
enterprise local area network, wide area network, Intranet or a secure Internet
connection. Our technology performs messaging between clients and the
application engine in real time over TCP/IP and makes database connections
through native database interfaces. Key features of our technology include:
Single unified data model. Our solutions are built around a single,
unified data model. The complete learning experience of a user, from
initial skill gap analysis and learning plan development, through
registration and content delivery, to post-assessment, certification and
measurement of results, is tracked in relational databases that share
information in an integrated, comprehensive and data-centric learning
environment.
Scalable platform. Our solutions are designed as a series of separable
application servers, allowing individual hardware platforms to be sized to
the specific needs of a customer. We are able to add multiple application
servers in one or more geographic locations to provide the capacity to
handle large numbers of participants, organizations, courses and types of
content or to improve the overall response time of the system.
Ease of implementation. Our solutions have been designed to be easily
tailored to an organization's business environment. This has been
accomplished through the use of our "application file" architecture which
includes HTML tags, SQL database queries and standard scripting language
statements in ordinary text files. A standard system can be quickly and
easily deployed using automated installation scripts.
Standards-based open architecture. Our application servers run in both
the Windows NT and UNIX environments, using standard Web servers from
Microsoft, Netscape, Apache and others, and relational databases from
Microsoft or Oracle. We provide direct connections to industry standard
databases and Web servers. Our platform can be accessed from any HTML 2.0+
compliant Internet browser without requiring any plug-ins, applets or
client-side software, including from platforms such as Macintosh OS and
Linux. Our solution infrastructure is based on standard Internet
architectures and protocols. We support standards activities in the
learning management arena, and our system is one of the few certified as
compliant with the Aviation Industry CBT Committee (AICC) AGR-010 Internet-
based course management interface standard. We are also in conformance with
the United States Department of Defense (DOD) Advanced Distance Learning
(ADL) initiative's Sharable Courseware Object Reference Model (SCORM)
version 1.0 specifications.
Remote and wireless operations. Our solutions provide a number of
capabilities to allow for remote and wireless operations. These include
hybrid Web/CD-ROM deliverables that enable organizations to make more
effective use of limited network bandwidth. Our
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Docent Mobile component allows users to download content for use while
disconnected from the Internet or an intranet and to synchronize results
upon reconnection. Our technology platform also allows us to deliver
knowledge exchange solutions through non-traditional devices such as WebTV,
Palm or other personal data assistant devices and browser-equipped cellular
telephones.
Sales and Marketing
We focus our marketing efforts on educating potential eHub members,
generating new sales and partnership opportunities, and creating awareness for
our knowledge exchange solutions. To reach our eHub constituents, we conduct a
variety of marketing programs including trade shows, seminars, Web marketing
programs, advertising, press relations and industry analyst programs. To help
our eHub constituents and resellers successfully create, market and maintain
their knowledge exchange, we have an extensive set of marketing programs which
include the "Powered by Docent" branding, lead exchange, co-marketing and
technical and sales training programs. We also host regularly scheduled
networking programs to facilitate communication among content providers,
resellers and professional communities.
We market and sell our solutions and related services primarily through our
direct sales force in the United States. Outside of the United States we rely
heavily on our international partners. To date, we have focused our sales
efforts on enterprise-class organizations in the technology, financial and
business services, and healthcare industries and on content providers. Our
sales efforts are directed at executive level decision makers within sales,
customer support and customer education organizations. We have ten sales
offices in the United States, one sales office in The Netherlands, one sales
office in France and one sales office in the United Kingdom. We also have sales
personnel in Belgium and Norway. As of August 31, 2000, we had 115 employees in
our sales and marketing departments.
During the six months ended June 30, 2000, we realized $179,000, or
approximately 7.3%, of our revenues from our European sales. In fiscal year
1999, we did not derive any revenues from foreign operations. These amounts are
attributable to our revenue on the basis of direct billing to the customer at
the customer's location.
Competition
The market for knowledge exchange and eLearning is intensely competitive,
subject to rapid technological change and significantly affected by new product
introductions and activities of other industry participants. The knowledge
exchange and eLearning market is highly fragmented with many competitors, and
no single company accounts for a dominant market share. Increased competition
is likely to result in price reductions, reduced gross margins and loss of
market share, any one of which could harm our business. Although we believe
that we offer one of the most comprehensive knowledge exchange platforms, we
encounter, or could encounter, competition with respect to different aspects of
our solution from a variety of companies, including:
. companies which provide software and services to address specific
components of knowledge exchange platform solutions;
. companies that sell online and traditional learning materials over the
Internet;
. existing or potential customers or partners who develop in-house
solutions, including traditional learning programs which are classroom-
based and led by instructors; and
. enterprise software vendors who could develop their products to include
learning content.
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The boundaries between the different areas in which these groups of
competitors compete are permeable. Competitors who are categorized in one area
may have or may develop products or services which compete with us in other
areas. Companies that compete with particular aspects of our solutions include:
Click2Learn, DigitalThink, IBM MindSpan (Lotus LearningSpace), Pathlore, Saba
Software and WBT Systems, among others. We expect additional competition from
other established and emerging companies as the market for knowledge exchange
solutions evolves. Some of our current or potential competitors have longer
operating histories and significantly greater financial, technical, marketing
and other resources than we do. Therefore, they may be able to respond more
quickly to new or changing opportunities, technologies and customer
requirements. Also, many current and potential competitors have wider brand
recognition and more extensive customer bases that could be leveraged, thereby
gaining market share to our detriment.
The markets we serve are new and evolving rapidly. We believe that the
principal factors that would bear upon our performance in comparison to our
competitors include the following: the breadth and depth of learning and
training solutions, product quality and performance, product features and
functions, eHub services and support, core technology and the ability to
rapidly implement solutions. We believe that our solutions are currently
competitive with respect to these factors. We may not be able to sustain our
competitive position against current and potential competitors, especially
those with significantly greater financial, marketing, service, support,
technical and other resources. We are not aware of any published quantitative
market share surveys regarding our industry to indicate our relative
competitive position in terms of market share.
Intellectual Property Rights
Our success and ability to effectively compete is dependent on our ability to
develop and maintain the proprietary aspects of our technology and operate
without infringing on the intellectual property rights of others. We rely on a
combination of trademark, trade secret and copyright law and contractual
restrictions to protect the proprietary aspects of our technology. These legal
protections afford only limited protection for our technology. We seek to
protect the source code for our software, documentation and other written
materials under trade secret and copyright laws. We license our software
pursuant to signed license or "shrink wrap" agreements, which impose
restrictions on the licensee's ability to use the software. Finally, we seek to
avoid disclosure of our intellectual property by requiring employees and
consultants with access to proprietary information to execute confidentiality
agreements with us and by restricting access to our source code. Due to rapid
technological change, we believe factors such as the technological and creative
skills of our personnel and new product developments and enhancements to
existing products are more important to establishing and maintaining a
technology leadership position than the various legal protections of our
technology.
Despite our efforts to protect our intellectual property rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our
products is difficult and, while we are unable to determine the extent to which
software piracy exists, if at all, it can be expected to be a persistent
problem. The laws of many countries do not protect our proprietary rights to as
great an extent as do the laws of the United States. Litigation may be
necessary in the future to enforce our intellectual property rights, to protect
our trade secrets, to determine the validity and scope of the intellectual
property rights of others or to defend against claims of infringement or
invalidity. Any such litigation could result in substantial costs and diversion
of resources. Our means of protecting our intellectual property rights may not
be adequate to protect us from the infringement or misappropriation of our
intellectual property rights by others.
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Currently, third parties have registered Docent or a variant as a trademark
in the United States and in some other jurisdictions outside the United States
for use with goods or services which could be construed to overlap those
offered by Docent. Although these third parties have not initiated formal
infringement proceedings or any other formal challenges to Docent's use of the
Docent trademark, any claims, with or without merit, could cause costly
litigation that could consume significant management time. Although our
application to register Docent as a trademark in the United States for
particular goods and services has been allowed and will proceed to registration
once a statement of use is filed, we may not be able to register Docent as a
trademark in some countries, including the United States, for use with other
goods or services due to existing registrations of third parties. As a result,
we may choose not to use Docent as a trademark in one or more of these
countries in connection with some of our products or services. A third party
has recently claimed that course offerings on our website infringe on its
patent. Although this third party has offered us the ability to license this
patent, it has not yet disclosed the terms for the license. If this third
party's claim for infringement and its patent are valid, we may be required to
license the patent on terms that may or may not be favorable or be forced to
alter our website or our software product which is the subject of the patent,
either of which results may adversely affect our revenue.
We obtain the content for many of the courses delivered with our solutions
from outside content providers and also receive the right to resell this
content to other customers. It is possible that the use of this content may
subject us to the intellectual property claims of third parties. Although we
seek indemnification from our content providers to protect us from these types
of claims, we may not be fully protected from extensive damage claims or claims
for injunctive relief. In addition, our content providers may assert that some
of the courses we develop under contract with other customers may improperly
use their proprietary content. Our involvement in any litigation to resolve
intellectual property ownership matters would require us to incur substantial
costs and divert management's attention and resources. If we became liable to
third parties for infringing their intellectual property rights, we could be
required to pay substantial damages. In order to continue marketing our
products, we may be required to develop noninfringing intellectual property,
obtain a license or cease selling the products that contain the infringing
intellectual property, each of which may cause us to incur significant costs
and expenses. Furthermore, we may be unable to develop noninfringing
intellectual property or to obtain a license on commercially reasonable terms,
if at all. In this event, if the intellectual property was a trademark, we
could be required to cease using a trademark which could involve a loss of
goodwill, as well as the possibility of a damage award and a temporary
disruption during a transition to other trademarks.
Employees
As of August 31, 2000, we had 205 full-time employees. Of these employees,
115 were engaged in sales and marketing, 32 in research and development, 31 in
professional services, 22 in finance and administration and 5 in facilities and
information technology. In addition, we expect to hire a significant number of
new employees in the near future. Our future success depends on our ability to
attract and retain highly qualified technical, sales and senior management
personnel.
None of our employees is represented by a labor union or collective
bargaining agreement. We have not experienced any work stoppages and consider
our relations with our employees to be good.
Facilities
We currently lease approximately 38,000 square feet of office space for our
headquarters in two buildings located in Mountain View, California. If we
continue to increase the number of
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our personnel as projected, we will outgrow the Mountain View premises by the
end of this calendar year. In addition to the Mountain View premises, in the
United States we also lease sales offices in Burlington, Massachusetts;
Atlanta, Georgia; Houston, Texas; Plano, Texas; Princeton, New Jersey; Irvine,
California; Reston, Virginia; Bloomington, Minnesota; and Lisle, Illinois. We
also lease sales offices in The Netherlands, France and the United Kingdom.
Legal Proceedings
A former vice president who did not exercise his vested stock options upon
termination of his employment has sued us and our CEO, David R. Ellett,
individually. The complaint seeks unspecified damages for wrongful termination
of his employment based upon a number of theories. We intend to vigorously
defend ourselves. In addition, a party has written to us, alleging patent
infringement, as described in the Intellectual Property Rights section above.
From time to time, we may become involved in litigation relating to claims
arising from our ordinary course of business. We believe that there are no
claims or actions pending or threatened against us, the ultimate disposition of
which would have a material adverse effect on us.
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MANAGEMENT
Executive Officers, Directors And Other Key Employees
The names, ages and positions of our current executive officers, directors
and other key employees are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
David R. Ellett.......... 46 Chief Executive Officer, President and
Chairman of the Board
Donald E. Lundgren....... 55 Vice President and Chief Financial Officer
David Mandelkern......... 41 Executive Vice President, Chief Technology
Officer, Secretary and Director
Kathleen A. Gogan........ 41 Vice President, Marketing
Mary A. Egan Lorigan..... 39 Vice President, Sales
Maarten W. G. de Groodt.. 36 Vice President, Europe
Richard L. Dellinger..... 50 Vice President, Engineering
Eric N. Campbell......... 38 Vice President, Human Resources
Kevin G. Hall............ 41 Director
Jos C. Henkens........... 48 Director
Ali Kutay................ 44 Director
Robert A. Lauer.......... 56 Director
Pardner Wynn............. 43 Director
</TABLE>
David R. Ellett, Chief Executive Officer, President and Chairman of the
Board, joined Docent in July 1998. He has served as Chief Executive Officer and
President since July 1998. He has been a member of the Board of Directors since
March 1998 and Chairman of the Board since January 2000. From April 1997 to
July 1998, Mr. Ellett served as Chief Operating Officer of Business Objects,
Inc. From January 1994 to April 1997, Mr. Ellett served as Corporate Vice
President of Worldwide Education at Oracle Corporation. In addition, Mr. Ellett
spent 13 years at Electronic Data Systems, most recently as President of the
Performance Service Group from 1991 to 1994. Mr. Ellett holds a B.A. degree
from Southern Methodist University.
Donald E. Lundgren, Vice President and Chief Financial Officer, joined Docent
in November 1999. From May 1999 until joining Docent, Mr. Lundgren worked as an
independent consultant. From November 1998 to May 1999, Mr. Lundgren served as
Chief Financial Officer of Blue Pumpkin Software, Inc., a provider of workforce
management software. In addition, Mr. Lundgren founded and served as Chief
Executive Officer of Kairos Software, Inc., a developer of Web-based,
knowledge-enabled selling systems, from July 1995 to June 1998. Prior
experience includes Chief Financial Officer positions at NetLabs, NetManage and
Frame Technology, Inc. Mr. Lundgren holds an M.B.A. degree from Indiana
University and a B.S. degree in Electrical Engineering from Rose Hulman
Institute of Technology.
David Mandelkern, Executive Vice President and Chief Technology Officer, co-
founded Docent in June 1997. He served as President and Chief Executive Officer
from January 1998 to July 1998 and has been a director since June 1997. He has
also served as Chief Technology Officer from August 1998 to present. Before co-
founding Docent, Mr. Mandelkern founded and served from July 1993 to June 1997
as President of AlmondSeed Software, a provider of UNIX utility software. From
October 1996 to June 1997, Mr. Mandelkern was a consultant to Stanford Testing
Systems, Inc., the predecessor to Docent. From February 1991 to June 1993, Mr.
Mandelkern served as President and Chief Executive Officer of Talarian
Corporation, a supplier of real-time networking middleware. Mr. Mandelkern is a
member of the board of
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<PAGE>
directors and compensation committee of Advanced Visual Systems, Inc. Mr.
Mandelkern holds a B.S. degree with distinction in Electrical Engineering from
Stanford University and an M.S. degree in Electrical Engineering from Stanford
University.
Kathleen A. Gogan, Vice President, Marketing, joined Docent in October 1998.
From July 1997 to September 1998, Ms. Gogan served as Vice President of
Marketing at Decisive Technology, a provider of online survey software. From
May 1990 to July 1997, Ms. Gogan was employed by Informix Corporation and
served in a variety of management roles including Vice President of Global
Partners, and Vice President of Channel and Partner Marketing. Ms. Gogan holds
a B.S. degree in Mechanical Engineering from the University of Notre Dame and a
Masters of Management degree from Northwestern University.
Mary A. Egan Lorigan, Vice President of Sales, joined Docent in October 1999.
From April 1999 to October 1999 Ms. Lorigan served as Vice President of Sales
at NetSage, Inc., a provider of intelligent agent software. From July 1998 to
April 1999, Ms. Lorigan took a leave of absence to care for her family. From
November 1993 to July 1998 Ms. Lorigan served in several sales management
capacities including Vice President North America Sales, Vice President North
American Verticals and Channels and Vice President Western Region at The
Vantive Corporation, a developer of customer relationship management and sales
force automation software. From May 1983 to November 1993, Ms. Lorigan served
in sales and various sales management roles at Informix Software, Inc. Ms.
Lorigan holds a B.A. degree from the University of California, San Diego.
Maarten W. G. de Groodt, Vice President, Europe, joined Docent in September
1999. Previously, Mr. de Groodt served as Director of Education for The
Netherlands for Oracle Corporation from June 1997 to September 1999. Prior to
Oracle, Mr. de Groodt was Manager of Professional Development at CAP Gemini
from July 1985 to May 1997. Mr. de Groodt holds a degree in business management
from IBO of Holland.
Richard L. Dellinger, Vice President, Engineering, joined Docent in November
1997. From October 1994 to October 1997, Mr. Dellinger served as Vice
President, Engineering at Presidio Systems, Inc., a provider of medical
software. From January 1991 to October 1994, Mr. Dellinger served as Vice
President, Engineering, at ParcPlace Systems, Inc. Mr. Dellinger holds a B.S.
degree in Engineering from the University of Houston and an M.S. degree in
Computer Science from Rice University.
Eric N. Campbell, Vice President, Human Resources, joined Docent in July
1999. Previous experience includes Director of Human Resources for Inprise
Corporation, formerly Borland International, from November 1992 to June 1999.
From January 1991 to October 1992, Mr. Campbell served as manager of Human
Resources for Bama Foods Ltd., a food products manufacturer. Mr. Campbell holds
a B.S. degree from Oklahoma State University.
Kevin G. Hall has served as a member of the Board of Directors of Docent
since June 1997, as a member of Docent's compensation committee since January
1999, and as a member of Docent's audit committee since January 2000. Since
1993, Mr. Hall has been a General Partner of Norwest Venture Partners. Prior to
joining Norwest, Mr. Hall was a Principal at Brentwood Associates. Mr. Hall
currently serves on the board of directors of Continuous Software, Inc., as
well as a variety of privately held companies. Mr. Hall received a B.S. degree
in Engineering and an M.S. degree in Engineering from Purdue University and an
M.B.A. degree from Stanford University.
Jos C. Henkens has served as a member of the Board of Directors of Docent
since June 1997, as a member of Docent's compensation committee since January
1999, and as a
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<PAGE>
member of Docent's audit committee since January 2000. Mr. Henkens is a General
Partner of Advanced Technology Ventures, with which he has been associated
since January 1983. Mr. Henkens currently serves on the board of directors of
Actel Corporation, Credence Systems Corporation, Seagull Business Software, BV,
Accord Networks, Ltd., as well as a variety of other privately held companies.
Mr. Henkens holds an MS and BS in Physics from the University of Leyden, The
Netherlands, an MS in Business Administration from the University of Delft, The
Netherlands, and an MS in Engineering-Economic Systems and an MBA from Stanford
University.
Ali R. Kutay has served as a member of the Board of Directors of Docent since
April 2000 and as a member of Docent's audit committee since April 2000. Mr.
Kutay is the Chairman, President, and CEO of AltoWeb, a provider of e-business
infrastructure software, with which he has been associated since its founding
in January 1999. From November 1998 until January 1999, he was a consultant for
BEA Systems, Inc. From May 1997 to October 1998 he was the director and CEO of
WebLogic, Inc., a Java-based Application Server company which was acquired by
BEA Systems, Inc. in October, 1998. Previously he was the President and CEO of
Lockheed Martin Corporation's Commercial Software Business Unit, Formtek, from
January 1990 to May 1997. Mr. Kutay currently serves on the board of directors
of the WebLogic subsidiary of BEA Systems, Inc. and on the board of directors
and compensation committee of Graham Technology Solutions, Inc., a privately
held company. Mr. Kutay holds a B.S. and M.S. degree in Engineering from Middle
East Technical University and has completed graduate work at Carnegie Mellon
University.
Robert A. Lauer joined the Board of Directors of Docent in September 2000. Mr
Lauer retired from Andersen Consulting on August 31, 2000 having most recently
served as managing partner of Andersen Consulting's eHuman Performance global
line of business. During his 31-year career at Andersen Consulting, which began
on December 20, 1968, he served in numerous managing partner leadership roles
including: Global Change Management--Communications & High Tech industries from
1998 to 1999; and Americas Change Management practice from 1994 to 1998. Mr.
Lauer holds a Bachelor of Science degree in Industrial Engineering and an MBA
from Ohio State University.
Pardner Wynn co-founded Docent in June 1997 and is currently a member of its
Board of Directors and has been a member of Docent's audit committee from
January 2000 through April 2000. Mr. Wynn has held various positions with
Docent, including Chairman of the Board from June 1997 to January 2000,
President and Chief Executive Officer from June 1997 to December 1997 and Chief
Technology Officer from May 1998 to August 1998. Prior to founding Docent, in
January 1991 Mr. Wynn founded Stanford Testing Systems, a provider of test
preparation and skill assessment software and predecessor to Docent.
Previously, Mr. Wynn had served as Product Line Manager at Xilinx, Inc., a
manufacturer of field programmable logic arrays. Mr. Wynn holds a B.S. degree
in Electrical Engineering from Stanford University and an M.S. degree in
Electrical Engineering from Stanford University.
