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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 14, 2000
REGISTRATION NO. 333-92429
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DIGITALTHINK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7372 94-3244366
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
DIGITALTHINK, INC.
1098 HARRISON STREET
SAN FRANCISCO, CA 94103
(415) 625-4000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
PETER J. GOETTNER
CHIEF EXECUTIVE OFFICER
DIGITALTHINK, INC.
1098 HARRISON STREET
SAN FRANCISCO, CA 94103
(415) 625-4000
(415) 437-3877 (FAX)
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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MARIO M. ROSATI, ESQ. ADAM D. LEVY, ESQ. WILLIAM D. SHERMAN, ESQ.
CHRISTOPHER D. MITCHELL, ESQ. GENERAL COUNSEL JUSTIN L. BASTIAN, ESQ.
WILSON SONSINI DIGITALTHINK, INC. ROCHELLE A. KRAUSE, ESQ.
GOODRICH & ROSATI 1098 HARRISON STREET MARY ANNE BECKING, ESQ.
PROFESSIONAL CORPORATION SAN FRANCISCO, CA 94103 MORRISON & FOERSTER, LLP
650 PAGE MILL ROAD (415) 625-4000 755 PAGE MILL ROAD
PALO ALTO, CA 94304 PALO ALTO, CA 94304
(650) 493-9300 (650) 813-5600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are 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 Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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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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THE INFORMATION IN THIS 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 EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES AND IT IS NOT SOLICITING
OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS
NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JANUARY 14, 2000
4,000,000 Shares
[DIGITALTHINK LOGO]
Common Stock
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Prior to this offering, there has been no public market for our common
stock. The initial public offering price of our common stock is expected to be
between $10.00 and $12.00 per share. We have made application to list our common
stock on The Nasdaq Stock Market's National Market under the symbol "DTHK."
The underwriters have an option to purchase a maximum of 600,000 additional
shares of common stock to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS DIGITALTHINK
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<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
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Delivery of the shares of common stock will be made on or about
, 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
CHASE H&Q
ROBERTSON STEPHENS
The date of this prospectus is , 2000.
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[ARTWORK]
<PAGE> 4
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY................... 3
RISK FACTORS......................... 6
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS................. 17
USE OF PROCEEDS...................... 17
DIVIDEND POLICY...................... 17
CAPITALIZATION....................... 18
DILUTION............................. 19
SELECTED FINANCIAL DATA.............. 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...................... 21
BUSINESS............................. 30
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PAGE
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MANAGEMENT........................... 41
TRANSACTIONS WITH RELATED
PARTIES............................ 50
PRINCIPAL STOCKHOLDERS............... 52
DESCRIPTION OF CAPITAL STOCK......... 54
SHARES ELIGIBLE FOR FUTURE SALE...... 57
UNDERWRITING......................... 59
NOTICE TO CANADIAN RESIDENTS......... 62
LEGAL MATTERS........................ 63
EXPERTS.............................. 63
ADDITIONAL INFORMATION............... 63
INDEX TO FINANCIAL STATEMENTS........ F-1
</TABLE>
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS
OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS REQUIREMENT IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
<PAGE> 5
PROSPECTUS SUMMARY
The following summary highlights information that we present more fully
elsewhere in this prospectus. You should read this entire prospectus carefully.
DIGITALTHINK, INC.
We provide online learning courses and services, which we refer to as
e-learning solutions. Our outsourced, Web-based courses enable customers to
deliver learning to any participant who has access to the Internet using a
standard Web browser. Our e-learning solutions are designed to enable our
customers to deliver knowledge and tools rapidly to a broad set of
constituencies and provide customers the ability to monitor, track and measure
student participation, performance and knowledge acquisition. Businesses
purchase course registrations and offer those courses to participants, including
their employees, distributors, suppliers and customers, a group which we refer
to as the "extended enterprise." We have over 200 customers and over 180 online
courses at December 31, 1999.
Our e-learning solutions help customers meet their strategic business
objectives by addressing their specific education requirements and delivering
targeted, relevant information to increase the productivity of their employees,
improve the effectiveness of their sales channels and enhance the knowledge and
satisfaction of their customers. We initially focused on delivering information
technology courses. To date, we have developed courses for customers in the
technology, financial services, healthcare and telecommunications industries.
Customers which have effectively deployed our courses include Adobe, Deutsche
Bank, Hewlett-Packard, KPMG, Lawson Software, Sun Microsystems and Texas
Instruments.
Our experience indicates that senior business executives recognize that a
principal source of competitive advantage in today's knowledge-based economy is
the depth and consistency of employee, distributor, supplier and customer
knowledge. We believe businesses that successfully drive knowledge to this
extended enterprise can maximize productivity and sustain a competitive
advantage. Recognizing the need to establish, maintain and extend this
advantage, businesses are increasing the amounts they spend on learning. In
1997, businesses spent approximately $55 billion primarily on in-person,
instructor-led training, according to the Department of Education.
Instructor-led programs can be costly, ineffective, difficult to deploy to a
dispersed set of participants and often provide no reliable way to track
participants' progress or the effectiveness of learning programs.
We host e-learning courses and services that are designed to deliver the
knowledge necessary to compete in today's dynamic marketplace. Our e-learning
solutions combine powerful delivery technologies, customized content, dedicated
tutors and tools to track and report on course registration and measure student
participation and performance. In addition to hosting, we centrally manage all
software and content. This e-learning solution significantly reduces our
customers' learning infrastructure costs and enables us to rapidly customize and
update our courses. As more businesses use online learning courses, the online
corporate learning market is projected to grow from $550 million in 1998 to more
than $11.4 billion in 2003, according to International Data Corporation.
Our Web-based technology can scale to deliver online content to thousands
of concurrent participants who can access courses from anywhere, at anytime
through a standard Web browser. This enables our customers to simultaneously
educate large, geographically dispersed groups on new initiatives, products or
processes. Our innovative instructional design encourages participants to
interact with tutors and peers through e-mail and the Internet using chat rooms
and discussion boards.
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We intend to leverage our expertise in course design and delivery to
establish the most effective e-learning courses and services for our customers
as they expand their learning initiatives. Key elements of our strategy include:
- enhancing our e-learning courses and services;
- developing long-term strategic relationships with our customers;
- introducing new courses and leveraging our existing courses across
multiple customers and industries;
- expanding our sales network of learning resellers, consulting companies,
development partners and Internet portals; and
- delivering our e-learning solutions in strategically targeted
international markets.
We generate revenues from participants registering for catalog or
customized e-learning courses. We begin recognizing these Delivered Learning
fees when a participant registers for a course. These fees are recognized
ratably over the term of the course, which is typically six months. We also
derive revenues from contracts that require us to develop custom-tailored
e-learning solutions. Typically, these Learning Solution service revenues are
generated from implementation services, course content development,
instructional plan design and release of the course for access by participants.
Learning Solution service revenues are recognized on a percentage of completion
basis.
We will encounter various risks and uncertainties in connection with the
implementation of our strategy. These include uncertainties regarding acceptance
of e-learning, uncertainties associated with our plans to develop and acquire
new course offerings and uncertainties associated with attracting and retaining
skilled employees. In addition, we have an accumulated deficit of $34.1 million
at December 31, 1999 and anticipate incurring losses, which may be substantial,
in the foreseeable future. We also operate in a highly competitive industry with
relatively low barriers to entry.
We are located at 1098 Harrison Street, San Francisco, California 94103,
and our telephone number is (415) 625-4000. Our corporate Web site is located at
www.digitalthink.com. Statements and information contained on our Web site are
not part of this prospectus. We were incorporated in California in April 1996
and reincorporated in Delaware in December 1999.
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DigitalThink, the Internet Learning Solution, Smart Companies Get It and
the DigitalThink logo are trademarks and service marks of ours. Other service
marks, trademarks and trade names referred to in this prospectus are the
property of their respective owners.
THE OFFERING
Common stock offered............... 4,000,000 shares
Common stock to be outstanding
after this offering................ 31,374,789 shares
Use of proceeds.................... General corporate purposes, including
working capital.
Proposed Nasdaq National Market
symbol............................. DTHK
The total number of outstanding shares of our common stock above is based
on:
- 4,560,199 shares of our common stock outstanding as of December 31, 1999;
and
- automatic conversion of all outstanding shares of preferred stock upon
completion of this offering into 22,814,590 additional shares of common
stock.
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SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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PERIOD FROM YEAR ENDED NINE MONTHS ENDED
APRIL 22, 1996 MARCH 31, DECEMBER 31,
(INCEPTION) TO ----------------- ----------------------
MARCH 31, 1997 1998 1999 1998 1999
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STATEMENTS OF OPERATIONS DATA:
Revenues:
Delivered Learning fees....................... $ 5 $ 148 $ 1,034 $ 685 $ 3,056
Learning Solution services.................... 20 52 813 472 3,432
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Total revenues........................... 25 200 1,847 1,157 6,488
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Total costs and expenses.......................... 945 3,855 7,764 5,010 19,773
------ ------- ------- ------- --------
Loss from operations.............................. (920) (3,655) (5,917) (3,853) (13,285)
Net loss.......................................... $ (888) $(3,469) $(5,751) $(3,779) $(12,936)
====== ======= ======= ======= ========
Basic and diluted loss per common share........... $(0.29) $ (1.27) $ (2.26) $ (1.46) $ (4.32)
====== ======= ======= ======= ========
Shares used in computing loss per share........... 4,010 4,036 4,095 4,088 4,280
====== ======= ======= ======= ========
Pro forma basic and diluted loss per common
share........................................... $ (0.56) $ (0.39) $ (0.77)
======= ======= ========
Shares used in computing pro forma loss per
share........................................... 16,687 15,240 23,930
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DECEMBER 31, 1999
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PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 23,344 $ 23,344 $ 63,564
Working capital............................................. 21,215 21,215 61,435
Total assets................................................ 31,545 31,545 71,765
Redeemable convertible preferred stock...................... 56,214 -- --
Accumulated deficit......................................... (34,075) (34,075) (34,075)
Total stockholders' equity (deficit)........................ (31,852) 24,362 64,582
</TABLE>
See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing per share data.
The pro forma balance sheet data reflects the conversion of all outstanding
shares of preferred stock into shares of common stock upon the completion of
this offering.
The as adjusted amounts above give effect to the sale of the 4,000,000
shares of common stock in this offering at an assumed initial offering price of
$11.00 per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses.
The above information excludes:
- 4,017,729 shares of common stock issuable upon exercise of options
outstanding as of December 31, 1999 at a weighted exercise price of $1.01
per share;
- 1,797,072 shares of common stock available for future grant at December
31, 1999 under our 1996 stock plan; and
- 200,000 additional shares of common stock available for issuance under
our 1999 employee stock purchase plan immediately following this
offering.
Unless otherwise specifically stated, information throughout this
prospectus:
- assumes no exercise of the underwriters' over-allotment option; and
- assumes the filing of our amended and restated certificate of
incorporation upon completion of this offering.
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RISK FACTORS
You should consider the risks described below before making an investment
decision. We believe that the risks and uncertainties described below are the
principal material risks facing our company as of the date of this prospectus.
In the future, we may become subject to additional risks that are not currently
known to us. Our business, financial condition or results of operations could be
materially adversely affected by any of the following risks. The trading price
of our common stock could decline due to any of the following risks, and you
might lose all or part of your investment.
WE COMMENCED OPERATIONS IN APRIL 1996 AND OUR LIMITED OPERATING HISTORY AND THE
NEW AND EMERGING E-LEARNING MARKET MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS
AND FUTURE PROSPECTS.
We commenced operations in April 1996 and did not begin to generate
significant revenue until fiscal 1999, which ended on March 31, 1999. In fiscal
1999, we had revenues of $1.8 million. We are still in the early stages of our
development, which, when combined with the new and emerging market for Web-based
delivery of learning programs, or e-learning market, make it difficult to
evaluate our business or our prospects. Because of our limited operating
history, we have a limited and unproven ability to predict the trends that may
emerge in the e-learning market and affect our business. The uncertainty of our
future performance, in general, and the uncertainty regarding the acceptance of
e-learning, in particular, increases the risk that we will be unable to build a
sustainable business and that the value of your investment will decline.
WE HAVE A HISTORY OF LOSSES AND A LARGE ACCUMULATED DEFICIT OF $34.1 MILLION AT
DECEMBER 31, 1999, WE EXPECT FUTURE LOSSES AND WE MAY NOT ACHIEVE OR MAINTAIN
PROFITABILITY.
We have experienced losses in each quarter since our inception and expect
that our losses will increase in each quarter at least through the end of fiscal
2001. Our accumulated deficit as of December 31, 1999, was $34.1 million. We
have never achieved a profitable quarter and we expect to continue to incur
increasing quarterly losses as we expand our operations and fund our growth. We
plan to increase our operating expenses to market, sell and support our
e-learning solutions, build infrastructure and hire additional staff. We also
plan to invest heavily to develop and acquire new course offerings with new
areas of expertise, which will increase operating expenses in absolute dollars.
We currently expect our total costs and expenses to be at least $50.0 million in
fiscal 2001. As a result, we will need to significantly increase our quarterly
revenues to achieve profitability. If we do not generate sufficient revenues or
become profitable within a timeframe expected by public market analysts or
investors, the market price of our common stock will likely decline. 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.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS WHICH COULD
ADVERSELY AFFECT OUR STOCK PRICE.
Our revenue and operating results are volatile and difficult to predict and
may be susceptible to declines in future periods. Our quarterly results of
operations may fluctuate significantly in the future due to shortfalls in
revenues or orders. We therefore believe that quarter to quarter comparisons of
our operating results may not be a good indication of our future performance,
and you should not rely on them to predict our future performance or the future
performance of our stock price. In the event of a revenue or order shortfall or
unanticipated expenses in some future quarter or quarters, our operating results
may be below the expectations of public market analysts or investors. In such an
event, the price of our common stock may decline significantly.
Due to the factors discussed in this risk factors section and elsewhere in
this prospectus and because we are engaged in a relatively new and emerging
business, revenue and operating results for
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the foreseeable future are difficult to forecast. Our current and future expense
estimates are largely fixed and based, to a significant degree, on our estimates
of future revenue. We will likely be unable to, or may elect not to, reduce
spending quickly enough to offset any unexpected revenue shortfall. Therefore,
any significant shortfall in revenue in relation to our expectations would cause
our quarterly results for a particular period to decline.
OUR RECOGNITION OF REVENUE IS DEPENDENT UPON THE ACHIEVEMENT OF VARIOUS
MILESTONES, AND OUR INABILITY TO RECOGNIZE REVENUE IN ACCORDANCE WITH OUR
EXPECTATIONS WILL HARM OUR OPERATING RESULTS.
In accordance with our revenue recognition policy, our ability to record
revenues depends upon several factors. These factors include acceptance by our
customers of new courses and the pace of participant registrations in courses
once they are completed and made available on our Web site. All of our customer
contracts provide that at least a portion of our revenues depend on either
course completion or participant registration, or both.
Revenues from custom-tailored courses accounted for approximately 53% of
our total revenues for the nine month period ended December 31, 1999.
Custom-tailored courses are dependent upon customers providing us with the
subject matter expertise to be incorporated into the course as well as our
completion of production and customer sign-off. Accordingly, if customers do not
provide us with the specific subject matter content in a timely manner, our
ability to recognize revenues will be harmed, which would harm our operating
results. In addition, if participant registration, which requires the
participants to come to our Web site to sign up for the course, does not proceed
as expected, our ability to recognize revenues will be delayed, which will also
harm our operating results. Participant registration depends in large part on
the promotional activities of our customers. If customers fail to take necessary
measures to require employee enrollment in courses or if they fail to promote
the course effectively to persons outside their organization, our ability to
recognize revenues, and therefore our operating results, could be harmed.
WE HAVE RELIED, AND EXPECT TO CONTINUE TO RELY, ON A LIMITED NUMBER OF CUSTOMERS
FOR THE MAJORITY OF OUR REVENUES, AND ANY DELAY IN RECEIVING REVENUES FROM THESE
CUSTOMERS COULD HARM OUR FINANCIAL PERFORMANCE IN ANY QUARTER.
During the first three quarters of fiscal 2000, we derived more than 50% of
our revenues from five customers. As a result, our operating results could
suffer if we lost any of these customers or if revenues from these customers are
delayed in any future fiscal period. For example, in the first three quarters of
fiscal 2000, KPMG LLP accounted for more than 10% of our total revenues and our
five largest customers accounted for more than 40% of our total revenues. No
other single customer has accounted for more than 10% of our revenues in the
first three quarters of fiscal 2000. We expect that we will continue to depend
upon a small number of customers for a significant portion of our revenues.
OUR FUTURE GROWTH DEPENDS ON SUCCESSFUL HIRING AND RETENTION, INCLUDING HIRING
AND RETENTION OF THIRD-PARTY TUTORS, AND WE MAY BE UNABLE TO HIRE AND RETAIN THE
SKILLED PERSONNEL WE NEED TO SUCCEED.
Our future growth depends on successful hiring and retention, and we may be
unable to hire and retain the skilled personnel we need to succeed. Although we
have sufficient headcount to accommodate our current level of business, the
growth of our business and revenues will depend in large part upon our ability
to attract and retain sufficient numbers of highly skilled employees,
particularly course content developers, Web designers and technical and sales
personnel. Additionally, we primarily rely on individual third parties to
provide the majority of our tutoring and our ability to adequately support our
courses is directly tied to the availability and competency of these third-party
tutors. Qualified personnel are in great demand throughout education and
Internet-related industries
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and we require a relatively rare blend of skills. The demand for qualified
personnel is particularly acute in the San Francisco Bay Area market in which we
compete for a majority of these personnel due to the large number of Internet
companies and the low unemployment rate in the region.
We also face non-geographically based competition for tutors because we can
utilize the services of any individual with the requisite course subject matter
knowledge and e-mail communication skills, as well as reliable Internet access
and the ability to work as a self-managed contractor. Currently, we contract
with individual tutors throughout the United States, as well as in the United
Kingdom, New Zealand and Australia. Our failure to attract and retain sufficient
skilled personnel and tutors may limit the rate at which we can grow, which will
harm our business and financial performance.
IF WE ARE UNSUCCESSFUL IN PROMOTING BRAND AWARENESS, WE MAY BE UNABLE TO GROW
OUR BUSINESS.
The development of our brand is critical to achieving widespread acceptance
and market penetration. The e-learning market is new and evolving and our
long-term success is dependent on our ability to be perceived as a leading
provider. From our inception in April 1996 through fiscal 1999, we spent $4.6
million on marketing, public relations and other brand development activities,
and have only recently hired personnel dedicated to this task. As a result, our
efforts in developing this brand awareness may not be successful. Furthermore,
many of our future sales opportunities will involve the development of private
label e-learning portals branded by our customers. These implementations will
only provide us with a limited branding opportunity. The factors which could
prevent us from successfully developing our DigitalThink brand, including the
emergence of more successful competitors and performance problems that lead to
customer dissatisfaction. If we fail to successfully promote and maintain our
brand, our operating margins and our growth may decline.