Board of Directors
Our board of directors is currently comprised of seven directors. The board
of directors designated a Compensation Committee in January 1999 and an Audit
Committee in January 2000. Prior thereto, there were no such committees of the
board of directors and decisions regarding the compensation of executive
officers were made by the board of directors as a whole. The Compensation
Committee, which consists of Messrs. Hall and Henkens, makes recommendations to
the Board concerning the compensation of our officers and directors and the
administration of our 1997 Stock Option Plan, 2000 Omnibus Equity Incentive
Plan and 2000 Employee Stock Purchase Plan. The Audit Committee, which consists
of Messrs. Hall,
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Henkens and Kutay, reviews our financial controls, evaluates the scope of the
annual audit, reviews audit results, consults with management and our
independent auditors prior to the presentation of financial statements to
stockholders and, as appropriate, initiates inquiries into aspects of our
internal accounting controls and financial affairs.
Upon the closing of this offering, the directors will be divided into three
classes, with each class to be elected every third year. Unless a director
resigns or is removed, the terms of Messrs. Wynn and Henkens will end at the
2001 annual stockholders' meeting; the terms of Messrs. Mandelkern and Hall
will end at the 2002 annual stockholders' meeting; and the terms of Messrs.
Ellett, Kutay and Lauer will end at the 2003 annual stockholders' meeting.
Our board of directors was most recently elected in July of 2000 at our
annual stockholders meeting. All of our current directors were then re-elected
except for Mr. Lauer, who was subsequently selected by the board. Our founders,
Pardner Wynn, Cynthia Wynn and David Mandelkern, are parties to a voting
agreement with our preferred stock investors concerning the election of the
between one to three directors that our common and preferred stockholders elect
voting together as a single class, currently Messrs. Ellett, Kutay and Lauer.
In any such election, all parties are to vote their shares as agreed by both
holders of a majority of the shares owned by the founders and holders of a
majority of the shares owned by the investors; otherwise, all parties are to
vote their shares so as to leave one or more vacancies on the board of
directors. These jointly-elected directors are in addition to the two directors
that the common stockholders elect voting separately as a class, who are
currently Messrs. Wynn and Mandelkern, and the two directors that the preferred
stockholders elect voting separately as a class, who are currently Messrs. Hall
and Henkens. This voting agreement expires upon completion of this offering.
Other than as provided in this voting agreement, there was no arrangement of
which we are aware pursuant to which any person was elected as one of our
officers or directors.
Director Compensation
Directors have not historically received any cash compensation from Docent
for their services as members of the board of directors, although members are
reimbursed for expenses in connection with attendance at board of directors and
committee meetings. Upon the closing of this offering, our non-employee
directors will receive $1,000 for every meeting of the board of directors they
attend and $500 for every meeting of a committee of the board of directors they
attend. Our directors are eligible to participate in our 2000 Omnibus Equity
Incentive Plan and our directors who are employees of Docent are eligible to
participate in our 2000 Employee Stock Purchase Plan.
After the closing of this offering, any non-management director upon first
becoming a Docent director will be granted a ten-year non-statutory option
under the 2000 Omnibus Equity Incentive Plan to purchase 40,000 common shares
with an exercise price equal to the market closing price that day. These
options will vest 25% as to 10,000 shares at the subsequent annual
shareholders' meeting and will vest 1/48th as to an additional 833 1/3 shares
every month thereafter. Each Docent non-management director who has served at
least six months at the time of a subsequent annual shareholders meeting shall
automatically receive a 10,000 share option grant which will vest at the rate
833 1/3 shares per month beginning three years after its date of grant.
Recently, Messrs. Hall, Henkens, Lauer and Wynn were each granted 40,000 non-
statutory options and Mr. Kutay was granted 44,000 non-statutory options at
exercise prices between $3.50 and $5.00 per share which vest 25% at the 2001
annual stockholders meeting and 1/48th every month thereafter. Mr. Lauer was
granted an additional 120,000 non-statutory stock options at an exercise price
of $3.50 per share for his services to us as a part-time employee.
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<PAGE>
These additional options vest at the rate of 10,000 per quarter until fully
vested at the end of three years.
Compensation Committee Interlocks and Insider Participation
Prior to the formation of the Compensation Committee, the board of directors
performed the functions typically assigned to a compensation committee. No
member of the Compensation Committee and none of our executive officers has a
relationship that would constitute an interlocking relationship with executive
officers and directors of another entity.
Norwest Venture Partners and its affiliated funds collectively have purchased
an aggregate of 8,068,339 shares of our Series A through F convertible
preferred stock for an aggregate of $15,226,776. One of our directors, Kevin
Hall, is a managing member of Norwest Venture Partners.
Advanced Technology Ventures and its affiliated funds have collectively
purchased an aggregate of 5,286,624 shares of our Series A through E
convertible preferred stock for an aggregate of $7,456,788. One of our
directors, Jos C. Henkens, is a general partner of Advanced Technology
Ventures.
Pardner Wynn, a director of Docent, has purchased an aggregate of 389,536
shares of our Series A through E convertible preferred stock for an aggregate
of $274,299. Mr. Wynn also owns an aggregate of 1,842,200 shares of our common
stock for which he paid less than $100.
Upon the closing of this offering, each outstanding share of Series A, B, B-
1, C, D, E and F convertible preferred stock will convert into one share of
common stock.
Prior to the completion of this offering we will have entered into
indemnification agreements with all of our officers and directors. These
indemnification agreements will contain provisions that may require us, among
other things, to indemnify our officers and directors against certain
liabilities that may arise by reason of their status or service as officers or
directors.
Required Number of Independent Directors
Under the rules of the Nasdaq National Market, we must have three independent
directors. For purposes of this rule, an independent director is a director
that is not an employee of ours and does not have other specified relationships
with us as specified in the Nasdaq's rules. We believe that Messrs. Hall,
Henkens and Kutay are independent directors for this purpose.
Executive Officers
Our executive officers are appointed by our board of directors and serve at
the pleasure of our board of directors until their successors are elected or
appointed or until their earlier resignation or removal.
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<PAGE>
Compensation
The following table sets forth in summary form information concerning the
compensation paid by us during the fiscal year ended December 31, 1999, to our
Chief Executive Officer and each of our four other most highly compensated
executive officers as well as our Vice President, Sales, who joined us in
October 1999, and our Chief Financial Officer who joined us in November, 1999.
These individuals are referred to as the named executive officers in this
prospectus.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
----------------- ------------
Common Stock
Fiscal Underlying
Name and Principal Position Year Salary Bonus Options
--------------------------- ------ -------- -------- ------------
<S> <C> <C> <C> <C>
David R. Ellett ........................ 1999 $229,327 $318,474 --
Chief Executive Officer
David Mandelkern ....................... 1999 168,173 63,313 --
Executive Vice President
E. Keith Finch(1)....................... 1999 163,077 61,500 --
Vice President, Professional Services
Kathleen A. Gogan ...................... 1999 163,077 31,522 --
Vice President, Marketing
Richard L. Dellinger ................... 1999 168,173 46,875 62,500
Vice President, Engineering
Mary A. Egan-Lorigan.................... 1999 31,066 25,000 262,100
Vice President, Sales
Donald E. Lundgren...................... 1999 27,259 -- 200,000
Vice President and Chief Financial
Officer
</TABLE>
--------
(1) Mr. Finch ceased as our employee on June 1, 2000.
David R. Ellett and David Mandelkern each have severance agreements with us
which provide that, if their employment with us is terminated without cause,
they will be entitled to receive six months salary and benefits.
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<PAGE>
Option Grants In Last Fiscal Year
The following table sets forth, as to the named executive officers,
information concerning stock options granted during the fiscal year ended
December 31, 1999 for the only named officers who received option grants in
1999.
The information regarding stock options granted to the named executive
officers as a percentage of total options granted to employees in the fiscal
year, as disclosed in the table is based upon options to purchase an aggregate
of 2,199,525 shares of common stock that were granted to all employees and
directors as a group, including the named executive officers, in the fiscal
year ended December 31, 1999.
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------
% of
Total
Number of Options Potential Realizable Value
Common Granted at Assumed Annual Rates of
Shares to Stock Price Appreciation for
Underlying Employees Exercise Option Term
Options in Fiscal Price Expiration --------------------------------
Name Granted 1999 (per share) Date 0% 5% 10%
---- ---------- --------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard L.
Dellinger (1).......... 62,500 2.84% $0.30 02/02/09 $ 606,250 $ 987,518 $1,572,456
Mary A. Egan Lorigan
(2).................... 262,100 11.92 1.00 10/08/09 2,358,900 3,842,400 6,118,378
Donald E. Lundgren (3).. 200,000 9.09 1.00 12/02/09 1,800,000 2,932,011 4,668,736
</TABLE>
--------
(1) Vests at the rate of 1/48th of the shares at the end of each full calendar
month elapsed from February 1, 1999, subject to continued service as an
employee or consultant.
(2) 25% vest on October 18, 2000, with 1/48th vesting at the end of each full
calendar month thereafter, subject to continued service as an employee or
consultant.
(3) 150,000 options vest 25% on October 19, 2000, and 50,000 options vest 25%
on November 8, 2001, in each case with 1/48th vesting at the end of each
full calendar month thereafter, subject to continued service as an employee
or consultant.
The potential realizable value at assumed 0%, 5% and 10% annual rates of
stock appreciation are based upon an assumed initial public offering price of
$10.00 per share over the ten-year term, compounded annually and subtracting
from that result the total option exercise price. These rates of appreciation
are mandated by the rules of the Securities and Exchange Commission and do not
represent our estimate or projection of our future stock prices. Actual gains,
if any, on stock option exercises will be dependent on the future performance
of our common stock.
The named executive officers have each signed agreements which provide that,
if an officer is terminated within six months after any change in control of
Docent and such termination is not for cause or for good reason, the vesting of
all the officer's unvested shares shall be accelerated one year forward.
Aggregated Option Exercises In Last Fiscal Year And Fiscal Year-End Option
Values
The following table sets forth information concerning option exercises during
1999 and unexercised options outstanding on December 31, 1999 with respect to
each of the named executive officers.
The value realized represents the difference between the deemed value of the
common stock on the date of exercise used by us for accounting purposes and the
exercise price of the option.
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<PAGE>
The value of unexercised in-the-money options was calculated by determining
the difference between $10.00 (the assumed initial public offering price) and
the exercise price of the option.
<TABLE>
<CAPTION>
Value Of
Number of Unexercised
Unexercised Options In-The-Money
at Fiscal Year- Options at Fiscal
Shares End(1) Year-End
Acquired Value -------------------- -----------------
Name on Exercise Realized Vested Unvested Vested Unvested
---- ----------- -------- --------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
David R. Ellett......... -- $ -- -- -- $ -- $ --
David Mandelkern........ -- -- -- -- -- --
E. Keith Finch(2)....... -- -- 51,041 123,959 468,143 1,246,857
Kathleen A. Gogan....... -- -- 73,689 178,961 722.152 1,753,818
Richard L. Dellinger.... -- -- 13,020 149,480 126,294 1,469,956
Donald E. Lundgren...... -- -- -- 200,000 -- 1,800,000
Mary A. Egan Lorigan.... -- -- -- 262,100 -- 2,358,900
</TABLE>
--------
(1) Due to early exercise provisions, all options, whether vested or unvested,
are fully exercisable. The shares underlying unvested options, if exercised
prior to vesting, would be subject to repurchase by the Company at a price
equal to the option exercise price.
(2) Mr. Finch ceased as our employee on June 1, 2000.
Company Repurchase Rights
Certain of the named executive officers exercised their options prior to such
options vesting, and another purchased his shares subject to vesting, in each
case with the unvested shares subject to repurchase at cost by us if the
officer's employment terminates for any reason. As of September 1, 2000, the
number of shares subject to such repurchase, the monthly rate of decline in
such number of repurchasable shares, and the repurchase price per share to us
are shown in the table below:
<TABLE>
<CAPTION>
Shares Monthly Repurchase Price
Name Repurchasable Decline Per Share
---- ------------- ------- ----------------
<S> <C> <C> <C>
David R. Ellett............................ 481,250 22,917 $0.10
David R. Ellett............................ 283,333 --(1) 1.00
David Mandelkern........................... 20,289 20,313 0.10
David Mandelkern........................... 142,709 --(2) 1.00
Kathleen A. Gogan.......................... 136,852 5,264 0.20
Richard L. Dellinger....................... 78,125 5,208 0.10
Richard L. Dellinger....................... 5,260 1,302 0.30
Donald E. Lundgren......................... 200,000 --(3) 1.00
</TABLE>
--------
(1) As to 85,417 shares, the repurchase option has a monthly decline of 2,083
shares. As to 97,916 shares, the repurchase option lapses in one
installment on January 1, 2004, and as to 100,000 shares, the repurchase
option lapses in one installment on January 1, 2005.
(2) As to 42,709 shares, the repurchase option has a monthly decline of 1,042
shares. As to 50,000 shares, the repurchase option has a monthly decline of
1,042 shares starting on November 1, 2000. As to the remaining 50,000
shares, the repurchase option lapses in 25,000 share installments on each
of January 1, 2004, and 2005.
(3) As to 150,000 shares, the repurchase option has a monthly decline of 3,125
shares starting on November 8, 2000. As to 50,000 shares, the repurchase
option has a monthly decline of 1,042 shares starting on November 8, 2001.
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<PAGE>
Compensation Plans
1997 Stock Option Plan
The 1997 Stock Option Plan is administered by our compensation committee. The
1997 Stock Option Plan provides a means by which our employees, directors and
consultants may be given an opportunity to purchase shares of our common stock.
The 1997 Stock Option Plan provides for the grant of incentive stock options as
defined in Section 422 of the Internal Revenue Code, the grant of nonstatutory
stock options, and the grant of stock purchase rights.
A total of 2,500,000 shares of common stock were originally reserved for
issuance under the 1997 Stock Option Plan. The number of shares reserved for
issuance under the plan has increased in multiple increments ultimately
resulting in a total of 8,300,000 shares.
The 1997 Stock Option Plan contains the following program features:
. Qualified employees are eligible for the grant of incentive stock
options to purchase shares of common stock;
. The compensation committee determines the exercise price of options, but
in no event is the option price for incentive stock options less than
100% of the fair market value of the stock on the date of grant; and
. The exercise price may, at the discretion of the compensation committee,
be paid in, among other things, cash, cash equivalents, full-recourse
promissory notes, past services or future services.
As of September 1, 2000, of the 8,300,000 shares available for issuance under
the 1997 Stock Option Plan, 4,730,105 shares were subject to outstanding
options; 3,463,616 shares had been issued pursuant to the exercise of stock
options or stock purchase rights and were currently outstanding, net of prior
repurchases of 70,107 shares; and 106,279 shares remained available to be the
subject of future-granted stock options or stock purchase rights. During
September, an additional 1,000,000 shares were reserved for issuance under the
1997 Stock Option Plan.
The board of directors is able to amend or modify the 1997 Stock Option Plan
at any time, subject to any required stockholder approval. The 1997 Stock
Option Plan will terminate on July 24, 2007. Upon closing this offering, we do
not intend to grant further options or stock purchase rights under this plan.
2000 Omnibus Equity Incentive Plan
The 2000 Omnibus Equity Incentive Plan was adopted by our board of directors
on March 23, 2000 and approved by our stockholders on July 18, 2000. The 2000
Omnibus Equity Incentive Plan will be administered by our compensation
committee. The 2000 Omnibus Equity Incentive Plan provides for the direct award
or sale of shares of common stock and for the grant of stock appreciation
rights and options to purchase shares of common stock. The 2000 Omnibus Equity
Incentive Plan provides for the grant of incentive stock options as defined in
Section 422 of the Internal Revenue Code to employees and the grant of
nonstatutory stock options, restricted shares, stock units and stock
appreciation rights to employees, non-employee directors, advisors and
consultants.
6,000,000 shares of common stock have been reserved for issuance under the
2000 Omnibus Equity Incentive Plan. Each year, the number of shares reserved
for issuance under the plan increases by 3% of the Company's outstanding shares
as of close of business on December 31 of the plan year, or such lower number
of shares determined by the board of directors. In no event may one participant
in the 2000 Omnibus Equity Incentive Plan receive option grants or direct stock
issuances for more than 1,000,000 shares in the aggregate per fiscal year.
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<PAGE>
The 2000 Omnibus Equity Incentive Plan has the following program features:
. Qualified employees will be eligible for the grant of incentive stock
options to purchase shares of common stock;
. Qualified non-employee directors will be eligible to receive automatic
option grants, to be made at periodic intervals, to purchase shares of
common stock at an exercise price equal to 100% of the fair market value
of those shares on the date of grant;
. The compensation committee will determine the exercise price of options
or the purchase price of stock purchase rights, but in no event will the
option price for incentive stock options be less than 100% of the fair
market value of the stock on the date of grant;
. The exercise price or purchase price may, at the discretion of the
compensation committee, be paid in, among other things, cash, cash
equivalents, full-recourse promissory notes, past services, future
services, surrender of outstanding stock held for one year, or the
Company withholding shares upon request of the optionees which would
otherwise have been issued upon exercise taken at their fair market
value.
The 2000 Omnibus Equity Incentive Plan includes change in control provisions
that may result in the accelerated vesting of outstanding option grants and
stock issuances. The committee may grant options or stock purchase rights in
which all or some of the shares shall become vested in the event of a change in
control of Docent. Change in control is defined under the 2000 Omnibus Equity
Incentive Plan as:
. a change in the composition of the board of directors, as a result of
which fewer than one-half of the incumbent directors are directors who
either:
-- had been directors of Docent twenty-four months prior to the change;
or
-- were elected, or nominated for election, to the board with the
affirmative votes of at least a majority of the directors who had
been directors 24 months prior to the change and who were still in
office at the time of the election or nomination; or
. an acquisition or aggregation of securities by a person, as defined in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended, as a result of which the person becomes the beneficial owner of
twenty percent or more of the voting power of the Company's outstanding
securities.
The board of directors will be able to amend or modify the 2000 Omnibus
Equity Incentive Plan at any time, subject to any required stockholder
approval. The 2000 Omnibus Equity Incentive Plan will terminate no later than
March 23, 2010.
2000 Employee Stock Purchase Plan
On March 23, 2000, the board of directors adopted and on July 18, 2000, the
stockholders approved our 2000 Employee Stock Purchase Plan to be effective
upon completion of this offering. A total of 1,500,000 shares of common stock
have been reserved for issuance under our 2000 Employee Stock Purchase Plan.
The number of shares reserved for issuance under the 2000 Employee Stock
Purchase Plan will be increased on the first day of each of our fiscal years
beginning in 2001 through 2009 by the lesser of:
. that number of shares such that the total shares reserved comprise 4% of
our outstanding common stock at the close of business on the last day of
the immediately preceding fiscal year; or
. the number of shares determined by the board of directors.
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<PAGE>
Our 2000 Employee Stock Purchase Plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, is administered by the board of
directors or by a committee appointed by the board. Employees (including
officers and employee directors of Docent but excluding 5% or greater
stockholders) are eligible to participate if they are employees as of the close
of this offering or if they have been employees for three consecutive months
provided that they are customarily employed for more than 20 hours per week and
for more than five months in any calendar year. Our 2000 Employee Stock
Purchase Plan permits eligible employees to purchase common stock through
payroll deductions, which may not exceed 15% of an employee's compensation.
The 2000 Employee Stock Purchase Plan will be implemented by a series of
offering periods of a duration of either six months or one year, as determined
by the board of directors, with new offering periods, other than the first
offering period, commencing on January 1 and July 1 of each year. The board of
directors will establish accumulation periods for our 2000 Employee Stock
Purchase Plan, none of which will exceed six months. During each accumulation
period, payroll deductions will accumulate, without interest. On the purchase
dates set by the board of directors for each accumulation period, accumulated
payroll deductions will be used to purchase common stock. The initial offering
period is expected to commence on the date of this offering and end on either
December 31, 2000; June 30, 2001; or December 31, 2001, as determined by the
board of directors. The initial accumulation period is expected to begin on the
date of this offering and end on December 31, 2000.
The purchase price will be equal to 85% of the fair market value per share of
common stock on either the last trading day of the accumulation period or on
the last trading day before the start of the applicable offering period,
whichever is less. In the case of the offering period beginning on the close of
this offering, the purchase price will be equal to 85% of initial offering
price in this offering or the fair market value per share of common stock on
the last trading day of the accumulation period. Employees may withdraw their
accumulated payroll deductions at any time before the last day of an
accumulation period. Participation in our 2000 Employee Stock Purchase Plan
ends automatically on termination of employment with us. Immediately prior to
the effective time of a corporate reorganization, the accumulation period then
in progress shall terminate and stock will be purchased with the accumulated
payroll deductions, unless the 2000 Employee Stock Purchase Plan is assumed by
the surviving corporation or its parent corporation pursuant to the plan of
merger or consolidation. Our 2000 Employee Stock Purchase Plan will terminate
on March 23, 2010, unless sooner terminated by the board of directors.