OUR BUSINESS WILL SUFFER IF E-LEARNING IS NOT WIDELY ACCEPTED.
The market for e-learning solutions is new and rapidly evolving. We expect
that we will engage in intensive marketing and sales efforts to educate
prospective customers about the benefits of our e-learning solutions. There are
a number of factors that could impact the acceptance of our e-learning
solutions, which are new and largely untested compared to more established
educational methods, including:
- companies that have historically relied on, or invested in, traditional
educational methods may be reluctant or slow to adopt Web-based
e-learning solutions;
- many of our potential customers have allocated only a limited portion of
their education budgets to e-learning; and
- end users may not use online learning solutions effectively.
If the market for e-learning fails to develop or develops more slowly than we
expect, we will not achieve our growth and revenue targets and the value of our
common stock will likely decline.
THE VARIABILITY AND LENGTH OF OUR SALES CYCLE FOR OUR E-LEARNING SOLUTIONS MAY
MAKE OUR OPERATING RESULTS UNPREDICTABLE AND VOLATILE.
The period between our initial contact with a potential customer and the
first purchase of our solution by that customer typically ranges from three to
nine months, and in some cases has extended for close to two years. Because we
rely on large sales for a substantial portion of our revenues, these long sales
cycles can have a particularly significant effect on our financial performance
in any quarter. Factors which may contribute to the variability and length of
our sales cycle include:
- the time required to educate potential customers about the benefits of
our e-learning solutions;
- the time it takes our potential customers to assess the value of online
solutions compared to more traditional educational solutions;
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- the time it takes our potential customers to evaluate competitive online
solutions;
- our potential customers' internal budget and approval processes; and
- the extended periods most large corporations require to make purchasing
decisions.
As a result of our lengthy sales cycle, we have only a limited ability to
forecast the timing and size of specific sales. This, in turn, makes it more
difficult to predict quarterly financial performance.
THE E-LEARNING MARKET IS HIGHLY COMPETITIVE AND WE MAY NOT HAVE ADEQUATE
RESOURCES TO COMPETE EFFECTIVELY, ACQUIRE AND RETAIN CUSTOMERS AND ATTAIN FUTURE
GROWTH.
The e-learning market is highly competitive and we may not have adequate
resources to compete effectively, acquire and retain customers and attain future
growth. In addition, the e-learning market is evolving quickly and is subject to
rapid technological change, shifts in customer demands and evolving learning
methodologies. The recent shift in customer demand from CD-ROM delivered
training to the use of the Internet for providing interactive courses is one
example of a technological change that has affected the e-learning market.
Future evolutions may include such technology innovations as increased bandwidth
connections to the home, the adoption of a standard for receiving voice or video
transmissions over the Internet, and development of new online learning
methodologies that achieve better knowledge results for adult learners. Our
failure to adapt to changes in our industry could cause us to lose existing
customers or fail to gain new customers. Although the e-learning market is
highly fragmented with no single competitor accounting for a dominant market
share, competition is intense. We compete primarily with:
- third-party suppliers of instructor-led education and learning;
- internal education departments; and
- other suppliers of technology-based learning solutions.
We may not provide solutions that compare favorably with traditional or new
instructor-led techniques or other technology-based learning methodologies. Our
competitors vary in size and in the scope and breadth of the courses and
services they offer. Several of our competitors have longer operating histories
and significantly greater financial, technical and marketing resources. In
addition, larger companies may enter the e-learning market through the
acquisition of our competitors. We anticipate that the lack of significant entry
barriers to the e-learning market will allow other competitors to enter the
market, increasing competition.
To succeed, we must continue to expand our course offerings, upgrade our
technology and distinguish our solution. We may not be able to do so
successfully. Any failure by us to anticipate or respond adequately to changes
in technology and customer preferences, or any significant delays in course
development or implementation, could impact our ability to capture market share.
As competition continues to intensify, we expect the e-learning market to
undergo significant price competition. We also expect to face increasing price
pressures from customers as they demand more value for their learning related
expenditures.
Increased competition or our inability to compete successfully against
current and future competitors could result in reduced operating margins, as
well as loss of market share and reduction in brand recognition.
WE MUST DELIVER COURSES THAT MEET THE NEEDS OF OUR CUSTOMERS OR OUR BUSINESS
WILL SUFFER.
To be competitive, we must develop and introduce on a timely basis new
course offerings which meet the needs of companies seeking to use our e-learning
solutions. Furthermore, the quality of our learning solutions depends in large
part on our ability to frequently update our courses and develop new content as
the underlying subject matter changes. We create courses both by using subject
9
<PAGE> 12
matter expertise provided by our customers, which we then incorporate into an
educational course format, and through material obtained from third-party
content developers. The quality of our courses depends on our receiving content
and cooperation from the following sources:
- customers, who provide us with specific subject matter expertise for
incorporation into many of our courses; and
- third-party content developers, who provide us with the curriculum for
our catalog courses.
If we do not receive materials from the above sources in a timely manner,
we may not be able to develop or deliver specialized courses for our customers
in the time frame they are expecting. Even if we do receive necessary materials
from third parties, if our employees and consultants, upon whom we rely for
instructional planning and Web design expertise, fail to complete their work in
a timely manner, we will be unable to meet customer expectations.
In the past, we have experienced delays in obtaining access to our
customers' expertise. Any prolonged delays, even when caused by our customers,
can damage our reputation and lead to a failure to satisfy a customer's demands.
WE DO NOT HAVE LONG-TERM OR EXCLUSIVE ARRANGEMENTS WITH THIRD-PARTY CONTENT
DEVELOPERS, AND SOME OF THESE DEVELOPERS MAY COMPETE WITH US.
We do not have exclusive arrangements or long-term contracts with any of
our third-party content developers, and some of these developers may compete
with us. If one or more of these content developers were to stop working with
us, we would have to rely on our employees or other content developers to
develop our courses. For relatively standard content, such as content related to
popular software applications, it may be relatively easy to obtain new or
replacement content from other sources. However, for highly specialized course
content for which few sources of expertise are available, we may not be able to
obtain reliable alternative sources on reasonable terms in a timely manner, or
at all. If we need to find new sources for content, our course development costs
could increase and we may delay the introduction of new courses. In addition,
our courses often need to be updated due to changes in technology, new product
introductions and the needs or demands of our customers, and we may be unable to
meet these demands on a timely basis.
TO REMAIN COMPETITIVE, WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES IN OUR
INDUSTRY.
The e-learning market is characterized by rapidly changing technologies,
frequent new service introductions, short development cycles and evolving
standards. We must adapt to rapidly changing technologies by maintaining and
improving the performance features and reliability of our courses. We may
experience technical difficulties that could delay or prevent the successful
development, introduction or marketing of new courses and related services. For
instance, adding capabilities to deliver video over the Internet to our courses
may be desired by some customers and may nevertheless pose a serious technical
challenge and could have a negative impact on our ability to develop and deliver
courses on a profitable basis. In addition, any new enhancements to our courses
must meet the requirements of our current and prospective customers and
participants. We could incur substantial costs to modify our services or
infrastructure to adapt to rapid technological change.
THE CONTINUED SERVICES AND LEADERSHIP OF SENIOR MANAGEMENT ARE CRITICAL TO OUR
ABILITY TO MAINTAIN OUR GROWTH AND ANY LOSS OF KEY PERSONNEL COULD ADVERSELY
AFFECT OUR BUSINESS.
Our future success depends to a significant degree on the skills and
efforts of Peter J. Goettner, one of our founders and our Chairman of the Board,
President and Chief Executive Officer, and the continued employment of Michael
W. Pope, our Chief Financial Officer, and Todd A. Clyde, our Vice President,
Learning Solutions. None of these persons are bound by employment agreements and
10
<PAGE> 13
each would be difficult to replace. If we lose the services of Mr. Goettner or
any other senior executives, and especially if one or more of these executives
joins a competitor or forms a competing company, our business and our ability to
successfully implement our business plan could be seriously harmed.
WE ARE GROWING RAPIDLY AND IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, WE MAY
NOT BE ABLE TO TAKE ADVANTAGE OF MARKET OPPORTUNITIES, WHICH WOULD SEVERELY
IMPACT OUR ABILITY TO COMPETE.
Our recent rapid growth has placed, and future anticipated growth is likely
to continue to place, a considerable strain on our managerial resources. We have
grown from 33 employees on January 1, 1998 to 200 employees on December 31,
1999. In particular, several members of our senior management joined us within
the last several months, including Michael W. Pope, our Chief Financial Officer,
and Linda T. Drumright, our Vice President of Engineering. These individuals
have not previously worked with our existing management team.
We plan to continue to expand our sales and marketing, administration,
content and technology development and tutoring organizations. In order to
manage this growth effectively, we will need to improve our financial and
managerial controls, our reporting systems and procedures. In addition, we will
need to expand, train and manage our work force, which we anticipate will expand
significantly. If we fail to manage our growth effectively, we will not be able
to capitalize on attractive business opportunities and may fail to adequately
support our existing customer base. Should this occur, our reputation and
competitive position could be seriously damaged.
IF WE DO NOT DEVELOP OUR INDIRECT SALES CHANNELS, WE WILL BE LESS LIKELY TO
INCREASE OUR REVENUES.
If we do not develop our indirect sales channels, we will be less likely to
increase our revenues. To date, more than 90% of our sales have been made
through direct sales efforts. We believe that we will need to diversify our
sales efforts if we are to be successful. If we do not develop indirect sales
channels, we may miss sales opportunities that might be available through these
other channels. For example, domestic and international resellers may be able to
reach new customers more quickly or more effectively than our direct sales
force. We are currently investing in personnel and marketing activities to
develop indirect sales channels including instructor-led training companies that
are seeking to provide an e-learning product offering, e-commerce Web sites that
sell Web-based learning, and other market participants such as software
producers and systems integrators who provide learning as an additional service
to their clients. Although we are currently investing to develop these indirect
sales channels, we may not succeed in establishing a channel that can
effectively market our e-learning solutions. In addition, we may not be able to
manage conflicts across our various sales channels, and our focus on increasing
sales through our indirect channel may divert management resources and attention
from direct sales.
IN ORDER TO ADDRESS THE EXPECTED GROWTH IN OUR BUSINESS WE MUST CONTINUE TO
IMPROVE THE CAPACITY OF OUR COMPUTER NETWORK; ANY FAILURE OF OUR NETWORK WOULD
DIRECTLY IMPACT OUR ABILITY TO DELIVER COURSES AND WOULD LIKELY LEAD TO
SIGNIFICANT LOSSES AND CUSTOMER DISSATISFACTION.
In order to address the expected growth in our business we must continue to
improve the capacity of our computer network. The continuing and uninterrupted
performance of our internal computer network and Internet course servers is
critical to our success. Any system failure that causes interruptions or delays
in our ability to make our courses accessible to customers could reduce customer
satisfaction and, if sustained or repeated, could reduce the attractiveness of
our courses and services and result in significant revenue losses. We are
particularly vulnerable to network failures during periods of rapid growth when
our roster of courses and participants can outpace our network capacity. The
continued viability of our business requires us to support multiple participants
concurrently and deliver fast response times with minimal network delays. We are
continuing to add
11
<PAGE> 14
system capacity, but we may not be able to adequately address network capacity,
especially during periods of rapid growth. Any failure to meet these capacity
requirements could lead to additional expenditures, lost business opportunities
and damage to our reputation and competitive position.
ANY FAILURE OF, OR CAPACITY CONSTRAINTS IN, THE SYSTEMS OF THIRD PARTIES ON
WHICH WE RELY COULD ADVERSELY AFFECT OUR BUSINESS.
Our communications hardware and some of our other computer hardware
operations are located at the facilities of Exodus Communications, Inc. in Santa
Clara, California. Unexpected events such as natural disasters, power losses and
vandalism could damage our systems. Telecommunications failures, computer
viruses, electronic break-ins, earthquakes, fires, floods, other natural
disasters or other similar disruptive problems could adversely affect the
operation of our systems. Despite precautions we have taken, unanticipated
problems affecting our systems in the future could cause interruptions or delays
in the delivery of our courses. The failure of our telecommunications provider
or Exodus, which together provide us with our Internet connection, to provide
sufficient and timely data communications capacity and network infrastructure
could cause service interruptions or slower response times, and reduce customer
demand for our courses and services. Our insurance policies may not adequately
compensate us for any losses that may occur due to any damages or interruptions
in our systems. Accordingly, we could be required to make capital expenditures
in the event of damage. We do not currently have fully redundant systems or a
formal disaster recovery plan.
Our Web site must accommodate a high volume of traffic and deliver courses
and other information in a timely manner. Our Web site has experienced in the
past, and may experience in the future, slow response times for a variety of
reasons. We periodically experience unscheduled system downtime, which results
in our Web site being inaccessible to participants. Since September 1, 1999, we
have experienced less than 35 hours of both scheduled and unscheduled instances
of system downtime. Although we have not suffered material losses during these
downtimes, if we experience extended downtime in the future, customers and our
course participants could lose confidence in our services.
WE CURRENTLY INTEND TO EXPAND INTERNATIONALLY AND, AS A RESULT, WE COULD BECOME
SUBJECT TO NEW RISKS.
Our strategy includes international expansion of our business. Our current
plans include possible expansion into the United Kingdom and Japan during fiscal
2001. Our prospects in Japan could be affected by recessionary economic
conditions, which prevailed for much of the 1990s. In the United Kingdom, we
could be affected by political and monetary changes, including European
unification and introduction of the Euro. This international expansion will
require significant management attention and financial resources and could harm
our financial performance by increasing our costs. We have very limited
experience in marketing, selling and distributing courses internationally. We
currently have no employees located outside of the United States. We could
become subject to additional risks as we expand internationally, including:
- difficulties in staffing and managing international operations;
- our inability to develop content localized for international
jurisdictions;
- protectionist laws and business practices that favor local competition;
- multiple, conflicting and changing governmental laws and regulations;
- slower adoption of e-learning solutions;
- different learning styles;
- longer sales and payment cycles;
12
<PAGE> 15
- greater difficulties in collecting accounts receivable;
- fluctuations in currency exchange rates;
- political and economic instability;
- potentially adverse tax consequences;
- little or no protection of our intellectual property rights in some
foreign countries, particularly less developed countries; and
- increases in tariffs, duties, price controls or other restrictions on
foreign currencies or trade barriers imposed by foreign countries.
If we are unable to successfully enter or compete in international markets,
our growth may be slowed.
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS AND
OUR INTERNET DOMAIN NAME COULD LEAD TO UNAUTHORIZED USE OF OUR COURSES OR
RESTRICT OUR ABILITY TO MARKET OUR COURSES.
Our success depends, in part, on our ability to protect our proprietary
rights and technology. We rely on a combination of copyrights, trademarks,
service marks, trade secret laws and employee and third-party nondisclosure
agreements to protect our proprietary rights. Despite our efforts to protect
these rights, unauthorized parties may attempt to duplicate or copy our courses
or our delivery technology or obtain and use information that we regard as
proprietary. In addition, the laws of many countries do not protect our
proprietary rights to as great an extent as do the laws of the United States. As
a consequence, effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our courses and
services are made available.
We have registered the trademark DigitalThink and we own the domain name
digitalthink.com. It is possible, however, that third parties could acquire
trademarks or domain names that are substantially similar or conceptually
similar to our trademarks or domain names. This could decrease the value of our
trademarks or domain names and could hurt our business. The regulation of domain
names in the United States and in foreign countries is subject to change. The
relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear. As a result, we may not
acquire or maintain exclusive rights to our domain names in the United States or
in other countries in which we conduct business.
We may from time to time encounter disputes over rights and obligations
concerning intellectual property. We obtain the content for many of our courses
from our customers and it is possible that the use of this content may subject
us to the intellectual property claims of third parties. Although we generally
seek indemnification from our customers 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 customers may assert that some of the
courses we develop for our general catalog or 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. In
addition, we cannot predict the effect of a failure to prevail in any litigation
of this kind.
OUR FUTURE GROWTH DEPENDS ON THE CONTINUED USE, AND POPULARITY, OF THE INTERNET.
Our business depends on the continued growth and acceptance of the Internet
by our customers, prospective customers and their customers, employees and
partners. A number of factors may inhibit Web usage, including inadequate
network infrastructure, security concerns, inconsistent quality of service and
lack of availability of cost-effective, high-speed service. As Internet usage
grows, the communications infrastructure may not be able to support the demands
placed on it by this growth
13
<PAGE> 16
and its performance and reliability may decline. In addition, Web sites have
experienced interruptions in their service as a result of outages and other
delays occurring throughout the Internet network infrastructure. If these
outages or delays frequently occur in the future, Internet usage, as well as the
usage of our Web site, could grow more slowly or decline. In this event, our
e-learning solutions would be less attractive and our future growth prospects
would be impaired.
ANY ACQUISITIONS THAT WE UNDERTAKE COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS, DILUTE STOCKHOLDER VALUE AND DAMAGE OUR FINANCIAL PERFORMANCE.
Although we currently are not in negotiation with any parties and have no
contracts or letters of intent relating to any acquisition or investment, we may
acquire or make investments in complementary businesses, technologies, services
or products if appropriate opportunities arise. If we acquire a company, we
could have difficulty integrating that company's personnel, operations and
technology with our business. Because we are dependent on the unique skills of
our personnel, corporate culture and personnel issues that may arise in the
course of completing these transactions could be particularly significant for
us. In particular, key personnel of an acquired company may decide not to work
for us. If we make other types of acquisitions, we could have difficulty in
integrating the acquired products, services or technologies into our operations.
These difficulties could disrupt our ongoing business, distract our management
and employees, increase our expenses and adversely affect our results of
operations due to the amortization of goodwill. Furthermore, we may incur
indebtedness or issue equity securities to pay for any future acquisitions. The
issuance of equity securities could be dilutive to our existing stockholders.
WE MAY REQUIRE ADDITIONAL FUNDING AND OUR PROSPECTS OF OBTAINING THIS FUNDING
ARE UNCERTAIN.
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 for at least the next 12
months. We may need to raise additional funds, however, to fund more rapid
expansion, to develop new course categories, to enhance existing services, to
respond to competitive pressures or to acquire complementary products,
businesses or technologies. If additional funds are raised through the issuance
of equity or convertible debt securities, the percentage ownership of our
stockholders will be reduced and such securities may have rights, preferences or
privileges senior to those of our stockholders. 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
expansion, take advantage of unanticipated opportunities, develop or enhance our
services or otherwise respond to competitive pressures would be significantly
limited.
SALES OF SHARES ELIGIBLE FOR FUTURE SALE AFTER THIS OFFERING COULD CAUSE OUR
STOCK PRICE TO DECLINE.