401(k) Plan
We have established a tax-qualified employee savings and retirement plan for
which our employees are generally eligible. Pursuant to the 401(k) Plan,
employees may elect to reduce their current compensation and have the amount of
such reduction contributed to the 401(k) Plan. To date, we have made no
matching contributions. The 401(k) Plan is intended to qualify under Section
401 of the Internal Revenue Code of 1986, as amended, so that contributions to
the 401(k) Plan and income earned on plan contributions are not taxable to
employees until withdrawn from the 401(k) Plan, and so that contributions by
us, if any, will be deductible by us when made.
Limitation On Liability And Indemnification Matters
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except
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for any liability arising with respect to (1) any breach of their duty of
loyalty to the corporation or its stockholders, (2) acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law
or (3) any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation and bylaws upon the closing of this offering
will further provide that we are required to indemnify our directors and
executive officers and may indemnify our other officers and employees and
agents to the fullest extent permitted by Delaware law. We believe that
indemnification under our certificate of incorporation covers negligence and
gross negligence on the part of indemnified parties.
Prior to the closing of this offering, we will have entered into agreements
to indemnify our directors and officers, in addition to indemnification
provided for in our certificate of incorporation. These agreements, among other
things, require us to indemnify these directors and officers for certain
expenses (including attorneys' fees), judgments, fines and settlement amounts
incurred by any such person in any action or proceeding, including any action
by or in our right, arising out of that person's services as a director or
officer of us or any of our subsidiaries or any other company or enterprise to
which the person provides services at our request.
At present, there is no pending litigation or proceeding involving any of our
directors, officers, employees or agents where indemnification would be
required or permitted. Except for this claim against us and Mr. Ellett
described in "Business--Legal Proceedings" above, we are not aware of any
pending or threatened litigation or proceeding that might result in a claim for
such indemnification. We believe that these provisions and agreements are
necessary to attract and retain qualified directors and officers.
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CERTAIN TRANSACTIONS
Transactions with Promoters
Stanford Testing Systems, Inc., wholly owned by Pardner and Cynthia Wynn, our
promoters and then husband and wife, engaged in test preparation, test
assessment and education content in the academic field since its incorporation
in 1994. The Wynns paid $100 for their shares in Stanford Testing Systems, Inc.
Stanford Testing Systems, Inc. began to market corporate online learning
products in earnest in 1997 and in June 1997, incorporated two wholly-owned
subsidiaries, Docent, Inc. and TestPrep, Inc., in order to separate its two
businesses. The academic market assets of Stanford Testing Systems, Inc. and
its tradename, were transferred to TestPrep, Inc. in exchange for 1,000 shares.
These shares were subsequently distributed to the Wynns who later disposed of
them. Stanford Testing Systems, Inc., and its remaining corporate online
learning business, was merged into Docent on June 27, 1997, with the Wynns
ending up owning 3,725,000 Docent shares. On the same day, investors purchased
Series A Preferred shares, as described below, and shortly thereafter David
Mandelkern, also a promoter, purchased 975,000 common shares in exchange for a
$97,500 promissory note secured by his shares and bearing 6% interest and due
in 20 years or earlier if his employment terminates or he sells the shares.
As part of these transactions, the Wynns and Mr. Mandelkern agreed to subject
a portion of their shares to repurchase at $0.10, with the repurchase option to
lapse over 30 months for the Wynns and 40 months for Mr. Mandelkern should the
employment of Mr. Wynn or Mr. Mandelkern cease. On September 30, 1998, Mr. Wynn
resigned and we bought back 509,275 shares from each of the Wynns, leaving them
each with 1,353,225 common shares which subsequently have been reallocated. We
bought back these shares at $0.20 rather than $0.10 in light of the amicable
departure and lack of severance pay. Until this offering, the Wynns,
Mr. Mandelkern, and our major preferred shareholders had an agreement on how to
vote their shares in an election of directors and another agreement providing
for rights of co-sale and first refusal on any sale of their shares.
Transactions With Management And Others
Since our inception, there has not been, nor is there currently proposed, any
transaction or series of transactions to which we were or are a party in which
the amount involved exceeded or will exceed $60,000 and in which any director,
executive officer, holder of more than 5% of any class of our capital stock or
any member of the immediate family of any of the foregoing persons had or will
have a direct or indirect material interest, other than the transactions
described below, the cash and equity compensation described under Management
above and our strategic relationship with Andersen Consulting LLP described on
page 48.
We did not sell any shares of common stock to any of our executive officers
or directors in the fiscal year ended December 31, 1999. As of June 30, 2000,
Mr. Mandelkern was indebted to us in the amount of $97,500 plus interest
accrued since July 9, 1997, at the rate of 6% per year, in connection with a
loan made to enable him to purchase 975,000 shares of common stock. As of June
30, 2000, Mr. Ellett was indebted to us in the amount of $103,000 plus interest
accrued since September 30, 1998 at the rate of 5.54% per year. He incurred
this indebtedness in connection with a loan made to enable him to purchase
1,030,000 of the 1,100,000 shares of common stock he acquired by exercising
options in addition to the other 70,000 shares for which he paid $7,000 cash.
We had offered to make six-year full recourse loans to the named executive
officers at the applicable federal interest rate to pay all or part of the
exercise price of options granted to them during or after December 1999. Such
loans would be secured by the shares so acquired. As a result, in addition to
the loans described above, as of September 1, 2000 Mr. Ellett was indebted to
us in the amount of $297,916, plus
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interest accrued since August 11, 2000 at the rate of 6.62%, in connection with
loans made to enable him to purchase 297,916 shares of common stock through the
exercise of options; Mr. Mandelkern was indebted to us in the amount of
$150,000, plus interest accrued since August 16, 2000 at the rate of 6.62%, in
connection with loans made to enable him to purchase 150,000 shares of common
stock through the exercise of options; and Mr. Lundgren was indebted to us in
the amount of $200,000, plus interest accrued since July 31, 2000 at the rate
of 6.62%, in connection with loans made to enable him to purchase 200,000
shares of common stock through the exercise of options.
Between June 1997 and September 2000, we sold an aggregate of 24,710,135
shares of convertible preferred stock in the following rounds of financing:
. We sold 5,799,998 shares of Series A convertible preferred stock in June
1997 at a price of $0.675 per share;
. We sold 2,000,000 shares of Series B convertible preferred stock in June
1998 at a price of $1.00 per share;
. We sold 833,333 shares of Series B-1 convertible preferred stock in
September 1998 at a price of $1.20 per share;
. We sold 2,036,717 shares of Series C convertible preferred stock in
November 1998, and 541,315 shares of Series C convertible preferred
stock in March 1999 at a price of $1.86 per share;
. We sold 5,856,645 shares of Series D convertible preferred stock in
August 1999, 174,825 shares of Series D convertible preferred stock in
September 1999, 699,300 shares of Series D convertible preferred stock
in November 1999 and 449,650 shares of Series D convertible preferred
stock in December 1999 at a price of $2.86 per share;
. We sold 3,719,477 shares of Series E convertible preferred stock in
March and April 2000 at a price of $7.52 per share; and
. We sold 2,598,875 shares of Series F convertible preferred stock in
August and September 2000 at a price of $7.52 per share.
The following table summarizes purchases, valued in excess of $60,000, of
shares of preferred stock by our directors, executive officers and our 5%
stockholders:
<TABLE>
<CAPTION>
Number of Number of Number of Number of Number of Number of Number of
Shares of Shares of Shares of Shares of Shares of Shares of Shares of
Purchaser Series A Series B Series B-1 Series C Series D Series E Series F
--------- --------- --------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Norwest Venture Partners
VI(1).................. 2,592,592 984,275 410,417 2,150,539 1,398,601 531,915 531,915
Advanced Technology
Ventures IV(2)......... 2,592,592 984,275 410,417 403,230 699,301 196,809
Pardner Wynn............ 370,370 10,000 4,166 5,000 -- --
Gilde IT Fund(3)........ -- -- -- -- 1,748,251 132,979 99,700
INVESCO Private Capital,
Inc.(4)................ -- -- -- -- 1,748,252 -- 82,713
Andersen Consulting,
LLP(5)................. -- -- -- -- -- -- --
</TABLE>
--------
(1) Itasca VC Partners VI, LLP is the general partner of Norwest Equity
Partners VI, LP and has the sole voting and investment power over the
shares held by Norwest Equity Partners VI, LP. General Partners George J.
Still and John P. Whaley share the investment and voting power over Company
shares beneficially owned by Itasca V Partners VI, LP. Kevin Hall, a
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<PAGE>
partner of Itasca VC Partners VI, LLP and one of our directors, disclaims
beneficial ownership of the shares held by Norwest Equity Partners VI, LP
except to the extent of his pecuniary interest therein.
(2) General Partners Jos Henkens, Michael Frank, Pieter Schiller and Steve
Baloff share the investment and voting power over Company shares
beneficially owned by the following Advanced Technology Ventures entities:
Advanced Technology Ventures owns 196,809 shares of Series E convertible
preferred stock, Advanced Technology Ventures I owns 174,825 shares of
Series D convertible preferred stock and Advanced Technology Ventures IV
owns 4,933,740 shares of various series of convertible preferred stock. Jos
Henkens, a general partner of Advanced Technology Ventures IV and one of
our directors, disclaims beneficial ownership of the shares held by
Advanced Technology Ventures IV except to the extent of his pecuniary
interest therein.
(3) Includes 250,000 shares of common stock issuable within 60 days upon the
exercise of a warrant. Gilde IT Fund's executive committee, which is
comprised of Leondert van Driel, Boudewijn Molenaar and Toon den Heijer,
share the investment and voting power over Company shares beneficially
owned by Gilde IT Fund.
(4) Represents 1,061,888 shares of Series D convertible preferred stock held by
Citiventure 96 Partnership, L.P., 243,706 shares of Series D convertible
preferred stock held by Chancellor Private Capital Partners III, L.P.,
41,259 shares of Series D convertible preferred stock held by Chancellor
Private Capital Offshore Partners I, C.V., and 401,399 shares of Series D
convertible preferred stock held by Chancellor Private capital Offshore
Partners II, L.P., INVESCO Private Capital, Inc. is the investment manger
for, and has the sole voting and investment power over the share held by,
Citiventure 96 Partnership, L.P., Chancellor Private Capital Partner III,
L.P., Chancellor Private Capital Offshore Partners I, C.V., and Chancellor
Private Capital Offshore Partners II, L.P.
(5) AC Ventures B.V. owns 531,915 shares of Series E convertible preferred
stock and 261,517 shares of Series F convertible preferred stock. Andersen
Consulting, LLP disclaims beneficial ownership of these shares. Andersen
Consulting LLP acquired and holds immediately exercisable warrants expiring
in March, 2003, to purchase 2,396,932 shares of Series E convertible
preferred stock with an exercise price of $7.52 per share. John T.
Kunzweiler has sole investment and voting power over Company shares
beneficially owned by Andersen Consulting, LLP.
In connection with the above transactions, we entered into agreements with
the investors providing for registration rights with respect to these shares.
The most recent such agreement is an Amended and Restated Investor Rights
Agreement dated April 2000, which restates and incorporates the registration
rights of all investors. For more information regarding this agreement, see
"Description of Capital Stock -- Registration Rights."
For more information regarding transactions with some of our officers and
directors and their affiliates, see "Compensation Committee Interlocks and
Insider Participation."
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of
our common stock as of September 1, 2000, by:
. each person or entity known to us to own beneficially more than 5% of
the outstanding shares of our common stock;
. each of the named executive officers;
. each of our directors; and
. all executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission. In computing the number
of shares beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of June 30, 2000 are deemed
outstanding. These shares, however, are not deemed outstanding for the purposes
of computing the percentage ownership of any other person. Except as indicated,
and subject to applicable community property laws, the stockholders named in
the table have sole voting and investment power with respect to the shares
beneficially owned by them.
Unless otherwise indicated, the address for the following stockholders is c/o
Docent, Inc., 2444 Charleston Road, Mountain View, California 94043.
The following table assumes conversion into common shares of 24,710,135
shares of preferred shares at the closing of this offering and assumes no
exercise of the underwriters' over-allotment option. Applicable percentage
ownership is based on 31,811,451 shares of common stock outstanding as of
September 1, 2000 and an additional 8,000,000 shares outstanding immediately
after completion of this offering.
<TABLE>
<CAPTION>
Percentage of
Number of Common Stock
Shares -----------------
Beneficially Before After
Name of Beneficial Owner Owned Offering Offering
------------------------ ------------ -------- --------
<S> <C> <C> <C>
5% Stockholders:
Norwest Venture Partners VI, LP(1)............. 8,700,254 27.3% 21.8%
Advanced Technology Ventures IV(2)............. 5,324,124 16.7 13.4
Andersen Consulting, LLP(3).................... 2,396,932 7.0 5.7
Gilde IT Fund(4)............................... 2,230,930 7.0 5.6
INVESCO Private Capital, Inc.(5)............... 1,830,965 5.8 4.6
Pardner Wynn(6)................................ 2,232,030 7.0 5.6
Directors and Executive Officers:
David R. Ellett(7)............................. 1,775,000 5.5 4.4
David Mandelkern(8)............................ 1,175,000 3.7 2.9
Richard L. Dellinger(9)........................ 557,500 1.7 1.4
Kathleen A. Gogan(10).......................... 312,650 1.0 *
E. Keith Finch(11)............................. 97,082 * *
Donald E. Lundgren(12)......................... 250,000 * *
Mary A. Egan Lorigan(13)....................... 437,100 1.4 1.1
Kevin G. Hall(14).............................. 40,000 * *
Jos C. Henkens(15)............................. 40,000 * *
Ali Kutay(16).................................. 44,000 * *
Robert A. Lauer(17)............................ 160,000 * *
Pardner Wynn(6)................................ 2,232,030 7.0 5.6
All directors and executive officers as a
group(14 persons)(18)......................... 7,365,362 21.9% 17.7%
</TABLE>
--------
* Less than 1% of the outstanding shares of common stock.
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(1) Principal address is 245 Lytton, Suite 250, Palo Alto, California 94301.
Itasca VC Partners VI, LLP is the general partner of Norwest Venture
Partners VI, LP and has the sole voting and investment power over the
shares held by Norwest Venture Partners VI, LP. Includes 100,000 shares
issuable upon exercise of warrants within sixty (60) days of September 1,
2000, which warrants terminate upon the closing of this offering if not
previously exercised. General Partners George J. Still and John P. Whaley
share the investment and voting power over Company shares beneficially
owned by Itasca VC Partners VI, LLP. Kevin Hall, a partner of Itasca VC
Partners VI, LLP and one of our directors, disclaims beneficial ownership
of the shares held by Norwest Venture Partners VI, LP except to the extent
of his pecuniary interest therein.
(2) Principal address is 485 Ramona Street, Suite 230, Palo Alto, California
94301. Includes 18,750 shares issuable upon exercise of warrants within
sixty (60) days of September 1, 2000, which warrants terminate upon the
closing of this offering if not previously exercised. General Partners Jos
Henkens, Michael Frank, Pieter Schiller and Steve Baloff share the
investment and voting power over Company shares beneficially owned by the
following Advanced Technology Ventures entities: 196,809 shares of common
stock held by Advanced Technology Ventures, 174,825 shares of common stock
held by Advanced Technology Ventures I and 4,933,740 shares of common
stock held by Advanced Technology Ventures IV. Jos Henkens, a general
partner of Advanced Technology Ventures IV and one of our directors,
disclaims beneficial ownership of the shares held by Advanced Technology
Ventures IV except to the extent of his pecuniary interest therein.
(3) Principal address is 200 Public Square, Suite 1900, Cleveland, Ohio 44114.
Excludes 793,432 shares owned by AC Ventures B.V. as to which Andersen
Consulting, LLP disclaims beneficial ownership. Includes 2,396,932 shares
of common stock issuable upon the exercise of a warrant within sixty (60)
days of September 1, 2000. John T. Kunzweiler has sole investment and
voting power over Company shares beneficially owned by Andersen
Consulting, LLP.
(4) Principal address is P.O. Box 85067, 3508 AB Utrecht, The Netherlands.
Includes 250,000 shares issuable upon the exercise of warrants within
sixty (60) days of September 1, 2000. Gilde IT Fund's executive committee,
which is comprised of Leondert van Driel, Boudewijn Molenaar and Toon den
Heijer, share the investment and voting power over Company shares
beneficially owned by Gilde IT Fund.
(5) Principal address of entities affiliated with INVESCO Private Capital,
Inc. is 1166 Sixth Avenue, New York, New York 10036. Represents 1,144,601
shares of common stock held by Citiventure 96 Partnership, L.P., 243,706
shares of common stock held by Chancellor Private Capital Partners III,
L.P., 41,259 shares of common stock held by Chancellor Private Capital
Offshore Partners I, C.V., and 401,399 shares of common stock held by
Chancellor Private Capital Offshore Partners II, L.P. INVESCO Private
Capital, Inc. is the investment manager for, and has the sole voting and
investment power over the shares held by, Citiventure 96 Partnership,
L.P., Chancellor Private Capital Partners III, L.P., Chancellor Private
Capital Offshore Partners I, C.V., and Chancellor Private Capital Offshore
Partners II, L.P. Alessandro Piol, Managing Director, has sole investment
and voting power over Company shares beneficially owned by INVESCO Private
Capital, Inc.
(6) Address is care of the Company, 2444 Charleston Road, Mountain View, CA
94043. Includes 294 shares issuable upon exercise of warrants within sixty
(60) days of September 1, 2000, which warrants terminate upon the closing
of this offering if not previously exercised. Includes 40,000 shares
issuable upon exercise of options within sixty (60) days of September 1,
2000, a portion of which would be subject to repurchase by us upon
termination of services as a member of our board of directors. Includes
5,000 shares held as trustee for each of Hannah G. Wynn, Jemima K. Wynn
and
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Nathaniel C. Wynn. Excludes 94,250 shares Mr. Wynn is in process of
transferring by gift to various third parties.
(7) Includes 764,583 shares subject to repurchase by us upon employment
termination, 481,250 at $0.10 per share and 283,333 shares at $1.00 per
share, and 377,084 shares issuable upon exercise of options within sixty
(60) days of September 1, 2000, a portion of which would be subject to
repurchase by us upon employment termination. Includes shares held in two
irrevocable trusts as to which his father-in-law is trustee and his minor
children, and their children, if any, are beneficiaries or contingent
beneficiaries.
(8) Includes 162,998 shares subject to repurchase by us upon employment
termination, 20,289 at $0.10 per share and 142,709 at $1.00 per share,
and 50,000 shares issuable upon exercise of options within sixty (60)
days of September 1, 2000, a portion of which would be subject to
repurchase by us upon employment termination.
(9) Includes 83,385 shares subject to repurchase by us upon employment
termination, 78,125 at $0.10 per share and 5,260 shares at $0.30 per
share, and 277,500 shares issuable upon exercise of options within sixty
(60) days of September 1, 2000, a portion of which would be subject to
repurchase by us upon employment termination.
(10) Includes 136,852 shares subject to repurchase by us upon employment
termination at $0.20 per share and 60,000 shares issuable upon exercise
of options within sixty (60) days of September 1, 2000, a portion of
which would be subject to repurchase by us upon employment termination.
(11) Mr. Finch ceased as our employee on June 1, 2000.
(12) Includes 200,000 shares subject to repurchase by us upon employment
termination at $1.00 per share and 50,000 shares issuable upon exercise
of options within sixty (60) days of September 1, 2000, a portion of
which would be subject to repurchase by us upon employment termination.
(13) Includes 437,100 shares issuable upon exercise of options within sixty
(60) days of September 1, 2000, a portion of which would be subject to
repurchase by us upon employment termination.
(14) Includes 40,000 shares subject to repurchase by us upon termination of
services as a member of our board of directors at $3.50 per share.
(15) Includes 40,000 shares issuable upon exercise of options within sixty
(60) days of September 1, 2000, a portion of which would be subject to
repurchase by us upon termination of services as a member of our board of
directors.
(16) Includes 44,000 shares issuable upon exercise of options within sixty
(60) days of September 1, 2000, a portion of which would be subject to
repurchase by us upon termination of services as a member of our board of
directors.
(17) Includes 160,000 shares issuable upon exercise of options within 60 days
of September 1, 2000, a portion of 40,000 of which would be subject to
repurchase by us upon termination of services as a member of our board of
directors and a portion of 120,000 of which would be subject to
repurchase by us upon termination of services as an employee and
consultant.
(18) Includes 1,780,978 shares issuable upon exercise of options exercisable
within 60 days of September 1, 2000.