If our stockholders sell substantial amounts of our common
stock -- including shares issued upon the exercise of outstanding options -- in
the public market following this offering, the market price of our common stock
could fall. These 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. The shares sold in this offering will be freely tradable
immediately upon completion of this offering. In addition, on the 181st day
after completion of this offering, 23,377,182 of shares of our common stock held
by existing stockholders will be freely tradable. Sales of these shares could
cause the market price of our common stock to decline. For a more detailed
discussion of when shares will become freely tradable, see "Shares Eligible for
Future Sale."
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<PAGE> 17
PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY HAVE ANTI-TAKEOVER
EFFECTS THAT COULD PREVENT A CHANGE IN OUR CONTROL, EVEN IF THIS WOULD BE
BENEFICIAL TO STOCKHOLDERS.
Provisions of our amended and restated certificate of incorporation, bylaws
and Delaware law could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders. These provisions
include:
- a classified board of directors, in which our board is divided into three
classes with three year terms with only one class elected at each annual
meeting of stockholders, which means that a holder of a majority of our
common stock will need two annual meetings of stockholders to gain
control of the board;
- a provision which prohibits our stockholders from acting by written
consent without a meeting;
- a provision which permits only the board of directors, the president or
the chairman to call special meetings of stockholders; and
- a provision which requires advance notice of items of business to be
brought before stockholders meetings.
In addition, amending any of the above provisions will require the vote of
the holders of 66 2/3% of our outstanding common stock.
DIRECTORS, EXECUTIVE OFFICERS AND THEIR AFFILIATED ENTITIES HOLD A MAJORITY OF
OUR STOCK AND WILL BE ABLE TO CONTROL MATTERS REQUIRING STOCKHOLDER APPROVAL.
Immediately after the closing of this offering, approximately 51.6% of our
outstanding capital stock will be owned by our directors, executive officers and
their affiliated entities. As a result, these stockholders, acting together,
would be able to control all matters requiring approval by the stockholders,
including the election of all directors and approval of significant corporate
transactions.
OUR BOARD OF DIRECTORS HAS THE AUTHORITY TO ISSUE PREFERRED STOCK HAVING RIGHTS
GREATER THAN OUR COMMON STOCK.
Our board of directors has the authority, without action by stockholders,
to designate and issue preferred stock and to fix the rights, preferences and
privileges of the preferred stock. These rights may be greater than the rights
of our common stock and may have the effect of:
- restricting dividends on common stock;
- diluting the voting power of the common stock;
- impairing the liquidation rights of the common stock; and
- delaying or preventing a change in our control without further action by
stockholders.
Any of these events could harm the market price of our common stock.
AS A NEW INVESTOR, YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
If you purchase shares of our common stock in this offering, you will incur
immediate and substantial dilution in pro forma net tangible book value of $8.94
per share. If the holders of outstanding options exercise those options, you
will incur further dilution. For more information on the calculation of the
amount of this dilution, see "Dilution."
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<PAGE> 18
OUR STOCK PRICE COULD BE VOLATILE AND COULD DECLINE FOLLOWING THIS OFFERING.
The stock market has experienced significant price and volume fluctuations,
and the market prices of technology companies, particularly Internet-related
companies like ours, have been highly volatile. Investors may not be able to
resell their shares at or above the initial public offering price. In addition,
our results of operations during future fiscal periods following the completion
of this offering may fail to meet the expectations of stock market analysts and
investors. In such event, the market price of our stock could fall.
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<PAGE> 19
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "forecasts,"
"predicts," "intend," "potential" or "continue" or the negative of such terms or
other comparable terminology. In addition, these forward-looking statements
include, but are not limited to, statements regarding the following: (1) our
ability to compete effectively in the e-learning market, (2) our plans to
develop new products, and (3) our business strategies and plans. These
statements are only predictions.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. The risks set forth in the "Risk Factors"
section and elsewhere in this prospectus could cause our future operating
results to differ materially from those contemplated by our forward-looking
statements. In addition, factors that we are not currently aware of could harm
our future operating results.
USE OF PROCEEDS
We expect to receive net proceeds of approximately $40.2 million from the
sale of the shares of common stock -- approximately $46.4 million if the
underwriters exercise their over-allotment option in full -- at an assumed
initial public offering price of $11.00 per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses.
We expect to use the net proceeds from this offering for general corporate
purposes, including working capital, increased technical capabilities and the
development of new courses. We are not currently able to estimate the allocation
of proceeds among these uses, and our management will have broad discretion to
allocate the proceeds of this offering. Pending use of the net proceeds of this
offering, we intend to invest the net proceeds in interest-bearing,
investment-grade securities.
A portion of the net proceeds may be used to acquire or invest in
complementary businesses or products or to obtain the right to use complementary
technologies. From time to time, in the ordinary course of business, we may
evaluate potential acquisitions of these businesses, products or technologies.
We have no current plans, agreements or commitments, and are not currently
engaged in any negotiations regarding any such transaction.
The principal purposes of this offering are to obtain additional working
capital, to create a public market for our common stock and to facilitate future
access by us to public markets.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, to support the development
of our business and do not anticipate paying any cash dividends in the
foreseeable future.
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<PAGE> 20
CAPITALIZATION
The following table sets forth our capitalization at December 31, 1999 on
the following three bases:
- on an actual basis;
- on a pro forma basis to reflect the automatic conversion of all
outstanding preferred stock, into 22,814,590 shares of common stock; and
- on a pro forma as adjusted basis to reflect the sale of the 4,000,000
shares of our common stock in this offering at an assumed initial public
offering price of $11.00 per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses,
and the receipt of the net proceeds.
The capitalization information set forth in the table below is qualified by
and should be read in conjunction with our Financial Statements and related
Notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------------
PRO
FORMA
PRO AS
ACTUAL FORMA ADJUSTED
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Redeemable convertible preferred stock, $0.001 par
value: 25,000,000 shares authorized, 22,814,590 shares
issued and outstanding (actual); no shares authorized,
issued and outstanding (pro forma and pro forma as
adjusted).............................................. $ 56,214 $ -- $ --
======== ======== ========
Stockholders' equity (deficit):
Preferred stock, $0.001 par value: none authorized,
issued and outstanding (actual); 10,000,000 shares
authorized, no shares issued or outstanding (pro
forma and pro forma as adjusted).................. -- -- --
Common stock, $0.001 par value: 51,500,000 shares
authorized, 4,560,199 shares issued and
outstanding (actual); 100,000,000 shares
authorized, 27,374,789 shares issued and
outstanding (pro forma); 100,000,000 shares
authorized, 31,374,789 shares issued and
outstanding (pro forma as adjusted)............... $ 9,601 $ 65,815 $106,035
Deferred stock compensation.......................... (7,378) (7,378) (7,378)
Accumulated deficit.................................. (34,075) (34,075) (34,075)
-------- -------- --------
Total stockholders' equity (deficit)......... (31,852) 24,362 64,582
-------- -------- ========
Total capitalization......................... $ 24,362 $ 24,362 64,582
======== ======== ========
</TABLE>
The above information excludes:
- 4,017,729 shares of common stock issuable upon exercise of options
outstanding as of December 31, 1999 at a weighted exercise price of $1.01
per share;
- 1,797,072 shares of common stock available for future grant at December
31, 1999 under our 1996 stock plan; and
- 200,000 additional shares of common stock available for issuance under
our 1999 employee stock purchase plan immediately following this
offering.
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<PAGE> 21
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering. We calculate net tangible book value per
share by dividing the net tangible book value, which equals total assets less
intangible assets and total liabilities, by the number of outstanding shares of
common stock.
At December 31, 1999, our pro forma net tangible book value, after giving
effect to the automatic conversion of all outstanding shares of preferred stock
into common stock upon the closing of this offering, was approximately $24.3
million, or approximately $0.89 per share of common stock. After giving effect
to our sale of 4,000,000 shares of common stock in this offering at an assumed
initial public offering price of $11.00 per share, less estimated underwriting
discounts and commissions and estimated offering expenses, our pro forma net
tangible book value at December 31, 1999 would have been approximately $64.6
million, or $2.06 per share. This represents an immediate increase in pro forma
net tangible book value of $1.17 per share to existing stockholders and an
immediate dilution in pro forma net tangible book value of $8.94 per share to
purchasers of common stock in this offering, or 81% of the initial offering
price per share.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book value per share at December
31, 1999.............................................. $ 0.89
Increase per share attributable to this offering....... 1.17
------
Pro forma net tangible book value per share after this
offering.................................................. 2.06
------
Dilution per share to new investors......................... $ 8.94
======
</TABLE>
The following table shows on a pro forma as adjusted basis at December 31,
1999, after giving effect to the sale of the 4,000,000 shares of common stock in
this offering at an assumed initial public offering price of $11.00 per share,
less estimated underwriting discounts and commissions and estimated offering
expenses, and conversion of all preferred stock into common stock, for the
number of shares of common stock purchased from us, the total consideration paid
to us and the average price paid per share by existing stockholders and by new
investors purchasing common stock in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 27,374,789 87% $45,172,000 51% $ 1.65
New investors................... 4,000,000 13% 44,000,000 49% $11.00
---------- --- ----------- ---
Total...................... 31,374,789 100% $89,172,000 100%
========== === =========== ===
</TABLE>
The foregoing discussion and table are based on actual shares outstanding
on December 31, 1999. The foregoing discussion assumes no exercise of any stock
option outstanding as of December 31, 1999. As of December 31, 1999, there were
options outstanding to purchase 4,017,729 shares of common stock at a weighted
average exercise price of $1.01 per share. To the extent any of these options
are exercised, there will be further dilution to investors.
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<PAGE> 22
SELECTED FINANCIAL DATA
The following selected financial data as of March 31, 1998 and 1999 and for
the period ended March 31, 1997 and the years ended March 31, 1998 and 1999 are
derived from the Financial Statements included elsewhere in this prospectus,
which have been audited by Deloitte & Touche LLP, independent auditors. The
financial data as of December 31, 1999 and for the nine months ended December
31, 1998 and 1999 is derived from unaudited financial statements included
elsewhere in this prospectus. The financial data as of March 31, 1997 is derived
from audited financial statements not included in this prospectus. We have
prepared the unaudited information on the same basis as the audited financial
statements and have included all adjustments, consisting of only normal
recurring adjustments, that we consider necessary for a fair presentation of our
financial position and operating results. When you read this selected financial
data, it is important that you also read the Financial Statements and related
Notes included in this prospectus, as well as the section of this prospectus
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Our historical results are not necessarily indicative of
our future results.
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED NINE MONTHS ENDED
APRIL 22, 1996 MARCH 31, DECEMBER 31,
(INCEPTION) TO ----------------- ------------------
MARCH 31, 1997 1998 1999 1998 1999
-------------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Delivered Learning fees........................ $ 5 $ 148 $ 1,034 $ 685 $ 3,056
Learning Solution services..................... 20 52 813 472 3,432
------- ------- ------- ------- --------
Total revenues............................. 25 200 1,847 1,157 6,488
Costs and expenses:
Content production and development............. 262 925 2,018 1,107 4,595
Web delivery and customer support.............. 29 363 855 570 1,455
Sales and marketing............................ 188 1,400 2,970 2,038 7,218
Research and development....................... 299 665 1,005 715 2,365
General and administrative..................... 157 419 622 424 1,519
Depreciation and amortization.................. 10 83 236 153 525
Stock-based compensation(*).................... -- -- 58 3 2,096
------- ------- ------- ------- --------
Total costs and expenses................... 945 3,855 7,764 5,010 19,773
------- ------- ------- ------- --------
Interest and other income........................ 32 186 166 74 349
------- ------- ------- ------- --------
Net loss......................................... $ (888) $(3,469) $(5,751) $(3,779) $(12,936)
======= ======= ======= ======= ========
Accretion of redeemable convertible preferred
stock.......................................... $ 278 $ 1,669 $ 3,518 $ 2,194 $ 5,565
======= ======= ======= ======= ========
Loss attributable to common stockholders......... $(1,166) $(5,138) $(9,269) $(5,973) $(18,501)
======= ======= ======= ======= ========
Basic and diluted loss per common share.......... $ (0.29) $ (1.27) $ (2.26) $ (1.46) $ (4.32)
======= ======= ======= ======= ========
Shares used in computing loss per share.......... 4,010 4,036 4,095 4,088 4,280
======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
------------------------------
1997 1998 1999 DECEMBER 31, 1999
------- ------- -------- ------------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 680 $ 2,862 $ 9,455 $ 23,344
Working capital..................................... 608 2,615 8,353 21,215
Total assets........................................ 786 3,580 11,330 31,545
Redeemable convertible preferred stock.............. 1,870 9,329 24,583 56,214
Accumulated deficit................................. (1,166) (6,305) (15,574) (34,075)
Total stockholders' deficit......................... (1,161) (6,298) (15,505) (31,852)
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
DECEMBER 31,
YEAR ENDED --------------
MARCH 31, 1999 1998 1999
-------------- ---- ----
<S> <C> <C> <C>
(*) DETAIL OF STOCK-BASED COMPENSATION:
Content production and development.......................... $ 8 $1 $ 212
Web delivery and customer support....................... 3 -- 98
Sales and marketing..................................... 25 1 607
Research and development................................ 13 1 230
General and administrative.............................. 9 -- 949
--- -- ------
Total................................................. $58 $3 $2,096
=== == ======
</TABLE>
20
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements based upon current
expectations that involve risks and uncertainties. When used in this prospectus,
the words "intend," "anticipate," "believe," "estimate," "plan" and "expect" and
similar expressions as they relate to us are included to identify
forward-looking statements. Our actual results and the timing of certain events
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors" and elsewhere in this prospectus.
OVERVIEW
We provide online learning courses and services, which we refer to as
e-learning solutions. We were founded in April 1996. In fiscal 1997, we invested
in both course content development and research and development as we built our
technology and course offerings, releasing our first course in the later part of
fiscal 1997. Since fiscal 1998, we have made significant investments in course
content development, sales and marketing activities, research and development,
Web delivery and customer support. We have also experienced significant
headcount increases during this period. We grew from 40 employees on March 31,
1998 to 200 employees as of December 31, 1999. Our revenues increased from
approximately $200,000 in the year ended March 31, 1998 to $1.8 million in the
year ended March 31, 1999. In the first nine months of fiscal 2000, we have
generated revenues of $6.5 million.
SOURCES OF REVENUE AND REVENUE RECOGNITION POLICY
We deliver our e-learning solutions through a catalog of existing courses
and through customized content tailored for specific needs of our customers. We
refer to the individuals taking courses as participants. Customized e-learning
solutions have accounted for, and we expect will continue to account for, a
significant portion of our total revenues.
We generate revenues from participants registering for courses included in
our course catalog as well as registrations for customized e-learning courses
developed for a specific customer. Customers that enter into Delivered Learning
contracts provide participants with access to our online courses and tutor
support. Additionally, customers are provided with access to training management
systems which allow them to track and monitor participant performance. Delivered
Learning contracts typically allow for a specific number of registered
participants, based on a per participant fee. These contracts also typically
limit the period of time over which participants can register for and complete
an online course. We begin recognizing these Delivered Learning fees when a
participant registers for a course. These fees are recognized ratably over the
term of the course, which is typically six months. Customers typically pay for
the courses in advance of the anticipated timeframe of course registration and
do not receive refunds for the unused portion of the available registrations
agreed to in the contract. In the future, we expect that our customers may
resell our courses to their customers. Under this scenario, we would begin
recognizing Delivered Learning fees payable to us at course registration, and
would do so ratably over the delivery obligation of the course.
We also derive revenues from contracts that require tailored e-learning
solutions that we develop. Typically, these Learning Solution service revenues
are generated from implementation services, course content development,
instructional plan design and release of the course for access by participants
and are recognized on a percentage of completion basis. Percentage of completion
is based on costs incurred as a percentage of total estimated costs.
Delivered Learning fees and Learning Solution service revenues are each
recognized only when collection is probable and there is evidence that we have
completed our obligation. If a contract includes both Delivered Learning fees
and Learning Solution services, the revenues are apportioned
21
<PAGE> 24
consistent with the value associated with each and the terms of the contract. In
all cases, these revenues are recognized in accordance with the policies
detailed above.
We have a limited operating history, which makes it difficult to forecast
future operating performance. Although our revenues have grown in recent
quarters, this growth rate may not be sustainable. In addition, we have never
been profitable and expect to incur significant net losses in the foreseeable
future as we substantially increase our content production and development,
sales and marketing, research and development and general and administrative
expenses. Net losses have increased in each of the last six quarters and we
expect this trend will continue at least through the first half of calendar
2002. As of December 31, 1999, we had an accumulated deficit of $34.1 million.
In addition, we derive a significant portion of our revenues from a limited
number of customers and the percentage of our revenues from any one customer can
be material. Sales to our largest customer comprised 34% of our revenues in the
first nine months of fiscal 2000. In fiscal 1999, no customer accounted for more
than 10% of our revenues. However, our five largest customers accounted for 40%
of our revenues in fiscal 1999.
Stock-Based Compensation
Deferred stock compensation represents the difference between the estimated
fair value of the common stock for accounting purposes and the option exercise
price at the date of grant. We recorded deferred stock compensation of
approximately $389,000 in fiscal 1999 and $9.1 million in the nine months ended
December 31, 1999 in connection with stock options granted during these periods.
This amount is amortized over the four year vesting period of the options using
the multiple option approach. Approximately $58,000 of stock-based compensation
expense was recorded during fiscal 1999 and $2.1 million was recorded in the
nine months ended December 31, 1999. Based on options granted through December
31, 1999, we expect to record stock-based compensation expense of $1.3 million
in the quarter ending March 31, 2000. We expect that stock-based compensation
expense recorded in quarters after March 31, 2000 will decrease sequentially. No
stock-based compensation was recorded in fiscal 1998 or 1997. See Note 6 of
Notes to Financial Statements.
Net Operating Loss Carryforwards
From inception through December 31, 1999, we incurred net losses for
federal and state income tax purposes and have not recognized any income tax
provision or benefit. As of December 31, 1999, we had $22.0 million of federal
and $15.8 million of state net operating loss carryforwards to offset future
taxable income which expire in varying amounts through 2020 and 2005,
respectively. Given our limited operating history and losses incurred to date,
coupled with difficulty in forecasting future results, a full valuation
allowance has been recorded. Furthermore, as a result of changes in our equity
ownership from our preferred stock offerings and this offering, utilization of
net operating losses and tax credits may be subject to substantial annual
limitations. This is due to the ownership change limitations provided by the
Internal Revenue Code and similar state provisions. The degree of any such
limitation cannot presently be estimated. To date, we have not performed an
evaluation to determine if such a limitation exists, and we may not perform such
an evaluation until and unless we are profitable in the future. The annual
limitation may result in the expiration of net operating losses and tax credits
before utilization. See Note 4 of Notes to Financial Statements.