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DESCRIPTION OF CAPITAL STOCK
Authorized And Outstanding Capital Stock
Our authorized capital stock as of September 1, 2000 consisted of 40,000,000
shares of common stock and 30,000,000 shares of convertible preferred stock. As
of September 1, 2000, there were outstanding 7,101,316 shares of common stock
and 24,710,135 shares of convertible preferred stock. Such shares were held of
record by a total of 148 stockholders.
Upon the closing of this offering:
. our certificate of incorporation will be amended and restated to provide
for total authorized capital consisting of 250,000,000 shares of common
stock and 5,000,000 shares of convertible preferred stock; and
. all shares of preferred stock will convert into common stock and a total
of 39,811,451 shares of common stock and no shares of preferred stock
will be outstanding, based on the number of shares outstanding as of
September 1, 2000 and assuming no exercise of the underwriters' over-
allotment option, after giving effect to the sale of common stock we are
offering.
Common Stock
The holders of our common stock are entitled to receive dividends as may be
declared by our board of directors and paid out of legally available funds.
Holders of shares of common stock are entitled to one vote per share upon all
matters upon which stockholders have the right to vote. Cumulative voting of
shares is not permitted. In the event of a voluntary or involuntary
liquidation, dissolution or winding up of Docent, the holders of our common
stock are entitled to receive and share ratably in all assets remaining
available for distribution to stockholders after payment of any preferential
amounts to which the holders of preferred stock may be entitled. Our common
stock has no preemptive rights and is not redeemable, assessable or entitled to
the benefits of any sinking fund. Shares of our common stock held by all other
persons are not convertible. All outstanding shares of our common stock are and
the common stock to be issued in this offering will be, validly issued, fully
paid and nonassessable.
Preferred Stock
As of the closing date of this offering, each outstanding share of preferred
stock will automatically convert into one share of common stock. Pursuant to an
amended and restated certificate of incorporation to be filed upon the closing
date, a total of 5,000,000 shares of preferred stock will be authorized for
future issuance, none of which has been designated in any series. Our board of
directors is authorized, without further stockholder action, to authorize and
issue any of the 5,000,000 undesignated shares of preferred stock in one or
more series and to fix the voting rights, liquidation preferences, dividend
rights, repurchase rights, conversion rights, preemption rights, redemption
rights and terms, including sinking fund provisions and certain other rights
and preferences of such shares of our preferred stock. The issuance of any
class or series of preferred stock could adversely affect the rights of the
holders of common stock by restricting dividends on, diluting the power of,
impairing the liquidation rights of common stock, or delaying, deferring or
preventing a change in control of Docent. We have no present plans to issue any
preferred stock.
Warrants
In March 1999, we issued warrants to purchase an aggregate of 119,962 shares
of common stock at an exercise price of $0.30 per share. These warrants expire
in November 2001.
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<PAGE>
In March 1998, we issued a warrant to purchase 10,000 shares of series B
convertible preferred stock at an exercise price of $1.25 per share. This
warrant expires in March 2003.
In April 1999, we issued warrants to purchase an aggregate of 228,493 shares
of series C convertible preferred stock at an exercise price of $1.86 per
share. These warrants expire in April 2006.
In March 1999, we issued a warrant to purchase up to 175,000 shares of
convertible preferred stock at an exercise price of the greater of $1.86 per
share or the highest purchase price per share paid by a purchaser of our
convertible preferred stock in a financing at any time after March 23, 1999. In
December 1999, 100,000 shares of Series D convertible preferred stock were
issued at $2.86 per share upon exercise of the warrant. The remaining
75,000 shares were not issued and the warrant expired at December 31, 1999.
In December 1999, we issued a warrant to purchase an aggregate of 250,000
shares of Series D convertible preferred stock at an exercise price of $2.86
per share. This warrant expires in December 2002.
In March 2000, we issued a warrant to purchase up to 200,000 shares of common
stock at an exercise price of $10.00. This warrant expires on October 31, 2000.
In March 2000, we issued warrants to purchase an aggregate of 2,446,932
shares of Series E convertible preferred stock at an exercise price of $7.52
per share. These warrants expire at various times over the next three years.
In April 2000, we issued a warrant to purchase that number of shares of
common stock equal to $274,733 divided by the exercise price of the warrant.
The exercise price will be at the initial public offering price if the offering
occurs within six months of the closing of Series E convertible preferred
stock, otherwise it will be $7.52 per share.
In September 2000, we issued a warrant to purchase that number of shares of
common stock equal to $162,500 divided by the exercise price of the warrant.
The exercise price will be at the initial public offering price if the offering
occurs within six months of the closing of Series F convertible preferred
stock, otherwise it will be $7.52 per share.
Upon completion of this offering, all of our warrants to purchase shares of
preferred stock will convert into the right to purchase the equivalent number
of shares of common stock at the same exercise price per share.
Registration Rights
Upon completion of this offering, the holders of 24,710,135 shares of common
stock issued upon conversion of the Series A, B, B-1, C, D, E and F preferred
stock and 228,500 shares of common stock issuable upon the exercise of certain
warrants have the right to cause us to register these shares under the
Securities Act as follows:
. Demand Registration Rights. At the earlier of December 31, 2001 or six
months after this offering, the holders of 20% of the common stock
issued upon conversion of Series A, B, B-1, C, D, E and F convertible
preferred stock may request that we register their shares with respect
to all or part of their registrable securities having aggregate gross
proceeds exceeding $7,500,000.
. Piggyback Registration Rights. The holders of common stock issuable upon
conversion of the Series A, B, B-1, C, D, E and F convertible preferred
stock may
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<PAGE>
request to have their shares registered anytime we file a registration
statement to register any of our securities for our own account or for
the account of others subject to a pro rata cutback to a minimum of 10%
of any offering.
. S-3 Registration Rights. The holders of common stock issued upon
conversion of the Series A, B, B-1, C, D, E and F convertible preferred
stock have the right to request registrations on Form S-3 if we are
eligible to use Form S-3 and have not already effected such an S-3
registration within the past twelve (12) months and if the aggregate
proceeds are at least $1,000,000.
Registration of shares of common stock pursuant to the exercise of demand
registration rights, piggyback registration rights or S-3 registration rights
under the Securities Act would result in these shares becoming freely tradable
without restriction under the Securities Act immediately upon the effectiveness
of such registration. See "Shares Eligible for Future Sale" and "Certain
Transactions."
We will pay all registration expenses, other underwriting discounts and
commissions in connection with any registration. The registration rights
terminate on or after completion of this offering for those holders whose
registrable securities may immediately be sold under Rule 144 during any 90-day
period.
Antitakeover Effects Of Provisions Of Our Certificate Of Incorporation and
Bylaws And Of Delaware Law
Certain provisions of our certificate of incorporation, bylaws and Delaware
law, described below, may have the effect of delaying, deferring or
discouraging another person from acquiring control of our company.
Certificate of Incorporation and Bylaws
Certain provisions of our certificate of incorporation and Bylaws are
designed to enhance the likelihood of continuity and stability of our board of
directors and in the policies formulated thereby. Accordingly, such provisions
may have the effect of preventing, discouraging or delaying any potential
acquisition proposals, whether by tender offer, proxy offer, or otherwise, or
changes in the control of our company and of preventing changes in our
management.
These provisions, summarized below, are expected to discourage certain types
of coercive takeover practices and inadequate takeover bids. These provisions
are also designed to encourage persons seeking to acquire control of us to
first negotiate with our board. We believe that the benefits of increased
protection of our potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure outweighs the
disadvantages of discouraging such proposals because negotiation of such
proposals could result in an improvement of their terms.
Classified Board
Our board of directors is divided into three classes. The directors in each
class will serve for a three-year term, with our stockholders electing one
class each year. This system of electing and removing directors 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.
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Restrictions on Persons Able to Call Stockholder Meetings
Under our bylaws, only the board of directors, the chairman of the board and
the president may call special meetings of stockholders.
Advance Notification of Stockholder Nominations and Proposals Required
Our bylaws establish advance notice procedures for stockholder proposals and
the nomination of candidates for election as directors, other than nominations
made by or at the direction of the board of directors or a committee of the
board.
Effect of Delaware Anti-Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law which,
subject to certain exceptions, prohibits a Delaware corporation from engaging
in any business combination with any interested stockholder for a period of
three years following the date that the stockholder became an interested
stockholder, unless:
. the transaction is approved by the board of directors prior to the date
the interested stockholder attained such status;
. upon the closing 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; or
. on or subsequent to such date the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders by at least two-thirds of the outstanding voting stock that
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. Generally, 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 voting stock. The existence of this provision may have an anti-
takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
Stockholder Action by Written Consent Eliminated
Upon the closing of this offering, the stockholders will not be able to take
action by using the written consent procedure. Rather, stockholders will only
be able to vote at a duly called meeting of stockholders.
Cumulative Voting
Our certificate of incorporation and bylaws do not provide for cumulative
voting in the election of directors unless required by Section 2115 as
described below.
Undesignated Preferred Stock
The authorization of undesignated preferred stock makes it possible for the
board of directors to issue preferred stock with voting or other rights or
preferences that could impede
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the success of any attempt to change our control. These and other provisions
may have the effect of deterring hostile takeovers or delaying changes in our
control or management.
Amendment of Charter Provisions Require Supermajority Vote
The amendment of any of the above provisions would require approval by
holders of at least 66 2/3% of the outstanding common stock.
Section 2115
We are currently subject to Section 2115 of the California General
Corporation Law. Section 2115 provides that, regardless of a company's legal
domicile, some provisions of California corporate law will apply to that
company if more than 50% of its outstanding voting securities are held of
record by persons having addresses in California and the majority of our
operations occur in California. For example, while we are subject to Section
2115, stockholders may cumulate votes in electing directors. This means that
each stockholder may vote the number of votes equal to the number of candidates
multiplied by the number of votes to which the stockholder's shares are
normally entitled in favor of one candidate. This potentially allows minority
stockholders to elect some members of the board of directors. When we are no
longer subject to Section 2115, cumulative voting will not be allowed and a
holder of 50% or more of our voting stock will be able to control the election
of all directors. In addition to this difference, Section 2115 has the
following additional effects:
. enables removal of directors with or without cause with majority
stockholder approval;
. places limitations on the distribution of dividends;
. extends additional rights to dissenting stockholders in any
reorganization, including a merger, sale of assets or exchange of
shares; and
. provides for information rights and required filings in the event we
effect a sale of assets or complete a merger.
We anticipate that our common stock will be qualified for trading as a
national market security on the Nasdaq National Market and that we will have at
least 800 stockholders of record by the record date for our 2001 annual meeting
of stockholders. If these two conditions occur, then we will no longer be
subject to Section 2115 as of the record date for our 2001 annual meeting of
stockholders.
Transfer Agent And Registrar
The transfer agent and registrar for our common stock is Computershare Trust
Company, Inc. Its telephone number is 303/986-5400.
Listing
We have applied to list our common stock on the Nasdaq National Market under
the trading symbol "DCNT."
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 39,811,451 shares of common
stock outstanding. Of these shares, the 8,000,000 shares sold in this offering
will be freely tradable without restriction under the Securities Act, unless
purchased by our "affiliates," as that term is defined in Rule 144 under the
Securities Act. Substantially all shares of our stock outstanding prior to this
offering are subject to 180-day lock-up agreements and may not be sold in the
public market prior to the expiration of the lock-up agreements. We are not
aware of any stockholder with registration rights who currently intends to
exercise any of their registration rights, and the registration rights would
not permit any stockholder to break the lock-up agreements. We are not aware
that any of our officers, directors or current stockholders intend to ask for
consent to offer, sell or otherwise dispose of the common stock within the
lock-up period. Upon the expiration of the lock-up agreements, approximately
25,493,099 additional shares will be available for sale in the public market,
subject in some cases to compliance with the volume and other limitations of
Rule 144.
<TABLE>
<CAPTION>
Days After Date of This Shares Eligible
Prospectus for Sale Comment
----------------------- --------------- -------
<S> <C> <C>
Upon effectiveness...... 8,000,000 Freely tradable shares sold in this
offering
One hundred eighty-one 25,493,099 Substantially all holders of securities
(181) days............. are bound by lock-up agreements. Lock-
up released; shares saleable under
Rule 144, 144(k) or 701
Various dates 6,318,352 Restricted securities held for one year
thereafter............. or less as of 180 days following
effectiveness
</TABLE>
Rule 144
Assuming other conditions are met, under Rule 144 a person (or persons whose
shares are aggregated) who has beneficially owned shares for at least one year
(including the holding period of any prior owner except an affiliate) is
entitled to sell within any three-month period commencing 90 days after the
date of this prospectus a number of shares that does not exceed the greater of
. 1% of the then outstanding shares of our common stock (approximately
shares immediately after this offering) or
. the average weekly trading volume during the four calendar weeks
preceding such sale, subject to the filing of a Form 144 with respect to
the sale.
A person (or persons whose shares are aggregated) who is not deemed to have
been our affiliate at any time during the 90 days immediately preceding the
sale who has beneficially owned his or her shares for at least two years
(including the holding period of any prior owner except an affiliate) is
entitled to sell these shares pursuant to Rule 144(k) without regard to the
volume limitations or other conditions described above. Affiliates must always
sell pursuant to Rule 144, even after the applicable holding periods have been
satisfied.
We cannot estimate the number of shares that will be sold under Rule 144, as
this will depend on the market price for our common stock, the personal
circumstances of the sellers and other factors. Prior to this offering, there
has been no public market for our common stock and there can be no assurance
that a significant public market for our common stock will develop or be
sustained after this offering. Any future sale of substantial amounts of our
common stock in the open market may adversely affect the market price of our
common stock.
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Lock-Up Agreements
We and our directors, executive officers, substantially all of our
stockholders and holders of options and warrants to purchase our capital stock
have agreed pursuant to the underwriting agreement and other agreements not to
sell any of our common stock without the prior consent of Deutsche Banc Alex.
Brown until 180 days from the effective date of the registration statement
except that we may, without such consent, grant options and sell shares
pursuant to our 2000 Omnibus Equity Incentive Plan and our 2000 Employee Stock
Purchase Plan.
Deutsche Bank Securities Inc. will determine whether to release shares
subject to a lock-up agreement on a case by case basis. In some of its prior
underwritings, Deutsche Bank Securities Inc. has considered such factors as the
likelihood of a material market effect from the sale of released shares, the
market price for the shares relative to the original offering price, the
hardship of any person requesting a waiver and the desirability of fostering an
orderly market for the shares. Deutsche Bank Securities Inc. has advised us
that it does not presently intend to release any shares from lock-up agreements
and will not consider its own position in our securities in making its case by
case determination.
Stock Options
We intend to file a registration statement on Form S-8 under the Securities
Act to register shares of our common stock that are subject to outstanding
options or reserved for issuance under our 2000 Omnibus Equity Incentive Plan
and our 2000 Employee Stock Purchase Plan within 180 days after the date of
this prospectus, thus permitting the resale of these shares by nonaffiliates in
the public market without restriction under the Securities Act.
Rule 701
Any of our employees or consultants who purchased his or her shares pursuant
to a written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701. Shares acquired under Rule 701 are restricted
securities. However, non affiliates may sell their Rule 701 shares without
having to comply with the current public information, holding period, volume
limitation or notice provisions of Rule 144. Affiliates may sell their Rule 701
shares without having to comply with the Rule 144 holding period restrictions.
Both non-affiliates and affiliates may sell their Rule 701 shares commencing 90
days after the effective date of this offering. The holders of approximately
six million shares of our common stock will be eligible to sell their shares in
reliance upon Rule 701 upon the expiration of the 180-day lockup period.
Registration Rights
After this offering, the holders of 24,710,135 shares of our common stock and
warrants to purchase 228,500 shares of our common stock will be entitled to
certain rights with respect to registration of such shares under the Securities
Act. Registration of these shares under the Securities Act would result in
these shares becoming freely tradable without restriction under the Securities
Act (except for shares purchased by our affiliates). See "Description of
Capital Stock--Registration Rights."
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives Deutsche Bank
Securities Inc., Dain Rauscher Incorporated and Thomas Weisel Partners LLC,
have severally agreed to purchase from Docent the following respective number
of shares of common stock at a public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ----------
<S> <C>
Deutsche Bank Securities Inc. ...................................
Dain Rauscher Incorporated.......................................
Thomas Weisel Partners LLC.......................................
----------
Total............................................................ 8,000,000
==========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock offered hereby are subject
to certain conditions precedent and that the underwriters will purchase all
shares of the common stock offered hereby, other than those covered by the
over-allotment option described below, if any of these shares are purchased.
The underwriters propose to offer the shares of common stock to the public at
the public offering price set forth on the cover of this prospectus and to
dealers at a price that represents a concession not in excess of $ per
share under the public offering price. The underwriters may allow and these
dealers may re-allow, a concession of not more than $ per share to other
dealers. After the initial public offering, representatives of the underwriters
may change the offering price and other selling terms.
We have granted to the underwriters an option, exercisable not later than 30
days after the date of this prospectus, to purchase up to 1,200,000 additional
shares of common stock at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the common stock offered hereby. To the extent that
the underwriters exercise this option, each of the underwriters will become
obligated, subject to conditions, to purchase approximately the same percentage
of additional shares of common stock as the number of shares of common stock to
be purchased by it in the above table bears to the total number of shares of
common stock offered hereby. We will be obligated, pursuant to the option, to
sell these additional shares of common stock to the underwriters to the extent
the option is exercised. If any additional shares of common stock are
purchased, the underwriters will offer the additional shares on the same terms
as those on which the 8,000,000 shares are being offered.
The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to us per share of common
stock. The underwriting fee is
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currently expected to be approximately 7% of the initial public offering price.
We have agreed to pay the underwriters the following fees, assuming either no
exercise or full exercise by the underwriters of the underwriters' over-
allotment option:
<TABLE>
<CAPTION>
Total Fees
-------------------
Without With
Exercise Exercise
Fee of Over- of Over-
per Allotment Allotment
Share Option Option
----- --------- ---------
<S> <C> <C> <C>
Fees paid by Docent................................ $ $ $
</TABLE>
In addition, we estimate that our share of the total expenses of this
offering, excluding underwriting discounts and commissions, will be
approximately $2,300,000.
We have agreed to indemnify the underwriters against some specified types of
liabilities, including liabilities under the Securities Act and to contribute
to payments the underwriters may be required to make in respect of any of these
liabilities.
Each of our officers and directors and substantially all of our stockholders
and holders of options and warrants to purchase our stock, have agreed not to
offer, sell, contract to sell or otherwise dispose of, or enter into any
transaction that is designed to, or could be expected to, result in the
disposition of any shares of our common stock or other securities convertible
into or exchangeable or exercisable for shares of our common stock or
derivatives of our common stock owned by these persons prior to this offering
or common stock issuable upon exercise of options or warrants held by these
persons for a period of 180 days after the effective date of the registration
statement of which this prospectus is a part without the prior written consent
of Deutsche Bank Securities Inc. This consent may be given at any time without
public notice. We have entered into a similar agreement with the
representatives of the underwriters, except that we may grant options and sell
shares pursuant to our 2000 Omnibus Equity Incentive Plan and our 2000 Employee
Stock Purchase Plan without such consent. There are no agreements between the
representatives and any of our stockholders or affiliates releasing them from
these lock-up agreements prior to the expiration of the 180-day period.
The representatives of the underwriters have advised us that the underwriters
do not intend to confirm sales to any account over which they exercise
discretionary authority.
In order to facilitate the offering of our common stock, the underwriters may
engage in transactions that stabilize, maintain, or otherwise affect the market
price of our common stock.
The underwriters may over-allot shares of our common stock in connection with
this offering, thus creating a short position for their own account. Short
sales involve the sale by the underwriters of a greater number of shares than
they are committed to purchase in the offering. A short position may involve
either "covered" short sales or "naked" short sales. Covered short sales are
sales made in an amount not greater than the underwriters' overallotment option
to purchase additional shares in the offering described above. The underwriters
may close out any covered short position by either exercising their
overallotment option or purchasing shares in the open market. In determining
the source of shares to close 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 shares through
the overallotment option. Naked short sales are sales in excess of the
overallotment 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
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<PAGE>
underwriters are concerned that there may be downward pressure on the price of
the shares in the open market after pricing that could adversely affect
investors who purchase in the offering.
Accordingly, to cover these short sales positions or to stabilize the market
price of our common stock, the underwriters may bid for, and purchase, shares
of our common stock in the open market. These transactions may be effected on
the Nasdaq National Market or otherwise. Additionally, the representatives, on
behalf of the underwriters, may also reclaim selling concessions allowed to an
underwriter or dealer. Similar to other purchase transactions, the
underwriters' purchases to cover the syndicate short sales or to stabilize the
market price of our common stock may have the effect of raising or maintaining
the market price of our common stock or preventing or mitigating a decline in
the market price of our common stock. As a result, the price of the shares of
our common stock may be higher than the price that might otherwise exist in the
open market. The underwriters are not required to engage in these activities
and, if commenced, may end any of these activities at any time.
We have applied for quotation of our common stock or the NASDAQ National
Market under the symbol "DCNT."
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 9% of our common stock being sold in this offering
for our vendors, employees, family members of employees, customers and other
third parties. These reserved shares will not be subject to lock-up agreements
with Deutsche Banc Alex. Brown. The number of shares of our common stock
available for sale to the general public will be reduced to the extent these
reserved shares are purchased. Any reserved shares that are not purchased by
these persons will be offered by the underwriters to the general public on the
same basis as the other shares in this offering.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has been named as a lead or co-manager on
176 filed public offerings of equity securities, of which 141 have been
completed, and has acted as a syndicate member in an additional 117 public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with
us pursuant to the underwriting agreement entered into in connection with this
offering and the share ownership of individuals associated with Thomas Weisel
Partners stated below.
As of April 10, 2000, we sold 3,719,477 shares of our Series E convertible
preferred stock in a private placement at a price of $7.52 per share. Each of
the shares of Series E convertible preferred stock is convertible at the option
of the holder into one share of our common stock. Deutsche Bank Securities Inc.
acted as a placement agent for us in connection with the private placement of
shares of our Series E convertible preferred stock. We incurred customary
placement fees to Deutsche Bank Alex. Brown for such services, including a cash
placement fee of $1,098,932 and a warrant to purchase shares of our common
stock. The number of shares of common stock underlying the warrant is equal to
$274,733 divided by the exercise price of the warrant. The exercise price of
the warrant will be at the private placement price of $7.52 per share if this
offering does not occur within six months of the closing of the Series E
convertible preferred stock offering and at the initial public offering price
if this offering occurs within six months of the closing of the Series E
convertible preferred stock offering. In this private placement, individuals
and funds associated with Deutsche Bank Securities Inc. purchased 159,579
shares of Series E convertible preferred stock, individuals and funds
associated with Dain Rauscher Incorporated purchased 33,245 shares of Series E
convertible preferred stock, and individuals associated with Thomas Weisel
Partners LLC purchased 5,320 shares of Series E
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<PAGE>
convertible preferred stock, all on the same terms as the other investors in
the private placement. The aggregate number of shares of Series E convertible
preferred stock purchased by individuals and funds associated with Deutsche
Bank Securities Inc., Dain Rauscher Incorporated and Thomas Weisel Partners LLC
was 198,144 shares. Upon conversion of these shares into common stock, based on
an assumed initial public offering price of $10.00, the value of these shares
is $1,981,440. The difference between the amount that individuals and funds
associated with Deutsche Bank Securities Inc., Dain Rauscher Incorporated, and
Thomas Weisel Partners LLC originally paid for the Series E convertible
preferred stock and the value of the Series E convertible preferred stock based
on the assumed initial public offering price of $10.00 equals $491,397. The
shares of Series E convertible preferred stock purchased by individuals and
funds associated with Deutsche Bank Securities Inc., Dain Rauscher Incorporated
and Thomas Weisel Partners LLC are restricted from sale, transfer, assignment
or hypothecation for a period of one year from the effective time of the
offering, except for transfers made to any member of the NASD participating in
the offering and the bona fide officers or partners of any member of the NASD
participating in the offering.
As of September 1, 2000, we sold 2,598,875 shares of our Series F convertible
preferred stock in a private placement at a price of $7.52 per share. Each of
the Series F convertible preferred stock is convertible at the option of the
holder into one share of our common stock. Deutsche Bank Securities Inc. also
acted as a placement agent for us in connection with the private placement of
shares of our Series F convertible preferred stock. We incurred customary
placement fees to Deutsche Banc Alex. Brown for such services, including a cash
placement fee of $650,000 and a warrant to purchase shares of our common stock.
The number of shares of common stock underlying the warrant is equal to
$162,500 divided by the exercise price of the warrant. The exercise price of
the warrant will be at the private placement price of $7.52 per share if this
offering does not close within six months of the closing of the Series F
convertible preferred stock offering and at the initial public offering price
if this offering occurs within six months of the closing of the Series F
convertible preferred stock offering.
Pricing Of This Offering
Prior to this offering, there has been no public market for our common stock.
Consequently, the initial public offering price for our common stock has been
determined by negotiation among us and the representatives of the underwriters.
Among the primary factors considered in determining the public offering price
were:
. prevailing market conditions;
. estimates of our business potential;
. the present stage of our development;
. the market capitalization and stage of development of other companies
that we and the representatives of the underwriters believe to be
comparable to our business; and
. our results of operations in recent periods.
The estimated initial public offering price range set forth on the cover of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
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<PAGE>
LEGAL MATTERS
Select legal matters with respect to the validity of the common stock offered
by this prospectus are being passed upon for us by Pillsbury Madison & Sutro
LLP, Palo Alto, California. At the close of this offering, an entity in which
attorneys and former attorneys of Pillsbury Madison & Sutro LLP are members,
and two current partners of Pillsbury Madison & Sutro LLP will beneficially own
a total of 39,815 shares of our common stock. Gibson Dunn and Crutcher LLP, San
Francisco, California will act as counsel to the underwriters in connection
with this offering. At the close of this offering, GDC Partners 2000 Fund, LLC,
an investment partnership composed of some current and former partners of
Gibson Dunn & Crutcher LLP, will beneficially own a total of 19,947 shares of
our common stock.
EXPERTS
The consolidated financial statements of Docent as of December 31, 1998 and
1999 and for each of the three years in the period ended December 31, 1999
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common
stock. This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules filed as part of the
registration statement. For further information with respect to us and our
common stock, we refer you to the registration statement and the exhibits and
schedule filed as a part of the registration statement. The registration
statement, including exhibits and schedule, may be inspected without charge at
the principal office of the Securities and Exchange Commission, Public
Reference Section, 450 Fifth Street N.W., Washington, D.C. 20549 and copies of
all or any part of it may be obtained from that office after payment of fees
prescribed by the Securities and Exchange Commission. You may obtain
information on the operation of the Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission maintains a Website that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission at
http://www.sec.gov.
Upon completion of this offering, Docent will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
and, in accordance therewith, will file periodic reports, proxy statements and
other information with the SEC. These periodic reports, proxy statements and
other information will be available for inspection and copying at the SEC's
public reference rooms and the Website of the SEC referred to above.
We intend to provide our stockholders with annual reports containing
financial statements audited by an independent public accounting firm and to
make available to our stockholders quarterly reports containing unaudited
financial data for the first three quarters of each year.
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<PAGE>
DOCENT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Convertible Preferred Stock and Stockholders'
Deficit................................................................. F-5
Consolidated Statements of Cash Flows.................................... F-7
Notes to Consolidated Financial Statements............................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Docent, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of convertible preferred stock and
stockholders' deficit and of cash flows present fairly, in all material
respects, the financial position of Docent, Inc. at December 31, 1998 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
March 28, 2000
F-2
<PAGE>
DOCENT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
Convertible
Preferred Stock
December 31, and Stockholders'
----------------- June 30, Equity at
1998 1999 2000 June 30, 2000
------- -------- ----------- -----------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.. $ 2,968 $ 12,773 $ 23,413
Accounts receivable, net... 307 809 2,227
Deferred contract costs.... -- 424 424
Prepaid expenses and other
current assets............ 17 159 235
------- -------- --------
Total current assets..... 3,292 14,165 26,299
Property and equipment, net.. 558 964 2,586
Deferred contract costs...... 250 -- --
Other assets................. 83 173 749
------- -------- --------
Total assets............. $ 4,183 $ 15,302 $ 29,634
======= ======== ========
Liabilities, Convertible
Preferred Stock and
Stockholders' Equity
(Deficit)
Current liabilities:
Accounts payable........... $ 275 $ 988 $ 1,694
Accrued liabilities........ 513 875 2,729
Deferred revenue........... 501 1,108 1,998
Capital lease obligations,
current portion........... 4 25 114
Notes payable, current
portion................... 137 1,231 991
------- -------- --------
Total current
liabilities............. 1,430 4,227 7,526
Capital lease obligations.... 13 47 92
Notes payable................ 149 1,070 944
------- -------- --------
Total liabilities........ 1,592 5,344 8,562
------- -------- --------
Commitments and Contingencies
(Note 4)
Convertible preferred stock,
$0.001 par value; 27,284
shares authorized; 10,670,
18,391, 22,111 (unaudited)
and no (unaudited) shares
issued and outstanding
(Liquidation value $60,217
(unaudited) at June 30,
2000)....................... 10,615 33,288 64,010 --
------- -------- -------- --------
Stockholders' equity
(deficit):
Common stock, $0.001 par
value; 38,800 shares
authorized; 5,160, 5,310,
6,230 (unaudited) and
28,342 (unaudited) shares
issued and outstanding.... 5 5 6 28
Additional paid-in
capital................... 655 11,218 44,511 108,499
Receivables from
stockholders.............. (201) (487) (201) (201)
Unearned stock-based
compensation.............. (330) (7,200) (19,883) (19,883)
Accumulated deficit........ (8,153) (26,866) (67,371) (67,371)
------- -------- -------- --------
Total stockholders'
equity (deficit)........ (8,024) (23,330) (42,938) 21,072
------- -------- -------- --------
Total liabilities,
convertible preferred
stock and stockholders'
equity (deficit)........ $ 4,183 $ 15,302 $ 29,634 $ 29,634
======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
DOCENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
-------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
License....................... $ 335 $ 297 $ 141 $ 41 $ 663
Services and maintenance...... 60 244 651 131 1,801
------- ------- -------- ------- --------
395 541 792 172 2,464
------- ------- -------- ------- --------
Costs and expenses:
Cost of license............... 35 23 29 4 10
Cost of services and
maintenance (exclusive of
stock-based compensation of
$0 and $78 in 1998 and 1999
and $2 and $139 (unaudited)
for the six months ended June
30, 1999 and 2000)........... 18 750 1,201 460 3,173
Research and development
(exclusive of stock-based
compensation of $3 and $517
in 1998 and 1999 and $92 and
$926 (unaudited) for the six
months ended June 30, 1999
and 2000).................... 653 2,242 2,482 1,049 1,856
Sales and marketing (exclusive
of stock-based compensation
of $22 and $3,030 in 1998 and
1999 and $339 and $15,614
(unaudited) for the six
months ended June 30, 1999
and 2000).................... 718 2,491 8,890 3,465 11,676
General and administrative
expenses (exclusive of stock-
based compensation of $241
and $909 in 1998 and 1999 and
$46 and $1,848 (unaudited)
for the six months ended June
30, 1999 and 2000)........... 524 1,232 2,321 667 2,485
Stock-based compensation...... -- 266 4,534 479 18,527
------- ------- -------- ------- --------
Total costs and expenses.... 1,948 7,004 19,457 6,124 37,727
------- ------- -------- ------- --------
Loss from operations........ (1,553) (6,463) (18,665) (5,952) (35,263)
Interest expense................ (7) (20) (310) (110) (203)
Other expense................... -- (2) (17) (1) (35)
Interest income................. 55 51 279 39 501
------- ------- -------- ------- --------
Net loss.................... (1,505) (6,434) (18,713) (6,024) (35,000)
Dividend accretion and deemed
dividend on convertible
preferred stock................ -- -- (1,354) -- (9,614)
------- ------- -------- ------- --------
Net loss attributable to
common stockholders........ $(1,505) $(6,434) $(20,067) $(6,024) $(44,614)
======= ======= ======== ======= ========
Net loss per share attributable
to common stockholders--basic
and diluted.................... $ (0.55) $ (2.24) $ (5.19) $ (1.67) $ (9.99)
======= ======= ======== ======= ========
Weighted average common shares
outstanding.................... 2,717 2,869 3,868 3,607 4,464
======= ======= ======== ======= ========
Pro forma net loss per share--
basic and diluted (unaudited).. $ (1.10) $ (1.64)
======== ========
Pro forma weighted average
common shares outstanding
(unaudited).................... 17,013 24,633
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DOCENT, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS'
DEFICIT
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Convertible
Preferred
Stock Common Stock Additional Receivables Unearned
-------------- -------------- Paid-In from Stock-based Accumulated
Shares Amount Shares Amount Capital Stockholders Compensation Deficit Total
------ ------- ------ ------ ---------- ------------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1996.................... -- $ -- 3,725 $ 4 $ 15 $ -- $ -- $ (214) $ (195)
Issuance of Series A
convertible preferred
stock for cash at $0.675
per share, net of
issuance costs of $48... 5,430 3,617 -- -- -- -- -- -- --
Issuance of Series A
convertible preferred
stock upon cancellation
of bridge loans......... 370 250 -- -- -- -- -- -- --
Issuance of common stock
for note receivable..... -- -- 975 1 97 (98) -- -- --
Net loss................ -- -- -- -- -- -- -- (1,505) (1,505)
------ ------- ------ --- ------- ----- ------- -------- --------
Balances, December 31,
1997.................... 5,800 3,867 4,700 5 112 (98) -- (1,719) (1,700)
Issuance of Series B
convertible preferred
stock for cash at $1 per
share, net of issuance
costs of $21............ 2,000 1,979 -- -- -- -- -- -- --
Issuance of Series B-1
convertible preferred
stock for cash at $1.20
per share, net of
issuance costs of $8.... 833 992 -- -- -- -- -- -- --
Issuance of Series C
convertible preferred
stock for cash at $1.86
per share, net of
issuance costs of $11... 2,037 3,777 -- -- -- -- -- -- --
Issuance of convertible
preferred stock warrants
in exchange for
services................ -- -- -- -- 14 -- -- -- 14
Unearned stock-based
compensation............ -- -- -- -- 366 -- (366) -- --
Issuance of options in
exchange for services... -- -- -- -- 12 -- -- -- 12
Amortization of unearned
stock-based
compensation............ -- -- -- -- -- -- 36 -- 36
Issuance of common stock
for cash on option
exercise................ -- -- 448 -- 49 -- -- -- 49
Issuance of common stock
on option exercise in
exchange for note
receivable.............. -- -- 1,030 1 102 (103) -- -- --
Repurchase of common
stock................... -- -- (1,018) (1) -- -- -- -- (1)
Net loss................ -- -- -- -- -- -- -- (6,434) (6,434)
------ ------- ------ --- ------- ----- ------- -------- --------
Balances, December 31,
1998.................... 10,670 10,615 5,160 5 655 (201) (330) (8,153) (8,024)
Issuance of Series C
convertible preferred
stock for cash at $1.86
per share, net of
issuance costs of $16... 541 834 -- -- -- -- -- -- --
Issuance of common stock
warrants in connection
with Series C
convertible preferred
stock financing......... -- -- -- -- 157 -- -- -- 157
Issuance of Series C
convertible preferred
stock warrants in
connection with
subordinated loan and
capital leases.......... -- -- -- -- 339 -- -- -- 339
Issuance of Series D
convertible preferred
stock for cash at $2.86
per share, net of
issuance costs of $51... 7,080 20,199 -- -- -- -- -- -- --
Issuance of convertible
preferred stock warrants
in exchange for
services................ -- -- -- -- 1,892 -- -- -- 1,892
Issuance of Series D
convertible preferred
stock upon exercise of
warrant................. 100 286 -- -- -- (286) -- -- (286)
Unearned stock-based
compensation............ -- -- -- -- 8,466 -- (8,466) -- --
Amortization of unearned
stock-based
compensation............ -- -- -- -- -- -- 1,596 -- 1,596
Issuance of options in
exchange for services... -- -- -- -- 310 -- -- -- 310
Issuance of common stock
in exchange for
services................ -- -- 126 -- 736 -- -- -- 736
Issuance of common stock
for cash on exercise of
options................. -- -- 93 -- 25 -- -- -- 25
Repurchase of common
stock................... -- -- (69) -- (8) -- -- -- (8)
Accretion of Series D
convertible preferred
stock................... -- 1,354 -- -- (1,354) -- -- -- (1,354)
Net loss................ -- -- -- -- -- -- -- (18,713) (18,713)
------ ------- ------ --- ------- ----- ------- -------- --------
Balances, December 31,
1999.................... 18,391 $33,288 5,310 $ 5 $11,218 $(487) $(7,200) $(26,866) $(23,330)
------ ------- ------ --- ------- ----- ------- -------- --------
</TABLE>
F-5
<PAGE>
DOCENT, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS'
DEFICIT
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Convertible
Preferred
Stock Common Stock Additional Receivables Unearned
-------------- -------------- Paid-In from Stock-based Accumulated
Shares Amount Shares Amount Capital Stockholders Compensation Deficit Total
------ ------- ------ ------ ---------- ------------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1999.................... 18,391 $33,288 5,310 $ 5 $11,218 $(487) $ (7,200) $(26,866) $(23,330)
Issuance of Series E
convertible preferred
stock for cash at $7.52
per share, net of
issuance costs of
$1,148.................. 3,719 26,613 -- -- -- -- -- -- --
Issuance of common stock
warrants in connection
with Series E
convertible preferred
stock financing......... -- -- -- -- 209 -- -- -- 209
Unearned stock-based
compensation............ -- -- -- -- 16,803 -- (16,803) -- --
Amortization of unearned
stock-based
compensation............ -- -- -- -- -- -- 4,405 -- 4,405
Stock-based compensation
on acceleration of
options upon
termination............. -- -- -- -- 363 -- -- -- 363
Issuance of options in
exchange for services... -- -- -- -- 557 -- (423) -- 134
Amortization of non-
employee stock-based
compensation............ -- -- -- -- -- -- 172 -- 172
Issuance of common stock
in exchange for
services................ -- -- 98 -- 607 -- (34) -- 573
Issuance of common stock
for cash on exercise of
options................. -- -- 823 1 479 -- -- -- 480
Repurchase of common
stock................... -- -- (1) -- (1) -- -- -- (1)
Repayment of receivables
from stockholders....... -- -- -- -- -- 286 -- -- 286
Issuance of preferred
stock warrants in
exchange for services... -- -- -- -- 12,556 -- -- -- 12,556
Issuance of common stock
warrants in exchange for
services................ -- -- -- -- 324 -- -- -- 324
Dividend accretion on
Series D convertible
preferred stock......... -- 3,818 -- -- (3,818) -- -- -- (3,818)
Dividend accretion on
Series E convertible
preferred stock......... -- 291 -- -- (291) -- -- -- (291)
Deemed dividend on
Series E convertible
preferred stock......... -- -- -- -- 5,505 -- -- (5,505) --
Net loss................ -- -- -- -- -- -- -- (35,000) (35,000)
------ ------- ----- --- ------- ----- -------- -------- --------
Balances, June 30, 2000
(unaudited)............. 22,110 $64,010 6,230 $ 6 $44,511 $(201) $(19,883) $(67,371) $(42,938)
------ ------- ----- --- ------- ----- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
DOCENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
-------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities
Net loss....................... $(1,505) $(6,434) $(18,713) $(6,024) $(35,000)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Allowance for doubtful
accounts.................... -- -- -- -- 52
Depreciation and
amortization................ 42 157 268 115 312
Loss on write-off of property
and equipment............... -- 48 -- -- --
Compensation expense related
to repurchase of common
stock from founders......... -- 204 -- -- --
Amortization of deferred
interest expense............ -- -- 91 37 54
Amortization of unearned
stock-based compensation.... -- 36 1,596 220 4,768
Issuance of options in
exchange for services....... -- 12 310 1 306
Issuance of convertible
preferred stock and common
stock warrants in exchange
for services................ -- 14 1,892 134 12,880
Issuance of common stock in
exchange for services....... -- -- 736 124 573
Changes in operating assets
and liabilities:
Accounts receivable......... (43) (233) (502) 144 (1,470)
Prepaid expenses and other
assets..................... (52) (292) (406) (208) (122)
Accounts payable............ 149 110 713 45 706
Accrued liabilities......... 96 385 362 14 1,854
Deferred revenue............ 44 457 607 291 890
------- ------- -------- ------- --------
Net cash used in operating
activities............... (1,269) (5,536) (13,046) (5,107) (14,197)
------- ------- -------- ------- --------
Cash flows from investing
activities
Purchases of property and
equipment..................... (242) (486) (611) (122) (1,779)
Disposal of property and
equipment..................... 10 -- -- -- --
------- ------- -------- ------- --------
Net cash used in investing
activities............... (232) (486) (611) (122) (1,779)
------- ------- -------- ------- --------
Cash flows from financing
activities
Loan from stockholder.......... 81 -- -- -- --
Payment to stockholder on note
payable....................... (84) -- -- -- --
Proceeds from issuance of
convertible preferred stock,
net........................... 3,617 6,748 21,033 833 26,822
Proceeds from issuance of
common stock, net............. -- 49 25 2 480
Proceeds from issuance of
convertible preferred stock
warrants...................... -- -- 157 157 --
Proceeds from repayment of
stockholder receivable........ -- -- -- -- 286
Repurchase of common stock..... -- (204) (8) (7) (1)
Proceeds from notes payable.... -- 343 3,000 3,000 --
Repayment of notes payable..... -- (57) (737) (207) (420)
Principal payments under
capital lease obligations..... -- (2) (8) (2) (21)
Prepaid initial public offering
costs......................... -- -- -- -- (530)
------- ------- -------- ------- --------
Net cash provided by
financing activities..... 3,614 6,877 23,462 3,776 26,616
------- ------- -------- ------- --------
Net increase (decrease) in cash
and cash equivalents.......... 2,113 855 9,805 (1,453) 10,640
Cash and cash equivalents,
beginning of period........... -- 2,113 2,968 2,968 12,773
------- ------- -------- ------- --------
Cash and cash equivalents, end
of period..................... $ 2,113 $ 2,968 $ 12,773 $ 1,515 $ 23,413
======= ======= ======== ======= ========
Supplemental disclosures of
cash flow information
Interest paid.................. $ 7 $ 20 $ 220 $ 73 $ 148
======= ======= ======== ======= ========
Income taxes paid.............. $ -- $ 2 $ -- $ 1 $ 3
======= ======= ======== ======= ========
Supplemental disclosure of
noncash investing and
financing activities
Receivable from stockholders in
connection with issuance of
common stock and convertible
preferred stock............... $ 98 $ 103 $ 286 $ -- $ --
======= ======= ======== ======= ========
Equipment acquired under
capital leases................ $ -- $ 19 $ 63 $ -- $ 155
======= ======= ======== ======= ========
Issuance of convertible
preferred stock upon
cancellation of bridge loan... $ 250 $ -- $ -- $ -- $ --
======= ======= ======== ======= ========
Deferred interest expense
related to warrants issued in
connection with subordinated
loan and capital leases....... $ -- $ -- $ 339 $ 339 $ --
======= ======= ======== ======= ========
Unearned stock-based
compensation.................. $ -- $ 366 $ 8,466 $ 661 $ 16,803
======= ======= ======== ======= ========
Dividend accretion and deemed
dividend on convertible
preferred stock............... $ -- $ -- $ 1,354 $ -- $ 9,614
======= ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
DOCENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 2000 and/or for the six months
ended June 30, 2000 and 1999 is unaudited)
1. Organization and Basis of Presentation
Docent Inc. (the "Company") was incorporated in the State of Delaware June
1997. The Company was incorporated to assume the assets, liabilities and assets
of Stanford Testing Systems, Inc. (the "Predecessor"). There was no change in
ownership as a result of this transaction and accordingly the transaction has
been treated as a reorganization with the results of the predecessor presented
as the historical results of the Company.