HISTORICAL RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED DECEMBER 31, 1998 AND 1999
REVENUES
Revenues increased from $1.2 million in the nine months ended December
31,1998 to $6.5 million for the nine months ended December 31, 1999. In the nine
months ended December 31,
22
<PAGE> 25
1999, Delivered Learning fees represented 47% of revenues, and Learning Solution
services represented 53% of revenues. This is compared to the nine months ended
December 31, 1998, during which Delivered Learning fees represented 59% of
revenues and Learning Solution services represented 41% of revenues. Delivered
Learning fees increased from approximately $685,000 in the nine months ended
December 31, 1998 to $3.1 million in the nine months ended December 31, 1999 as
the number of customers increased from 93 to 201 and the number of courses we
offered increased from 89 to 180. We expect that the number of courses and
customers will continue to increase as our content development projects
progress. Learning Solution service revenues increased from approximately
$473,000 in the nine months ended December 31, 1998 to $3.4 million in the nine
months ended December 31, 1999 as the number of projects and the dollar size of
projects increased. We expect that both Delivered Learning fees and Learning
Solutions services revenue will continue to account for a similarly significant
portion of our total revenues in the near term.
We market our products primarily through our direct sales force in the
United States. We also market our products through indirect channels including
learning resellers, consulting firms, customer and development partners and
Internet portal partners. Internationally, we have begun developing reseller
relationships. Our operations are currently conducted exclusively in the United
States. Some participants currently access our courses from international
locations.
Costs and Expenses
Content Production and Development
Content production and development expenses include course development
personnel related costs, content acquisition costs, royalties paid to authors
and content editing. Each of these expenses relate to both our Delivered
Learning fees and our Learning Solution services revenue. Content production and
development expenses increased from $1.1 million in the nine months ended
December 31, 1998 to $4.6 million in the nine months ended December 31, 1999.
This increase was due to higher content acquisition fees related to the purchase
of additional content and the hiring of additional personnel primarily engaged
in course development. Headcount in content production and development increased
from 28 employees at December 31, 1998 to 91 employees at December 31, 1999. All
content production and development expenses have been expensed as incurred.
Management believes that continued investment in content development and content
acquisition is essential to expand our business. As a result, we expect these
expenses to increase substantially in future periods.
Web Delivery and Customer Support
Web delivery and customer support expenses relate exclusively to Delivered
Learning fee revenue and include personnel related costs, maintenance and
facility costs required to operate our Web site and to provide interactive tutor
support to participants in our courses. Web delivery and customer support
expenses increased from approximately $569,000 in the nine months ended December
31, 1998 to $1.5 million in the nine months ended December 31, 1999. This
increase was attributable to increased personnel and equipment related charges
required to scale the capacity required for a greater number of courses and an
increased number of participants. In addition, a greater number of customers and
courses required additional tutor support. Headcount in Web delivery and
customer support increased from 4 employees at December 31, 1998 to 14 employees
at December 31, 1999.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel related costs,
commissions, advertising and other promotional expenses, and travel and
entertainment expenses. Sales and marketing expenses increased from $2.0 million
in the nine months ended December 31, 1998 to
23
<PAGE> 26
$7.2 million in the nine months ended December 31, 1999. This increase reflects
the costs associated with the hiring of additional personnel and increased
promotional activities. Headcount in sales and marketing increased from 21
employees at December 31, 1998 to 50 employees at December 31, 1999. We expect
sales and marketing expenses will continue to increase as we continue to expand
our sales and marketing efforts, establish additional sales territories and
increase our promotional activities.
Research and Development
Research and development expenses consist primarily of personnel related
costs related to our product development efforts related to both Delivered
Learning fees and Learning Solution services, exclusive of content development.
Research and development expenses increased from approximately $715,000 in the
nine months ended December 31, 1998 to $2.4 million in the nine months ended
December 31, 1999. This increase was due to the hiring of additional research
and development employees. Headcount increased from 11 employees at December 31,
1998 to 30 employees at December 31, 1999. Management believes that continued
investment in research and development is essential to our future success and
expects these expenses to increase substantially in future periods.
General and Administrative
General and administrative expenses consist primarily of personnel related
costs, occupancy costs and professional service fees. General and administrative
expenses increased from approximately $424,000 in the nine months ended December
31, 1998 to $1.5 million in the nine months ended December 31, 1999. This
increase was due to an increase in personnel related costs, higher occupancy
costs and fees related to professional services. Headcount increased from five
employees at December 31, 1998 to 15 employees at December 31, 1999. Management
expects general and administrative expenses to increase substantially in the
future as we expand our staff and incur additional costs to support the expected
growth of our business.
Stock-Based Compensation
Stock-based compensation expense totaled approximately $3,000 in the nine
months ended December 31, 1998. During the nine months ended December 31, 1999,
stock-based compensation expense totaled $2.1 million.
Net Loss
The net loss increased from $3.8 million in the nine months ended December
31, 1998 to $12.9 million in the nine months ended December 31, 1999.
FISCAL YEARS ENDED MARCH 31, 1997, 1998, AND 1999
REVENUES
Revenues increased from $25,000 in fiscal 1997 to $200,000 in fiscal 1998
to $1.8 million in 1999. In fiscal 1997, Delivered Learning fees accounted for
19% of revenues and Learning Solutions services accounted for 81% of revenues.
In fiscal 1998, Delivered Learning fees accounted for 74% of revenues and
Learning Solutions services accounted for 26% of revenues. In fiscal 1999,
Delivered Learning fees accounted for 56% of revenues and Learning Solutions
services accounted for 44% of revenues. Delivered Learning fees increased from
approximately $5,000 in fiscal 1997 to approximately $148,000 in fiscal 1998 to
$1.0 million in fiscal 1999. These absolute dollar increases resulted from
increased course registration in existing courses and in courses we introduced
during the periods. Learning Solution services increased from approximately
$20,000 in fiscal 1997 to approximately $52,000 in fiscal 1998 to approximately
$813,000 in fiscal 1999. These absolute dollar increases were
24
<PAGE> 27
attributable to an increase in the number of learning solutions developed for,
and released to, a larger base of customers.
COSTS AND EXPENSES
Content Production and Development
Content production and development expenses increased from approximately
$262,000 in fiscal 1997 to approximately $925,000 in fiscal 1998 to $2.0 million
in fiscal 1999. These increases resulted from the hiring of additional personnel
and the increased costs related to the acquisition of course content required to
expand the breadth of the our product offerings. Headcount increased from five
employees at March 31, 1997 to 11 employees at March 31, 1998 to 33 employees at
March 31, 1999.
Web Delivery and Customer Support
Web delivery and customer support expenses increased from approximately
$29,000 in fiscal 1997 to approximately $363,000 in fiscal 1998 to approximately
$855,000 in fiscal 1999. These increases resulted from the expansion of capacity
and capability for our Web site, as well as the hiring of additional tutors to
support our expanded product offerings. Headcount increased from two employees
at March 31, 1997 to three employees at March 31, 1998 to eight employees at
March 31, 1999.
Sales and Marketing
Sales and marketing expenses increased from approximately $188,000 in
fiscal 1997 to $1.4 million in fiscal 1998 to $3.0 million in fiscal 1999. These
increases resulted from higher personnel related expenses, recruiting fees,
travel expenses, commissions, increased marketing expenses, including
tradeshows, public relations, advertising and other promotional activities.
Headcount increased from two employees at March 31, 1997 to 14 employees at
March 31, 1998 to 23 employees at March 31, 1999.
Research and Development
Research and development expenses increased from approximately $299,000 in
fiscal 1997 to approximately $665,000 in fiscal 1998 to $1.0 million in fiscal
1999. These increases resulted from higher personnel related costs as we
increased our staff to improve the feature set and scalability of our
technology. Headcount increased from five employees at March 31, 1997 to eight
employees at March 31, 1998 to 12 employees at March 31, 1999.
General and Administrative
General and administrative expenses increased from approximately $157,000
in fiscal 1997 to approximately $419,000 in fiscal 1998 to approximately
$622,000 in fiscal 1999. These increases resulted from the addition of finance,
executive, information systems and administrative personnel to support the
growth of our business. Headcount increased from two employees at March 31, 1997
to four employees at March 31, 1998 to five employees at March 31, 1999.
Stock-Based Compensation
No stock-based compensation expense was incurred in fiscal 1997 or fiscal
1998. Stock-based compensation expense was approximately $58,000 for fiscal
1999.
25
<PAGE> 28
Net Loss
Our net loss increased from approximately $888,000 in fiscal 1997 to $3.5
million in fiscal 1998 to $5.8 million in fiscal 1999.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth our unaudited quarterly results of
operations for the seven most recent quarters ended December 31, 1999. You
should read the following table in conjunction with our Financial Statements and
related Notes included elsewhere in this prospectus. We have prepared this
unaudited information on the same basis as our audited financial statements.