The Company is a provider of products and services that enable the exchange
of knowledge within and among large enterprises, educational content providers
and professional communities. The Company's Internet-based platform provides
for the delivery of learning content online, commonly known as eLearning, as
well as brings together the Company's customers into a virtual marketplace with
an array of value-added features, commonly known as an "eHub."
2. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All significant intercompany balances and
transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Unaudited interim financial information
The accompanying unaudited balance sheet as of June 30, 2000, the statements
of operations and cash flows for the six months ended June 30, 1999 and 2000
and the statement of convertible preferred stock and stockholders' deficit for
the six months ended June 30, 2000 are unaudited. The unaudited interim
financial statements have been prepared in accordance with generally accepted
accounting principles. In the opinion of the Company's management, the
unaudited interim financial statements have been prepared on the same basis as
the audited financial statements and include all adjustments, consisting only
of normal recurring adjustments, necessary for the fair presentation of the
Company's results of operations and its cash flows for the six months ended
June 30, 1999 and 2000. The results for the six months ended June 30, 2000 are
not necessarily indicative of the results to be expected for the year ending
December 31, 2000.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with original
or remaining maturities of three months or less to be cash equivalents. Cash
and cash equivalents are stated at cost which approximates market value.
F-8
<PAGE>
DOCENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2000 and/or for the six months
ended June 30, 2000 and 1999 is unaudited)
Fair value of financial instruments
Carrying amounts of certain of the Company's financial instruments including
accounts receivable, accounts payable and accrued liabilities approximate fair
value due to their short maturities. The carrying amounts of notes payable
approximate fair value based on the terms of similar borrowing arrangements
available to the Company.
Risks and uncertainties
The Company is subject to all of the risks inherent in a company which
operates in the intensely competitive Internet industry, providing a service
which is relatively new and constantly evolving. These risks include, but are
not limited to, dependence upon customer acceptance of the Internet,
development of relationships with content providers, reliance on third-party
software incorporated in the Company's products and market acceptance of the
Company's products and services. The Company's operating results may be
materially affected by the foregoing factors.
Concentration of credit risk
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash, cash equivalents and accounts
receivable. The Company's cash and cash equivalents are deposited with two
financial institutions which, at times, may exceed federally insured limits.
Accounts receivable include amounts due from customers in a wide variety of
industries. The Company performs ongoing customer credit evaluations of its
customers, does not require collateral and maintains allowances for potential
credit losses when deemed necessary. To date, such losses have been within
management's expectations. At December 31, 1998, the Company had accounts
receivable from three customers representing, 16%, 35% and 37% of total
accounts receivable, respectively. At December 31, 1999, the Company had
accounts receivable from two customers representing 20% and 39% of total
accounts receivable, respectively. At June 30, 2000, one of the Company's
customers represented 11% of accounts receivable.
Revenue recognition
The Company derives its revenue from the licensing of its software, either
through perpetual or time-based licenses, maintenance and support, hosting and
the provision of professional services, including implementation, consulting
and training.
For arrangements involving the external licensing of its software, the
Company adopted the provisions of the American Institute of Certified Public
Accountants Statement of Position ("SOP") 97-2, "Software Revenue Recognition",
as amended by SOP 98-4 "Deferral of the Effective Date of Certain Provisions of
SOP 97-2" effective January 1, 1998. The Company records revenue from licensing
of software products to end-users when evidence of an arrangement exists, the
fee is fixed and determinable, collection is probable and delivery of the
product has occurred. For agreements which include multiple obligations, such
as product license, maintenance and support, web-hosting and professional
services, the Company
F-9
<PAGE>
DOCENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2000 and/or for the six months
ended June 30, 2000 and 1999 is unaudited)
allocates revenue to all undelivered elements, usually maintenance and support
and professional services, based on objective evidence of its fair value which
is specific to the Company. Any amount remaining is allocated to the delivered
elements and recognized as revenue when the conditions set forth above are met.
For arrangements involving customer acceptance, revenue recognition is
deferred until the earlier of the end of the acceptance period or until written
notice of acceptance is received from the customer.
For arrangements involving significant modification and customization of the
Company's software product, the Company recognizes revenue using the
percentage-of-completion method or, where there are customer acceptance clauses
which the Company does not have an established history of meeting or which are
not considered to be routine, when the arrangement has been completed and
accepted by the customer. The Company also defers the costs relating to these
arrangements until the revenue is recognized.
The Company recognizes revenue from maintenance fees for ongoing customer
support and product updates ratably over the period of the maintenance and
support arrangement. Payments for maintenance fees are generally made in
advance and are non-refundable.
Revenue generated from the sale of consulting, installation and training
services is recognized as the related services are performed.
Revenue from sales through resellers are recognized upon sales to end users
provided all the conditions for revenue recognition set forth above have been
met.
Fees associated with web-hosting services, including the initial set-up fee,
are recognized as revenue over the hosting period agreement, generally one
year.
During the year ended December 31, 1997 the Company recognized revenue from
product revenue when evidence of an arrangement existed, the fee was fixed and
determinable, collection was probable and delivery had occurred in accordance
with Statement of Position 91-1. Revenue from maintenance fees was recognized
ratably over the period of the maintenance agreement. Fees from professional
services were recognized as revenue as the services were performed.
In addition, the Company has entered into multi-year royalty agreements with
content providers. Under these agreements, the Company receives a minimum
annual royalty amount and a percentage of revenue the content provider receives
in excess of the minimum royalty amount for content provided to customers. In
return the Company provides their software and application hosting. In the
first year of the agreement the Company also provides professional services
such as marketing, implementation and training. In subsequent years,
professional services are available for an additional fee.
For agreements with content providers, the minimum fee is allocated among the
separate elements, including professional services and web-hosting, based on
the fair value of each of these elements. Any minimum royalty amount is
recognized as revenue ratably over the period which the minimum is earned. Any
royalty over and above the minimum is recognized upon notification from the
content provider.
F-10
<PAGE>
DOCENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2000 and/or for the six months
ended June 30, 2000 and 1999 is unaudited)
Property and equipment
Property and equipment are stated at cost. Depreciation and amortization is
generally calculated using the straight-line method over the estimated useful
lives of the related assets ranging from 3 to 5 years. Leasehold improvements
and assets acquired under capital leases are amortized on a straight-line basis
over the term of the lease, or the useful life of the assets, whichever is
shorter. Maintenance and repairs are charged to expense as incurred, and
improvements and betterments are capitalized. When assets are retired or
otherwise disposed of, the cost and accumulated depreciation and amortization
are removed from the accounts and any resulting gain or loss is reflected in
operations in the period realized.
Long-lived assets
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of," which requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
value of the long-lived asset. Fair value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk
involved. Losses on long-lived assets to be disposed of are determined in a
similar manner, except that fair values are reduced for the cost of disposal.
No losses from impairment have been recognized in the financial statements.
Research and development
Costs incurred in the research and development of new software products are
expensed as incurred until technological feasibility is established.
Development costs are capitalized beginning when a products technological
feasibility has been established and ending when the product is available for
general release to customers. Technological feasibility is reached when the
product reaches the beta stage. To date, products and enhancements have
generally reached technological feasibility and have been released for sale at
substantially the same time.
Advertising
Cost related to advertising and promotion of products is charged to sales and
marketing expense as incurred. Advertising expense for the year ended December
31, 1999, was $84,000. No advertising expenses were incurred during the years
ended December 31, 1997 and 1998.
Income taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary
to reduce deferred tax assets to amounts expected to be realized.
F-11
<PAGE>
DOCENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2000 and/or for the six months
ended June 30, 2000 and 1999 is unaudited)
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion ("APB") No.
25, Accounting for Stock Issued to Employees, and Financial Accounting
Standards Board Interpretation ("FIN") No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans, and
complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-
Based Compensation. Under APB No. 25, compensation expense is based on the
difference, if any, on the date of grant, between the estimated fair value of
the Company's common stock and the exercise price. SFAS 123 defines a "fair
value" based method of accounting for an employee stock option or similar
equity investment. The pro forma disclosures of the difference between the
compensation expense included in net loss and the related cost measured by the
fair value method are presented in Note 9. The Company accounts for equity
instruments issued to nonemployees in accordance with the provisions of SFAS
No. 123 and Emerging Issues Task Force ("EITF") 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services.
Comprehensive income (loss)
The Company adopted the provisions of SFAS No. 130, Reporting Comprehensive
Income. This statement requires companies to classify items of other
comprehensive income by their nature in the financial statements and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. There has been no difference between the Company's net loss and its
total comprehensive loss through June 30, 2000.
Foreign currency remeasurement and transactions
The functional currency of the Company's foreign subsidiary is the U.S.
dollar and as a result monetary assets and liabilities denominated in foreign
currency, are remeasured at the balance sheet date exchange rate. Nonmonetary
assets are remeasured using historical rates and revenue and expenses are
remeasured at the average exchange rate prevailing during the year. The
resulting remeasurement gains and losses, are recorded in operations.
Foreign currency transaction gains and losses are included in results of
operations.
Net loss per share
Basic and diluted net loss per share is computed by dividing the net loss for
the period by the weighted average number of shares of common stock outstanding
during the period. The calculation of diluted net loss per share excludes
potential common shares if the effect is antidilutive. Potential common shares
are comprised of common stock subject to repurchase rights, incremental shares
of common and preferred stock issuable upon the exercise of stock options or
warrants and shares issuable upon conversion of convertible preferred stock.
F-12
<PAGE>
DOCENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2000 and/or for the six months
ended June 30, 2000 and 1999 is unaudited)
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
-------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net loss attributable to
common stockholders......... $(1,505) $(6,434) $(20,067) $(6,024) $(44,614)
======= ======= ======== ======= ========
Basic and diluted shares:
Weighted average common
shares outstanding........ 4,213 4,868 5,189 5,146 5,697
Weighted average unvested
common shares subject to
repurchase................ (1,496) (1,999) (1,321) (1,539) (1,233)
------- ------- -------- ------- --------
Weighted average shares
used to compute basic and
diluted net loss per
share..................... 2,717 2,869 3,868 3,607 4,464
======= ======= ======== ======= ========
Net loss per share
attributable to common
stockholders--basic and
diluted..................... $ (0.55) $ (2.24) $ (5.19) $ (1.67) $ (9.99)
======= ======= ======== ======= ========
</TABLE>
The following table sets forth potential shares of common stock that are not
included in the diluted net loss per share attributable to common stockholders
above because to do so would be antidilutive for the periods indicated (in
thousands):
<TABLE>
<CAPTION>
December 31,
------------------- June 30,
1997 1998 1999 2000
----- ------ ------ -----------
(unaudited)
<S> <C> <C> <C> <C>
Convertible preferred stock upon conversion
to
common stock.............................. 5,800 10,670 18,391 22,111
Warrants to purchase convertible preferred
stock..................................... -- 10 488 2,935
Warrants to purchase common stock.......... -- -- 120 356
Unvested common shares subject to
repurchase................................ 2,300 1,786 1,006 1,328
Options to purchase common stock........... 764 1,340 2,619 4,470
----- ------ ------ ------
8,864 13,806 22,624 31,200
===== ====== ====== ======
</TABLE>
Pro forma net loss per share (unaudited)
The pro forma net loss per share for the year ended December 31, 1999 and six
months ended June 30, 2000 is computed using the weighted average number of
common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's convertible preferred stock into shares of common
stock effective upon the closing of the Company's initial public offering, as
if such conversion occurred on January 1, 1999 and January 1, 2000 or at the
date of original issuance, if later. The resulting pro forma adjustment
F-13
<PAGE>
DOCENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2000 and/or for the six months
ended June 30, 2000 and 1999 is unaudited)
includes an increase in the weighted average shares used to compute pro forma
basic net loss per share of 13,145,000 shares for the year ended December 31,
1999 and 20,169,000 shares for the six months ended June 30, 2000. The
calculation of pro forma diluted net loss per share excludes potential shares
of common stock as their effect would be antidilutive.
Pro forma Convertible Preferred Stock and Stockholders' Equity (unaudited)
The pro forma convertible preferred stock and stockholders' equity as of June
30, 2000 reflects the conversion of all outstanding shares of convertible
preferred stock into an aggregate of 22,111,260 shares of common stock.
Segment reporting
Financial Accounting Standards Board Statement No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("SFAS 131") requires that
companies report separately in the financial statements certain financial and
descriptive information about operating segments profit or loss, certain
specific revenue and expense items and segment assets. Additionally, companies
are required to report information about the revenue derived from their
products and service groups, about geographic areas in which the Company earns
revenue and holds assets, and about major customers. The Company has one
reporting segment.
During 1997, 1998 and 1999, all revenue was generated from customers located
in and all long-lived assets are held in the United States. During the six
months ended June 30, 2000, approximately $179,000 of the Company's revenue was
derived from customers in Europe. As of June 30, 2000, approximately $107,000
of the Company's long-lived assets are held in Europe. No customers accounted
for more than 10% of the Company's revenue for the six months ended June 30,
2000. Two customers accounted for 29% and 11% of the Company's revenue for the
six-month period ended June 30, 1999. One customer accounted for 27% of the
Company's revenue for the year ended December 31, 1999. Three customers
accounted for 12%, 13% and 26% of the Company's revenue for the year ended
December 31, 1998. One customer accounted for 13% of the Company's revenue for
the year ended December 31, 1997.
Recently issued accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes a new model for accounting for derivatives and hedging activities
and supercedes and amends a number of existing accounting standards. SFAS No.
133 requires that all derivatives be recognized in the balance sheet at their
fair market value and the corresponding derivative gains or losses be either
reported in the statement of operations or as a deferred item depending on the
type of hedge relationship that exists with respect of such derivatives. In
July 1999, the Financial Accounting Standards Board issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133, SFAS No. 137 deferred the effective
date until the year beginning after June 30, 2000. In June 2000, the Financial
Accounting Standards Board issued SFAS No. 138, Accounting for Derivative
Instruments and Hedging Activities--An Amendment of FASB Statement No. 133.
SFAS No. 138 amends the accounting and reporting standards for certain
derivatives and hedging
F-14
<PAGE>
DOCENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2000 and/or for the six months
ended June 30, 2000 and 1999 is unaudited)
activities such as net settlement contracts, foreign currency transactions and
intercompany derivatives. The Company will adopt SFAS No. 133 in its quarter
ending March 31, 2001. To date, the Company has not engaged in derivative or
hedging activities.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. The Company
has complied with the guidance in SAB 101 for all periods presented.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 ("FIN 44") "Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25." FIN 44 clarifies the
application of Opinion No. 25 for (a) the definition of employee for purposes
of applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur either after December 15, 1998, or January 12, 2000.
The adoption of certain of the provisions of FIN 44 prior to March 31, 2000 did
not have a material impact on the financial statements. Management does not
expect that the adoption of the remaining provisions will have a material
effect on the financial statements.
In various areas, including revenue recognition and stock-based compensation,
accounting standards and practices continue to evolve. The SEC is preparing to
issue interpretative guidance relating to SAB 101, and the FASB continues to
address revenue and other related accounting issues. The management of the
Company believes it is in compliance with all of the rules and related guidance
as they currently exist. However, any changes to generally accepted accounting
principles in these areas could impact the Company's accounting for its
operations.
F-15
<PAGE>
DOCENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2000 and/or for the six months
ended June 30, 2000 and 1999 is unaudited)
3. Balance Sheet Components (in thousands)
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1998 1999 2000
----- ------ -----------
(unaudited)
<S> <C> <C> <C>
Accounts receivable,
net:
Accounts receivable..... $ 307 $809 $2,279
Less: Allowance for
doubtful accounts...... -- -- (52)
----- ------ ------
$ 307 $809 $2,227
===== ====== ======
Property and equipment,
net:
Computer equipment and
software............... $ 606 $1,063 $2,680
Furniture and fixtures.. 62 277 587
Leasehold improvements.. 48 50 57
----- ------ ------
716 1,390 3,324
Less: Accumulated
depreciation and
amortization........... (158) (426) (738)
----- ------ ------
$ 558 $ 964 $2,586
===== ====== ======
Accrued liabilities:
Accrued payroll and
related liabilities.... $ 357 $ 629 $1,019
Other accrued
liabilities............ 156 246 1,710
----- ------ ------
$ 513 $ 875 $2,729
===== ====== ======
</TABLE>
Depreciation expense was $42,000, $157,000 and $268,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
4. Commitments and contingencies
The Company leases its current office facilities in California, Massachusetts
and Texas under noncancelable operating lease agreements with various
expiration dates through 2004.
At December 31, 1999, the future minimum lease payments under all
noncancelable operating lease agreements are as follows (in thousands):
<TABLE>
<S> <C>
Year Ending December 31,
2000.................................................................. $ 938
2001.................................................................. 898
2002.................................................................. 912
2003.................................................................. 715
2004.................................................................. 623
------
Total minimum lease payments........................................ $4,086
======
</TABLE>
Rent expense under operating leases for the years ended December 31, 1997,
1998 and 1999 was $87,000, $325,000 and $485,000, respectively.
The Company is not currently subject to any material legal proceedings. The
Company may from time to time, however, become a party to various legal
proceedings, arising in the
F-16
<PAGE>
DOCENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2000 and/or for the six months
ended June 30, 2000 and 1999 is unaudited)
ordinary course of business. The Company may also be indirectly affected by
administrative or court proceedings or actions in which the Company is not
involved but which have general applicability to the Internet industry.
5. Capital Leases
At December 31, 1999, the future minimum lease payments under noncancelable
capital leases are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year ending December 31,
-------------------------------
<S> <C>
2000................................................................... $ 25
2001................................................................... 25
2002................................................................... 25
2003................................................................... 5
----
Total minimum lease payments........................................... 80
Less amount representing interest...................................... (8)
----
Present value of capital lease obligations............................. 72
Less current portion................................................... (25)
----
Long-term portion of capital lease obligations......................... $ 47
====
</TABLE>
During the years ended December 31, 1998 and 1999, the Company acquired
equipment under capital leases with a cost of $19,000 and $63,000,
respectively. The accumulated depreciation on these assets was $3,000 and
$12,000 at December 31, 1998 and 1999, respectively.
6. Borrowings
Notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
----- -------
<S> <C> <C>
Subordinated loan............................................ $ -- $ 2,400
Equipment loan............................................... 286 149
Unamortized discount......................................... -- (248)
----- -------
286 2,301
Less current portion......................................... (137) (1,231)
----- -------
Noncurrent portion........................................... $ 149 $ 1,070
===== =======
</TABLE>
Equipment loan
The Company had $149,000 outstanding under an equipment loan and security
agreement with a bank at December 31, 1999. The loan agreement provides for
borrowings of up to $750,000, all of which is collateralized by substantially
all of the Company's assets. Under the terms of the loan agreement, certain
transactions, including the payment of dividends and redemption of stock, are
prohibited without the bank's consent. The loan bears interest at the prime
rate (8.5% on December 31, 1999). The Company is required to make monthly
payments of principal and interest on this loan through February 2001.
F-17
<PAGE>
DOCENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2000 and/or for the six months
ended June 30, 2000 and 1999 is unaudited)
Subordinated loan
In April 1999, the Company entered into a subordinated debt agreement (the
"Subordinated Loan") with a financing company (the "Lender") for an amount of
$3,000,000. Amounts due under the subordinated loan bear interest at 12.16%.
Principal and interest installments are payable monthly through May 2002 and
the notes are collateralized by substantially all of the Company's assets.
The Subordinated Loan is subject to an agreement under which borrowings under
this facility are subordinated to any borrowings currently outstanding under
the equipment loan and any future borrowings from the bank. In the event of
specific default by the Company on the equipment loan the bank may issue a
blockage notice preventing the Lender from accepting any further repayment on
the subordinated loan until such default is cured.
Future payments under these loans are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year ending December 31,
-------------------------------
<S> <C>
2000................................................................. $ 1,336
2001................................................................. 1,211
2002................................................................. 400
-------
2,947
Less amount representing interest.................................... (398)
Unamortized discount................................................. (248)
-------
2,301
Less current portion................................................. (1,231)
-------
Noncurrent portion................................................... $ 1,070
=======
</TABLE>
7. Receivables from Stockholders
Receivables from stockholders include two full recourse promissory notes for
$97,500 and $103,000, as well as a receivable from a stockholder of $286,000.
The notes bear interest at rates of 5.54% and 6.00% and are due and payable in
full no later than September 31, 2003, and June 27, 2017, respectively. The
receivable was repaid in January 2000.
8. Convertible Preferred Stock
The following table summarizes convertible preferred stock at December 31,
1999 (in thousands):
<TABLE>
<CAPTION>
Shares
---------------------- Liquidation
Series Authorized Outstanding Amount
------ ---------- ----------- -----------
<S> <C> <C> <C>
A........................................ 5,800 5,800 $ 3,915
B........................................ 2,010 2,000 2,000
B-1...................................... 833 833 1,000
C........................................ 3,340 2,578 4,795
D........................................ 7,500 7,180 20,536
------ ------ -------
19,483 18,391 $32,246
====== ====== =======
</TABLE>
F-18
<PAGE>
DOCENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2000 and/or for the six months
ended June 30, 2000 and 1999 is unaudited)
The rights, privileges and restrictions of holders of Series A, B, B-1, C and
D convertible preferred stock ("Series A," "Series B," "Series B-1," "Series C"
and "Series D," respectively) are summarized as follows:
Voting
Each share of preferred stock has voting rights equal to an equivalent number
of shares of common stock into which it is convertible and votes together as
one class with the common stock.
As long as any shares of preferred stock remain outstanding, the Company must
obtain approval from a majority of the holders of Series A, B, B-1, C and D
convertible preferred stock; voting together as a class, in order to modify the
rights, preferences or privileges of the preferred stock, alter or repeal any
provision of the Amended and Restated Certificate of Incorporation, increase
the authorized number of shares of preferred stock or common stock, repurchase
any shares of preferred stock or common stock other than shares subject to the
right of repurchase by the Company pursuant to restrictive stock purchase
agreements, create a new class or series of stock or effect an Asset Transfer
or Acquisition.
For as long as any shares of Series D remain outstanding, the Company must
obtain approval from a majority of the holders of Series D to modify the
rights, preferences or privileges of Series D, create a new class or series of
stock, authorize a dividend or redeem any shares for any class of convertible
preferred stock other than Series D, or issue more than 2,600,000 shares of
stock to the Company's employees, officers, directors and consultants on or
before March 31, 2001.
Dividends
Holders of Series A, B, B-1, C and D convertible preferred stock are entitled
to receive noncumulative dividends at the per annum rate of $0.068, $0.10,
$0.12, $0.186 and $0.286 per share, respectively, when and if declared by the
Board of Directors. The holders of convertible preferred stock will also be
entitled to participate in dividends on common stock, when and if declared by
the Board of Directors, based on the number of shares of common stock held on
an as-if converted basis. No dividends will be paid to common stockholders
until the holders of convertible preferred stock are paid. No dividends on the
convertible preferred stock or common stock have been declared by the Company's
Board of Directors from inception through December 31, 1999.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
including a merger, acquisition or sale of assets where the beneficial owners
of the Company's common stock and convertible preferred stock own less than 50%
of the resulting voting power of the surviving entity, the holders of Series D
are entitled to receive an amount of $2.86 per share plus any declared but
unpaid dividends prior to and in preference to any distribution to the holders
of Series A, B, B-1 and C convertible preferred or any common stock.
F-19
<PAGE>
DOCENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2000 and/or for the six months
ended June 30, 2000 and 1999 is unaudited)
After payment of the full liquidation preference of Series D preferred
stockholders, the holders of Series A, B, B-1 and C shall be entitled to
receive the amount of $0.675, $1.00, $1.20 and $1.86 per share, respectively,
plus any declared but unpaid dividends.
After payment of the full liquidation preferences of the preferred
stockholders, the legally available assets shall be distributed ratably to
holders of the common stock and Series D (on an as-if converted basis) until
such time as the holders of Series D have received a total of $5.72 per share.
After such payment to holders of Series D, all remaining assets, if any, shall
be distributed ratably to the holders of common stock.
Conversion
Each share of preferred stock is convertible into common stock at the option
of the holder at any time. The conversion rate is the quotient obtained by
dividing the Original Issue Price of Series A, B, B-1, C and D by the Series A,
B, B-1, C and D Conversion Price, which initially is the Original Issue Price
as adjusted. Conversion is automatic upon either the consent of the holders of
a majority of the outstanding shares of preferred stock or the effective date
of a public offering of common stock for which the aggregate proceeds are not
less than $15,000,000 and the offering price is not less than $6.00 per share
of common stock.
Redemption
The Series D convertible preferred stock is redeemable after receipt of a
written election at least 60 days prior to the fifth anniversary of the
original issue date. Upon receipt of the written election, the Company is
required to redeem in three equal annual installments the Series D preferred
stock on the fifth, sixth and seventh anniversary of the original issue date.
The redemption price is the greater of (i) $2.86 per share (appropriately
adjusted under certain circumstances), plus all declared but unpaid dividends,
and (ii) the fair market value on the date of redemption. Accordingly, the
Company has recorded preferred stock accretion of $1,354,000 for the year ended
December 31, 1999 based on $9.00 per share being the estimated fair market
value of shares of such stock at December 31, 1999.
Warrants for convertible preferred stock
The Company issued warrants to purchase 10,000 shares of Series B convertible
preferred stock at $1.25 per share in March 1998, which expires in March 2003,
in exchange for services. The Company valued the warrants using the Black-
Scholes option pricing model applying an expected life of five years, a
weighted average risk free rate of 5.11%, a dividend yield of 0% and volatility
of 75%. The fair value of approximately $14,000 was expensed during the year
ended December 31, 1998.
In connection with a loan and capital leases, the Company issued warrants to
purchase 228,493 shares of Series C at $1.86 per share. These warrants expire
on the later of 7 years from the date of the grant, or three years from the
effective date of the Company's initial public offering. The Company valued the
warrants using the Black-Scholes option pricing model applying an expected life
of 7 years, a weighted average risk free rate of 5.08%, a dividend yield of 0%
and volatility of 75%. The fair value of approximately $339,000 is being
F-20
<PAGE>
DOCENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2000 and/or for the six months
ended June 30, 2000 and 1999 is unaudited)
amortized over the term of the loan and capital leases. Amortization for the
year ended December 31, 1999, was approximately $91,000.
In March 1999, the Company issued a warrant to purchase up to 175,000 shares
of Series D at $2.86 per share to a consultant. In December 1999, 100,000
shares of Series D were issued upon the exercise of the warrant. The remaining
75,000 shares of Series D were not issued and the warrant expired at December
31, 1999. The warrant was valued using the Black-Scholes option pricing model
applying an expected life of nine months, a weighted average risk free rate of
4.5%, a dividend yield of 0% and volatility of 75%. The fair value of
approximately $134,000 was recognized as sales and marketing expense for the
year ended December 31, 1999.
In December 1999, the Company issued a warrant to purchase 250,000 shares of
Series D at a price of $2.86 per share to a new investor as an inducement to
assist the Company in the development of its European operations. The warrant
expires in seven years and was valued using the Black-Scholes option pricing
model applying an expected life of seven years, a weighted average risk free
rate of 6.19%, a dividend yield of 0% and volatility of 75%. The fair value of
approximately $1,758,000 was recognized as sales and marketing expense for the
year ended December 31, 1999.
In March 2000, the Company issued warrants to purchase up to 2,446,932 shares
of Series E convertible preferred stock to two strategic partners. These
warrants were issued as inducements to sign strategic alliance agreements and
have exercise prices of $7.52 per share and exercise periods of one year to
three years. The warrants were valued using the Black-Scholes option pricing
model applying expected lives ranging from one year to three years, weighted
average risk free interest rates ranging from 6.07% to 6.36%, a dividend yield
of 0% and volatility of 75%. The fair value of approximately $12,556,000 was
recognized as sales and marketing expense during the six months ended June 30,
2000.
9. Stockholders' Equity
Warrants for common stock
In March 1999, the Company issued warrants to purchase 119,962 shares of
common stock at $0.30 per share to investors in conjunction with the issuance
of Series C. The warrants had a term of 32 months. The proceeds received from
the investors have been allocated between Series C and the warrants based on
the relative fair values of each element. Accordingly, $157,000 of the proceeds
was allocated to the warrants. The fair value was calculated using the Black-
Scholes option pricing model applying an expected life of 32 months, a risk
free rate of 5.14%, a dividend yield of zero percent and volatility of 75%.
In March 2000, the Company issued a warrant to purchase up to 200,000 shares
of common stock to a strategic partner. This warrant was issued as an
inducement to sign a strategic alliance agreement and has an exercise price of
$10.00 per share and a seven month exercise period. The warrant was valued
using the Black-Scholes option pricing model applying expected life of six
months, risk free interest rate of 6.1%, a dividend yield of 0% and volatility
of 75%. The fair value of approximately $324,000 was recognized as sales and
marketing expense during the six months ended June 30, 2000.
F-21
<PAGE>
DOCENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2000 and/or for the six months
ended June 30, 2000 and 1999 is unaudited)
In April 2000, the Company issued a warrant to purchase that number of shares
of common stock equal to $274,733 divided by the exercise price of the warrant
in connection with the completion of the Series E convertible preferred stock
financing. The exercise price will be at the initial public offering price if
the offering occurs within six months of the closing of Series E, otherwise it
will be $7.52 per share. The warrant was valued using the Black-Scholes option
pricing model applying an expected life of five years, a weighted average risk
free rate of 5.83%, a dividend yield of 0% and volatility of 75%. The fair
value of approximately $209,000 has been recorded as a cost of issuance of the
Series E convertible preferred stock.
Restricted common stock
A total of 4,700,000 shares of common stock were issued to the Company's
founders, of which 2,829,293 were issued subject to restricted stock purchase
agreements which provide the Company with the right to repurchase these shares
at the original issuance price. In September 1998, 1,018,550 shares were
repurchased from two of the founders at the then fair market value of $0.20 per
share. As a result the Company recognized stock-based compensation expense of
approximately $204,000 during 1998. The repurchase right over the remaining
shares lapses ratably over 40 months and is due to expire in October 2000. As
of December 31, 1997, 1998 and 1999 and June 30, 2000, a total of 2,299,991,
426,549, 182,793 and 60,915 shares, respectively, were subject to repurchase by
the Company under these agreements.
Stock Option Plan
On July 25, 1997, the Company adopted the 1997 Stock Option Plan (the
"Plan"). The Plan provides for the granting of stock options to employees and
consultants of the Company. Options granted under the Plan may be either
incentive stock options or non-statutory stock options. Incentive stock options
("ISO") may be granted only to Company employees (including officers and
directors who are also employees). Non-statutory stock options ("NSO") may be
granted to Company employees and consultants. The Company has reserved
6,500,000 shares of common stock for issuance under the Plan.
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date
of grant as determined by the Board of Directors, provided, however, that the
exercise price of an ISO and NSO granted to a 10% shareholder shall not be less
than 110% of the estimated fair value of the shares on the date of grant.
Options are exercisable immediately subject to repurchase options held by the
Company which lapse with the options vesting schedule. Options may have maximum
term of up to 10 years as determined by the Board of Directors. To date,
options granted generally vest over four years.
F-22
<PAGE>
DOCENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2000 and/or for the six months
ended June 30, 2000 and 1999 is unaudited)
A summary of the activity under the Plan since its inception is set forth
below:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------
Weighted
Shares Average
Available Number of Exercise
for Grant Shares Price
---------- ---------- --------
<S> <C> <C> <C>
Options reserved at Plan inception......... 2,500,000 --
Options granted............................ (962,500) 962,500 $ 0.10
Options canceled........................... 198,230 (198,230) $ 0.10
---------- ----------
Balance, December 31, 1997................. 1,735,730 764,270 $ 0.10
Additional options reserved................ 1,000,000 --
Options granted............................ (2,375,950) 2,375,950 $ 0.14
Options exercised.......................... -- (1,476,363) $ 0.19
Options canceled........................... 323,522 (323,522) $ 0.12
---------- ----------
Balance, December 31, 1998................. 683,302 1,340,335 $ 0.15
Additional options reserved................ 3,000,000 --
Options granted............................ (2,199,525) 2,199,525 $ 0.78
Options exercised.......................... -- (93,143) $ 0.27
Options canceled........................... 827,366 (827,366) $ 0.22
Unvested shares repurchased................ 68,856 -- $ 0.12
---------- ----------
Balance, December 31, 1999................. 2,379,999 2,619,351 $ 0.66
Additional options reserved................ 1,800,000 --
Options granted............................ (3,017,960) 3,017,960 $ 2.72
Options exercised.......................... -- (826,160) $ 0.58
Options cancelled.......................... 340,731 (340,731) $ 1.15
Unvested shares repurchased................ 1,251 -- $(0.45)
---------- ----------
Balances, June 30, 2000 (unaudited)........ 1,504,021 4,470,420 $ 2.03
========== ==========
</TABLE>
Common stock option holders have the right to exercise unvested options,
subject to a repurchase right held by the Company, at the original exercise
price, in the event of voluntary or involuntary termination of employment of
the stockholder. As of December 31, 1998 and 1999 and June 30, 2000, 1,359,189,
823,400 and 1,266,971 shares of common stock, respectively, were subject to
repurchase.
F-23
<PAGE>
DOCENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2000 and/or for the six months
ended June 30, 2000 and 1999 is unaudited)
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
-----------------------------------
Weighted Weighted
Average Average
Number of Remaining Exercise
Options Contractual Price
Outstanding Life (in per
Exercise Price (in thousands) years) Share
-------------- -------------- ----------- --------
<S> <C> <C> <C>
$0.10.................................... 133 8.0 $0.10
$0.15.................................... 32 8.5 $0.15
$0.20.................................... 466 8.9 $0.20
$0.30.................................... 378 9.2 $0.30
$0.50.................................... 101 9.4 $0.50
$0.75.................................... 191 9.6 $0.75
$1.00.................................... 1,318 9.8 $1.00
-----
$0.10-$1.00.............................. 2,619 9.4 $0.66
=====
</TABLE>
At December 31, 1997, 1998 and 1999, 9,000, 57,000 and 169,000, respectively,
of the options outstanding were vested.
Fair value disclosures
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for the awards under a
method prescribed by SFAS No. 123, the Company's net loss attributable to
common stockholders would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net loss attributable to common stockholders
(in thousands):
As reported.................................. $(1,505) $(6,434) $(20,067)
Pro forma.................................... $(1,505) $(6,439) $(20,161)
Net loss per share attributable to common
stockholders--basic and diluted:
As reported.................................. $ (0.55) $ (2.24) $ (5.19)
Pro forma.................................... $ (0.55) $ (2.24) $ (5.21)
</TABLE>
The Company calculated the value of each option grant on the date of grant
using the Black-Scholes option pricing model with the following assumptions for
the year ended December 31, 1997, 1998 and 1999: dividend yield expected is 0%
and volatility of 0%; expected lives of four years and risk free interest rates
of 4.91% to 6.19% for 1999. These pro forma amounts may not be representative
of the effects on reported net loss for future years as options vest over
several years and additional awards are generally made each year. The weighted
average fair value of options granted was $0.03, $0.23 and $4.23 for the years
ended December 31, 1997, 1998 and 1999, respectively.
F-24
<PAGE>
DOCENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2000 and/or for the six months
ended June 30, 2000 and 1999 is unaudited)
Stock-based compensation
In connection with certain stock option grants to employees during the years
ended December 31, 1998 and 1999, the Company recognized approximately $366,000
and $8,466,000 of unearned stock-based compensation for the excess of the
deemed fair value of the shares of common stock subject to such options over
the exercise price of these options at the date of grant. Such amounts are
included as a reduction of stockholders' equity and are being amortized over
the vesting period of generally four years. The Company recorded stock-based
compensation expense of $36,000 and $1,596,000 for the years ended December 31,
1998 and 1999, respectively.
Stock-based compensation expense related to equity investments granted to
consultants is recognized as earned. At each reporting date, the Company re-
values any unvested equity investments using the Black-Scholes option pricing
model. As a result, the stock-based compensation expense will fluctuate as the
fair market value of the Company's common stock fluctuates. In connection with
the grant of fully vested stock options to consultants, the Company recorded
stock-based compensation expense of $12,000 and $310,000 for the years ended
December 31, 1998 and 1999, respectively.
During the year ended December 31, 1999 the Company granted 126,000 shares of
common stock with a fair value of $736,000 in exchange for services from
consultants.
As discussed in Note 8 the Company recorded stock-based compensation expense
of $14,000 and $1,892,000 in respect of warrants issued to consultants in
exchange for services during the years ended December 31, 1998 and 1999.
During the six months ended June 30, 2000 the Company granted options to
purchase 2,930,300 shares of the Company's common stock to its employees. The
Company recognized approximately $16,803,000 of unearned stock-based
compensation for the excess of the deemed fair value of the shares subject to
such options over the exercise price of these options at the date of grant. The
Company recorded stock-based compensation expense of $4,405,000 for the six
months ended June 30, 2000.
During the six months ended June 30, 2000, the Company terminated the
employment of two individuals. In connection with the terminations, the Company
accelerated the vesting on certain stock options held by the employees and
recorded a compensation charge of $363,000 related to the re-measurement of
these options at the date of termination.
During the six months ended June 30, 2000 the Company granted fully vested
options to purchase 35,660 shares of its common stock to consultants and
recorded unearned stock-based compensation expense of $557,000 which is being
amortized over the service period. A total of $134,000 related to these grants
was expensed during the six months ended June 30, 2000.
Additionally, during the six months ended June 30, 2000, the Company issued
options to purchase 52,000 shares of common stock to consultants in exchange
for services. These options vest monthly over periods ranging from six to
eleven months. At each reporting date the Company will re-measure the unvested
portion of these option grants which remain unvested using the Black-Scholes
option pricing model. As a result, the stock-based
F-25
<PAGE>
DOCENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2000 and/or for the six months
ended June 30, 2000 and 1999 is unaudited)
compensation expense will fluctuate as the fair market value of the Company's
common stock fluctuates. In connection with these grants the Company recorded
unearned stock-based compensation of $423,000, of which $172,000 has been
amortized during the six months ended June 30, 2000.
During the six months ended June 30, 2000 the Company issued 97,739 shares of
its common stock with a fair value of $607,000 to consultants in exchange for
services, of which $573,000 has been charged to operations during the period.
In addition as discussed in Notes 8 and 9 the Company has recorded stock-
based compensation expense of $12,880,000 in respect of convertible preferred
stock and common stock warrants granted to strategic partners.
10. Income Taxes
At December 31, 1998 and 1999, temporary differences which gave rise to
significant deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Net operating losses.......................................... $ 1,747 $ 6,385
Capitalized research and development.......................... 1,043 1,927
Other......................................................... 460 768
------- -------
3,250 9,080
Less valuation allowance...................................... (3,250) (9,080)
------- -------
Net deferred tax assets....................................... $ -- $ --
======= =======
</TABLE>
In accordance with generally accepted accounting principles, a valuation
allowance must be established for a deferred tax asset if it is more likely
than not that a tax benefit will not be realized from the asset in the future.
The Company has established a valuation allowance to the extent of its deferred
tax assets as no immediate benefit is expected to be received due to the
Company's recurring losses. The valuation allowance increased by $603,000,
$2,647,000 and $5,830,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
At December 31, 1999, the Company had federal and state net operating loss
carryforwards of approximately $16,094,000 and $15,656,000, respectively,
available to offset future regular and alternative minimum taxable income. The
Company's federal and state net operating loss carryforwards will expire
beginning in 2012 and 2023, respectively, if not utilized.
At December 31, 1999, the Company also has research and development credit
carryforwards of approximately $443,000 for federal and California tax purposes
available to reduce future income tax liability. Such carryforwards expire in
varying amounts beginning 2002.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company.
F-26
<PAGE>
DOCENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2000 and/or for the six months
ended June 30, 2000 and 1999 is unaudited)
If the Company should have an ownership change, as defined by the tax law,
utilization of the carryforwards could be restricted.
11. Employee Benefit Plan
The Company adopted a 401(k) Profit Sharing Plan and Trust (the "401(k)
Plan") effective October 16, 1997, which is intended to qualify under Section
401(k) of the Internal Revenue Code. The 401(k) Plan allows eligible employees
to contribute up to 25% of their pre-tax salary, subject to a maximum limit of
$10,500 for the year ended December 31, 1999, subject to certain limitations.
The 401(k) Plan provides for employer contributions at the discretion of the
Board of Directors. No amounts have been contributed by the Company to the
401(k) Plan through December 31, 1999.
12. Subsequent Events (unaudited)
2000 Omnibus Equity Incentive Plan
The 2000 Omnibus Equity Incentive Plan was adopted by the Company's board of
directors on March 23, 2000 and approved by the stockholders on July 18, 2000.
The 2000 Omnibus Equity Incentive Plan provides for the direct award or sale of
shares of common stock and for the grant of options to purchase shares of
common stock to employees, non-employee directors, advisors and consultants.
The Company has reserved 6,000,000 shares of common stock for issuance under
this Plan. Each year, the number of shares reserved for issuance under this
plan increases by 3%.
2000 Employee Stock Purchase Plan
On March 23, 2000, the Company's board of directors adopted the 2000 Employee
Stock Purchase Plan and on July 18, 2000 the stockholders approved it, to be
effective upon completion of the Company's initial public offering. The common
stock purchase price will be 85% of fair market value. A total of 1,500,000
shares of common stock have been reserved for issuance under this plan. The
number of shares reserved increases on an annual basis.
Series E Convertible Preferred Stock
In April 2000, the Company sold 3,719,477 shares of Series E convertible
preferred stock at $7.52 per share for net proceeds of approximately $26.8
million. In connection with this issuance the Company issued a warrant to its
bankers to purchase that number of shares of common stock equal to $274,733
divided by the exercise price of the warrant. The exercise price will be at the
initial public offering price if the offering occurs within six months of the
closing of Series E, otherwise it will be $7.52 per share. The fair value of
the warrant calculated using the Black-Scholes option pricing model will be
recorded as a cost of issuance.
The issuance resulted in a beneficial conversion feature of approximately
$5,505,000, calculated as the difference between the deemed fair market value
of common stock of $9.00 per share and the issuance price of $7.52. As the
preferred stock is immediately convertible the beneficial conversion feature is
being recognized as a deemed dividend to the preferred stockholders at the date
of issuance with a corresponding amount recorded in additional paid-in capital.
F-27
<PAGE>
DOCENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2000 and/or for the six months
ended June 30, 2000 and 1999 is unaudited)
The rights and preferences of Series E convertible preferred stock are
substantially the same as those of Series A, Series B, Series B-1, Series C and
Series D convertible preferred stock except for the following: (1) the Company
must obtain approval from a majority of the holders of Series E to modify the
rights, preferences or privileges of Series E, create a new class or series of
stock; (2) the holders of Series E have liquidation preferences senior to
Series A, Series B, Series B-1, Series C and Series D convertible preferred
stock; (3) the Company must obtain approval from the holders of Series D and
Series E to declare or pay any dividends, repay stockholders loans and issue
more than 2,600,000 shares of stock to the Company's employees, officers,
directors and consultants on or before the earlier of the initial public
offering of the Company or March 31, 2001; (4) the shares will automatically
convert into common stock on the effective date of a public offering of common
stock for which the aggregate proceeds are not less than $35 million and the
offering price is not less than $8.00 per share of common stock; (5) the shares
convert one-to-one into common stock subject to anti-dilution protection using
various formulas in the event of certain sales of securities by the Company at
less than $7.52 per share. The redemption rights of Series E are substantially
the same as those of Series D. Accordingly, the Company has recorded preferred
stock accretion of $291,000 for the six months ended June 30, 2000 based on
$9.00 per share being the estimated fair market value of shares of such stock
at June 30, 2000. The Company recorded accretion on Series D of $3,818,000
during the same period.
Series F Convertible Preferred Stock
In August and September 2000, the Company sold 2,598,875 shares of Series F
convertible preferred stock at $7.52 per share for net proceeds of
approximately $18.8 million.
In connection with this issuance the Company issued a warrant to its bankers
to purchase that number of shares of common stock equal to $162,500 divided by
the exercise price of the warrant. The exercise price will be at the initial
public offering price if the offering occurs within six months of the closing
of Series F, otherwise it will be $7.52 per share. The Company will calculate
the fair value of the warrant using the Black-Scholes option pricing model and
record this as issuance cost.
The rights and preferences of Series F convertible preferred stock are
substantially the same as those of Series E convertible preferred stock except
for the following: (1) the Company must obtain approval from a majority of the
holders of Series F to modify the rights, preferences or privileges of Series F
or to create a new class or series of stock; (2) the holders of Series F are
entitled to a liquidation payment of $7.52 per share (plus all declared and
unpaid dividends) prior to payments to holders of other preferred stock. After
payment to these other preferred stockholders, the holders of Series F
participate with common stockholders and Series D and Series E preferred
stockholders until the holders of Series F have received an aggregate payment
of $22.56; and (3) the Company must obtain approval from the holders of Series
D, Series E and Series F to declare or pay any dividends, repay stockholders
loans and issue more than 2,600,000 shares of stock to the Company's employees,
officers, directors and consultants on or before the earlier of the initial
public offering of the Company or March 31, 2001. The redemption rights of
Series F are substantially the same as those of Series E.
In connection with this issuance the Company expects to record a beneficial
conversion charge of approximately $6,445,000 representing the difference
between the fair market value
F-28
<PAGE>
DOCENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information as of June 30, 2000 and/or for the six months
ended June 30, 2000 and 1999 is unaudited)
of the Company's common stock on the date of issuance of $10.00 over the
conversion price of $7.52. Based on the conversion terms this charge will be
recorded in the third quarter of fiscal 2000.
Option Grants
In July and August 2000, the Company issued options to purchase up to
1,372,904 shares of the Company's common stock at an exercise of $3.50 to
employees. The Company will record deferred stock-based compensation of
approximately $8,646,000 for these options which will be amortized over the
vesting period, generally four years.
Receivables from Stockholders
In conjunction with the exercise of 647,916 stock options in July and August
2000 by three officers of the Company, the Company issued full recourse notes
totalling $647,916. These notes bear interest at 6.62% per annum and have six-
year terms.
F-29
<PAGE>
Set forth on the back page is the Docent logo in the center of the page.
<PAGE>
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide information different from that contained in
this prospectus. We are offering to sell, and seeking offers to buy, shares of
common stock only in jurisdictions where offers and sales are permitted.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Special Note Regarding Forward-Looking Statements and Industry Data...... 22
Use of Proceeds.......................................................... 23
Dividend Policy.......................................................... 23
Capitalization........................................................... 24
Dilution................................................................. 25
Selected Consolidated Financial Data..................................... 27
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 29
Business................................................................. 39
Management............................................................... 55
Certain Transactions..................................................... 67
Principal Stockholders................................................... 70
Description of Capital Stock............................................. 73
Shares Eligible for Future Sale.......................................... 78
Underwriting............................................................. 80
Legal Matters............................................................ 84
Experts.................................................................. 84
Where You Can Find Additional Information................................ 84
Index to Consolidated Financial Statements............................... F-1
</TABLE>
Until , 2000 (25 days after the date of this prospectus), all dealers
that buy, sell or trade in this securities, whether or not participating in
this offering, may be required to deliver a prospectus. Dealers are also
obligated to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
-------------------------------------------------------------------------------
[LOGO OF DOCENT INC.]
8,000,000 Shares
Common Stock
Deutsche Banc Alex. Brown
Dain Rauscher Wessels
Thomas Weisel Partners LLC
Prospectus
, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of Common Stock being registered. All amounts are estimates
except the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
Amount
to be Paid
----------
<S> <C>
SEC Registration Fee............................................. $ 24,288
NASD Filing Fee.................................................. 8,500
Nasdaq National Market Listing Fee............................... 90,000
Printing and Engraving........................................... 800,000
Legal Fees and Expenses.......................................... 675,000
Accounting Fees and Expenses..................................... 600,000
Blue Sky Fees and Expenses....................................... 10,000
Transfer Agent Fees.............................................. 30,000
Miscellaneous.................................................... 62,212
----------
Total.......................................................... $2,300,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law provides for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). Article VI.B. of the
Registrant's Amended and Restated Certificate of Incorporation (Exhibit 3.2
hereto) and Article XI of the Registrant's Amended and Restated Bylaws (Exhibit
3.4 hereto) provide for indemnification of the Registrant's directors,
officers, employees and other agents to the extent and under the circumstances
permitted by the Delaware General Corporation Law. The Registrant has also
entered into agreements with its directors and officers that will require the
Registrant, among other things, to indemnify them against certain liabilities
that may arise by reason of their status or service as directors or officers to
the fullest extent not prohibited by law.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by
ourselves, our underwriters and our directors and officers of the underwriters,
for certain liabilities, including liabilities arising under the Act and
affords certain rights of contribution with respect thereto.
Item 15. Recent Sales of Unregistered Securities
Since June 1997, we have issued and sold the following unregistered
securities:
1. On June 27, 1997, we issued 3,725,000 shares to Pardner and Cynthia Wynn,
the shareholders of Stanford Testing Systems, Inc. upon its merger into the
Company, of which 1,018,550 shares were subsequently repurchased.
2. Other than as described in item 1 above, between June 1997 and September
1, 2000, we issued and sold an aggregate of 4,394,866 shares of common stock at
prices ranging from $0.10 to $5.00 per share, net of any repurchases. The
recipients of the shares were all employees, directors and consultants.
II-1
<PAGE>
3. In June 1997, we sold 5,799,998 shares of Series A convertible preferred
stock to seven investors for an aggregate purchase price of $3,914,998.65.
4. In June 1998, we sold 2,000,000 shares of Series B convertible preferred
stock to four investors for an aggregate purchase price of $2,000,000.
5. In September 1998, we sold 833,333 shares of Series B-1 convertible
preferred stock to four investors for an aggregate purchase price of
$999,999.60.
6. From November 1998 to March 1999, we sold 2,578,032 shares of Series C
convertible preferred stock to four investors for an aggregate purchase price
of $4,795,139.52.
7. From August 1999 to December 1999, we sold 7,180,420 shares of Series D
convertible preferred stock to twelve investors for an aggregate purchase price
of $20,536,001.20.
8. In April 2000, we sold 3,719,477 shares of Series E convertible preferred
stock to twenty-five investors for an aggregate purchase price of
$27,970,467.04.
9. In August and September 2000, we sold 2,598,875 shares of Series F
convertible preferred stock to 14 investors for an aggregate purchase price of
$19,543,540.
10. In March 1999, we issued warrants to purchase an aggregate of 119,962
shares of common stock at an exercise price of $0.30 per share. These warrants
expire in November 2001.
11. In March 1998, we issued a warrant to purchase 10,000 shares of Series B
convertible preferred stock at an exercise price of $1.25 per share. This
warrant expires in March 2003.
12. In April 1999, we issued warrants to purchase an aggregate of 228,493
shares of Series C convertible preferred stock at an exercise price of $1.86
per share. These warrants expire in April 2006.
13. In March 1999, we issued a warrant to purchase up to 175,000 shares of
convertible preferred stock at an exercise price of the greater of $1.86 per
share or the highest purchase price per share paid by a purchaser of our
convertible preferred stock in a financing at any time after March 23, 1999. In
December 1999, 100,000 shares of Series D convertible preferred stock were
issued at $2.86 per share upon exercise of the warrant. The remaining 75,000
shares were not issued and the warrant expired at December 31, 1999.
14. In December 1999, we issued a warrant to purchase up to 250,000 shares of
Series D convertible preferred stock at an exercise price of $2.86 per share.
This warrant expires in December 2002.
15. In March 2000, we issued a warrant to purchase up to 200,000 shares of
common stock at an exercise price of $10.00 per share. This warrant expires on
October 31, 2000.
16. In March 2000, we issued warrants to purchase an aggregate of 2,446,932
shares of Series E convertible preferred stock at an exercise price of $7.52
per share. These warrants expire at various times over the next three years.
17. In April 2000, we issued a warrant to purchase that number of shares of
common stock equal to $274,733 divided by the exercise price of the warrant.
The exercise price will be at the initial public offering price if the offering
occurs within six months of the closing of Series E, otherwise it will be $7.52
per share.
18. In September 2000, we issued a warrant to purchase that number of shares
of common stock equal to $162,500 divided by the exercise price of the warrant.
The exercise
II-2
<PAGE>
price will be at the initial public offering price if the offering occurs
within six months of the closing of Series F, otherwise it will be $7.52 per
share.
The sales and issuances of the above securities, other than the sales and
issuances in Item 2, were deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation
D promulgated thereunder, as transactions by an issuer not involving a public
offering and involving only sophisticated investors or "accredited" investors
as defined under Rule 501 of the Securities Act. The sales and issuances of
securities listed above in Item 2 were deemed exempt by virtue of Rule 701
promulgated under Section 3(b) of the Securities Act, as transactions by an
issuer pursuant to compensatory benefit plans and contracts relating to
compensation made to employees, directors and consultants as provided under
Rule 701. All of the foregoing securities are deemed restricted securities for
the purposes of the Securities Act. The recipients of securities in each of
these transactions represented their intention to acquire the securities for
investment only and not with view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationship with the Registrant, to information
about the Registrant.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
See exhibits listed on the Exhibit Index following the signature page of the
Form S-1, which is incorporated herein by reference.
(b) Financial Statement Schedules
Schedules have been omitted because they are not applicable or not required
or because the information is included elsewhere in the Financial Statements or
the notes thereto.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, 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 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 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, as amended, 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 Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
II-3
<PAGE>
(2) For the purpose of determining any liability under the Securities Act of
1933, as amended, 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 the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) The Registrant will provide to the underwriters at the closing(s)
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.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 6 to the Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Mountain View, State of California, on the 28th day of September, 2000.
DOCENT, INC.
/s/ David R. Ellett
By: _________________________________
David R. Ellett,
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ David R. Ellett Chairman, President, Chief September 28, 2000
____________________________________ Executive Officer and
David R. Ellett Director (Principal
Executive Officer)
/s/ Donald E. Lundgren Vice President and Chief September 28, 2000
____________________________________ Financial Officer
Donald E. Lundgren (Principal Financial and
Accounting Officer)
/s/ David Mandelkern Executive Vice President, September 28, 2000
____________________________________ Chief Technology Officer,
David Mandelkern Secretary and Director
/s/ Kevin G. Hall Director September 28, 2000
____________________________________
Kevin G. Hall
/s/ Jos C. Henkens Director September 28, 2000
____________________________________
Jos C. Henkens
/s/ Pardner Wynn Director September 28, 2000
____________________________________
Pardner Wynn
/s/ Ali Kutay Director September 28, 2000
____________________________________
Ali Kutay
/s/ Robert A. Lauer Director September 28, 2000
____________________________________
Robert A. Lauer
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Exhibit Description
------- ----------------------------------------------------------------------
<C> <S>
1.1# Form of Underwriting Agreement
3.1# Amended and Restated Certificate of Incorporation.
3.2# Amended and Restated Certificate of Incorporation, to be effective
upon completion of this offering.
3.3# Bylaws.
3.4# Amended and Restated Bylaws, to be effective upon completion of this
offering.
4.1# Form of Stock Certificate.
4.2# Amended and Restated Investors' Rights Agreement, dated April 7, 2000.
5.1# Opinion of Pillsbury Madison & Sutro LLP.
10.1# Registrant's 1997 Stock Option Plan.
10.2# Registrant's 2000 Omnibus Equity Incentive Plan.
10.3# Registrant's 2000 Employee Stock Purchase Plan.
10.4# Form of Directors and Officers' Indemnification Agreement, to be
entered into subsequent to the completion of this offering.
10.5# Employment Letter from the Registrant to David Ellett dated February
25, 1998.
10.6# Employment Letter from the Registrant to Richard Dellinger dated
November 4, 1997.
10.7# Employment Letter from the Registrant to Kathleen Gogan dated
September 22, 1998.
10.8# Officer's Change in Control Agreement dated October 14, 1999 by and
between the Registrant and David Mandelkern.
10.9# Officer's Change in Control Agreement dated October 14, 1999 by and
between the Registrant and Richard Dellinger.
10.10+# Integrator Reseller Agreement dated January 7, 2000 by and between the
Registrant and Hewlett-Packard Company, as amended July 31, 2000.
10.11+ Master Consulting Services dated April 1, 2000 between the Registrant
and Andersen Consulting, LLP.
10.12+# Amended and Restated ASP Development and Hosting Agreement dated March
31, 2000 between the Registrant and The Richardson Company.
10.13+ Master Alliance Agreement dated March 31, 2000 between the registrant
and Andersen Consulting, LLP.
10.14+# Master License and Services Agreement dated June 26, 2000 between the
registrant and Qwest Communications.
10.15+# Professional Services Agreement dated June 27, 2000 between the
Registrant and Qwest Communications.
10.16+# License and Co-Marketing Agreement dated May 26, 2000 between the
Registrant (Netherlands B.V.) and FT Knowledge, Ltd.
10.17+# Marketing Agreement dated March 31, 2000 between the Registrant and
Harvard Business School Publishing.
10.18+# Professional Services Agreement dated March 25, 1999 between the
Registrant and Impiric (formerly Wunderman Cato Johnson).
10.19+# Master License Agreement dated March 25, 1999 between the Registrant
and Impiric (formerly Wunderman Cato Johnson).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Exhibit Description
------- ----------------------------------------------------------------------
<C> <S>
10.20+# License Agreement for commercial use of Docent Software dated December
30, 1998 between the Registrant and Veritas Software, Inc.
10.21+# Term Sheet dated August 7, 2000 between the Registrant and SmartForce.
10.22# Lease Agreement dated September 22, 1999 by and between the Registrant
and Limar Realty Corp. #17.
10.23# Lease Agreement dated February 1, 2000 by and between the Registrant
and Connecticut General Life Insurance Company.
10.24# Quickstart Loan and Security Agreement dated August 1, 1997 by and
between the Registrant and Silicon Valley Bank as amended on October
31, 1997.
10.25# Subordinated Loan and Security Agreement dated April 23, 1999 by and
between the Registrant and Comdisco, Inc.
10.26# Promissory Note from David Ellett to the Registrant.
10.27# Promissory Note from David Mandelkern to the Registrant.
10.28# Stock Pledge Agreements dated July 9, 1997 by and between the
Registrant and David Mandelkern and dated September 30, 1998 by and
between the Registrant and David Ellett.
10.29# Warrant to Purchase Shares of Series C Preferred Stock dated April 23,
1999.
10.30# Warrant to Purchase Shares of Series D Preferred Stock dated December
1999.
10.31# Warrant to Purchase Shares of Series E Preferred Stock dated March 31,
2000.
10.32# Severance Agreement dated June 27, 1997 by and among Pardner Wynn,
David Mandelkern, Norwest Equity Partners, V and Advanced Technology
Ventures IV.
21.1 Subsidiaries of the Registrant.
23.1# Consent of Pillsbury Madison & Sutro LLP (included in Exhibit 5.1).
23.2# Consent of Independent Accountants.
24.1# Power of Attorney. Reference is made to Page II-4.
27.1# Financial Data Schedule.
</TABLE>
--------
+ Confidential Treatment Requested; Portions of these exhibits have been filed
separately with the Securities and Exchange Commission.
# Previously Filed.