This table includes all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of our financial
position and operating results for the quarters presented. You should not draw
any conclusions about our future results from the results of operations for any
quarter.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------
JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, SEPT. 30, DEC. 31,
1998 1998 1998 1999 1999 1999 1999
-------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Delivered Learning fees..... $ 148 $ 224 $ 313 $ 349 $ 458 $ 992 $ 1,606
Learning Solution
services.................. 135 182 155 341 716 1,144 1,572
------- ------- ------- ------- ------- ------- -------
Total revenues....... 283 406 468 690 1,174 2,136 3,178
------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Content production and
development............... 303 324 479 912 990 1,497 2,108
Web delivery and customer
support................... 146 202 222 285 318 486 651
Sales and marketing......... 623 711 703 933 1,351 2,065 3,802
Research and development.... 219 271 225 290 443 922 1,000
General and
administrative............ 120 138 166 198 288 486 745
Depreciation and
amortization.............. 44 49 61 82 108 143 274
Stock-based compensation.... -- -- 3 55 143 479 1,474
------- ------- ------- ------- ------- ------- -------
Total costs and
expenses........... 1,455 1,695 1,859 2,755 3,641 6,078 10,054
------- ------- ------- ------- ------- ------- -------
Interest and other income..... 30 17 27 92 92 68 189
------- ------- ------- ------- ------- ------- -------
Net loss...................... $(1,142) $(1,272) $(1,364) $(1,973) $(2,375) $(3,874) $(6,687)
======= ======= ======= ======= ======= ======= =======
</TABLE>
The trends discussed in the comparisons of operating results for the nine
months ended December 31, 1998 and 1999, and fiscal 1997, 1998 and 1999 apply to
the comparison of results of operations for our seven most recent quarters ended
December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have historically satisfied our cash requirements primarily through
private placements of equity securities. Through December 31, 1999, we have
raised $45.1 million through equity financing. See Notes 5, 6 and 11 of Notes to
Financial Statements.
Net cash used in operating activities totaled approximately $806,000 for
fiscal 1997, $3.2 million for fiscal 1998, $4.6 million for fiscal 1999 and $9.3
million for the nine months ended December 31, 1999. Cash used in operating
activities resulted from net operating losses in each of the periods, offset in
part by increases in deferred revenue. To date, we have met our operating
expense requirements through a combination of revenue generated and from the
proceeds of private stock offerings. Deferred revenue increased from
approximately $245,000 at March 31, 1998 to $1.2 million at March 31, 1999 to
$3.7 million at December 31, 1999. Deferred revenue results from customer
26
<PAGE> 29
prepayments of Delivered Learning fees and Learning Solution services. In both
cases, prepayments remain in deferred revenue until revenue recognition criteria
have been met.
Net cash used in investing activities totaled approximately $111,000 in
fiscal 1997, approximately $398,000 in fiscal 1998, approximately $544,000 in
fiscal 1999, and $2.9 million for the nine months ended December 31, 1999. These
increases resulted from the acquisition of capital assets, including hardware
for our Web site, computer and office equipment, and tenant improvements related
to our newly leased facilities located at 1098 Harrison Street, San Francisco,
CA required to accommodate our increased number of employees.
Cash provided by financing activities totaled $1.6 million for fiscal 1997,
$5.8 million in fiscal 1998, $11.7 million in fiscal 1999 and $26.1 million for
the nine months ended December 31, 1999. These increases resulted from the
proceeds received from the issuance of preferred stock.
We believe that our available cash resources together with the net proceeds
of this offering will be sufficient to finance our presently anticipated
operating expenses, including course development and working capital requirement
for at least the next 12 months. To the extent that this offering is
unsuccessful, we will seek additional private financing. After the next twelve
months, we expect to continue to incur net losses for the foreseeable future and
may need additional funds to expand or meet all of our operating needs. Our
future liquidity and capital requirements will depend on numerous factors. The
rate of expansion of our operations in response to potential growth
opportunities and competitive pressures will affect our capital requirements as
will funding of continued net losses and substantial negative cash flows.
Additionally, we may need additional capital to fund acquisitions of
complementary businesses, products and technologies. Our forecast of the period
of time through which our financial resources will be adequate to support
operations is a forward-looking statement that involves risks and uncertainties.
Actual resources sought may differ materially. We may seek to sell additional
equity or debt securities or secure a bank line of credit. The sale of
additional equity or other securities could result in additional dilution to our
stockholders. Arrangements for additional financing may not be available in
amounts or on terms acceptable to us, if at all.
YEAR 2000 ISSUES
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer programs
or hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations causing disruptions of operations for any
company using such computer programs or hardware, including, among other things,
a temporary inability to process research data, send invoices or engage in
normal business activities. We experienced no problems with our systems since
the beginning of 2000. We plan to continue to monitor our system throughout the
year to assess whether any problems develop.
State of Readiness
We completed an assessment of our information technology systems for year
2000 problems in September 1999. Our internal technology group conducted a
review of our internally developed systems and coordinated a program to assess
and document all other systems.
We are a relatively new enterprise and therefore a majority of the computer
hardware and software we use to operate our business has been acquired or
created internally within the past three years. While this itself is not
protection against Year 2000 issues, it is a factor to consider when comparing
the efforts required to achieve Year 2000 readiness against other enterprises
with older legacy systems.
27
<PAGE> 30
Our approach was to prioritize a comprehensive list of all systems on the
basis of their importance to the operation of our business. Working from this
list, we would:
- obtain documentation from third party vendors as to their Year 2000
compliance testing and recommendations;
- devise a review and testing plan for all internal systems;
- conduct the review and testing;
- assess any necessary follow-on actions or remediation required; and
- execute the measures identified.
We have completed execution of this process against all software we have
developed for use in course development and commercial software used in
financial operations and in support of standard employee daily activities. In
some cases, the process resulted in the determination that the system had no
date processing and therefore was not deemed to be a risk. In other cases,
systems were subjected to a detailed software code review and a "smoke test"
consisting of running the system with the date manually set beyond December 31,
1999.
We have not replaced any of our systems based on the results of our
assessment.
Budget
To date we have incurred expenses of less than $100,000. These costs have
been included in the operating expenses.
Reasonably Likely Worst Case Scenario
If we, our customers, our providers of hardware and software, or our
third-party computer network providers fail to remedy any Year 2000 issues, the
reasonably likely worst case scenario would be the interruption of our ability
to develop and deliver our courses, which could have a material adverse effect
on our business, financial conditions and results of operations. Presently we
are unable to quantitatively estimate the duration and extent of any such
interruption, or estimate the effect such interruption may have on our future
revenue.
Contingency Plans
We do not believe that we will need to implement a Year 2000 contingency
plan.
MARKET RISK
The following discusses our exposure to market risk related to changes in
interest rates, foreign currency exchange rates and equity prices. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors.
Interest Rate Risk
As of December 31, 1999, we had cash and cash equivalents of $23.3 million,
consisting of cash and highly liquid short-term investments with original
maturities of three months or less at the date of purchase. As of December 31,
1999, we also had $1.8 million of restricted cash related to our long-term lease
of facilities in San Francisco. These investments may be subject to interest
rate risk and will decrease in value if market rates increase. A hypothetical
increase in market interest rates of 10% from the market rates in effect at
December 31, 1999 would cause the fair value of these
28
<PAGE> 31
investments to decrease by an immaterial amount. Declines in interest rates over
time will result in lower interest income.
Foreign Currency and Exchange Rate Risk
All of our revenues recognized to date have been denominated in U.S.
dollars and are primarily from the United States. However, an increasing portion
of our future revenue may be derived from international customers. Revenues from
these customers may be denominated in the local currency of the applicable
countries. As a result, our operating results could become subject to
significant foreign currency fluctuations based upon changes in exchange rates
in relation to the U.S. dollar. Furthermore, if we engage in business outside
the United States, changes in exchange rates relative to the U.S. dollar could
make us less competitive in international markets. Although we will continue to
monitor our foreign currency exposure, and may use financial instruments to
limit this exposure, there can be no assurance that exchange rate fluctuations
will not have a materially negative impact on our business.
Equity Price Risk
We do not own any equity investments.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, which requires an enterprise to report by major components
and as a single total, the change in its net assets during the period from
nonowner sources; and SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information, which establishes annual and interim reporting
standards for an enterprise's business segments and related disclosures about
its products, services, geographic areas and major customers. We had no items of
other comprehensive income to report through December 31, 1999. We currently
operate in one reportable segment under SFAS No. 131. Adoption of these
statements did not impact our financial position, results of operations or cash
flows. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which defines derivatives, requires that all
derivatives be carried at fair value, and provides for hedge accounting when
certain conditions are met. SFAS No. 133 is effective for us in fiscal 2002. We
do not believe that adoption of this statement will have a material impact on
our financial position or results of operations.
29
<PAGE> 32
BUSINESS
The following Business section contains forward-looking statements relating
to future events or our future financial performance, which involves risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of several factors, including
those set forth in "Risk Factors" and elsewhere in this prospectus.
DIGITALTHINK OVERVIEW
We provide online learning courses and services, which we refer to as
e-learning solutions. Our e-learning solutions are designed to address the
strategic business objectives of our customers by helping them to increase
employee productivity, sales channel effectiveness and customer loyalty and
satisfaction. We host and centrally manage all software and content,
significantly reducing our customers' learning infrastructure costs and enabling
us to rapidly update or customize our courses. Our Web-based solutions deliver
content on new initiatives, products or processes to large, geographically
dispersed groups who can access courses from anywhere, at anytime through a
standard Web browser. Our instructional design approach encourages participants
to interact with tutors through e-mail and the Internet. In addition, our
solutions allow customers to generate revenue opportunities by offering branded
e-learning solutions to their customers. We also offer Web-based tracking and
reporting and tools that our customers use to track participants' progress and
the effectiveness of our learning programs.
As of December 31, 1999, we had over 200 customers and over 180 online
courses in the technology, financial services, healthcare and telecommunications
industries. Customers which have purchased our courses include Adobe, Deutsche
Bank, Hewlett-Packard, KPMG, Lawson Software, Sun Microsystems and Texas
Instruments. Our customers either select courses from our catalog or pay us to
develop special courses for their specific requirements. We also receive payment
from our customer when one of their employees, distributors, suppliers or
customers, members of a group which we refer to as the "extended enterprise",
registers and takes the course.
INDUSTRY BACKGROUND
Today's businesses face rapidly changing environments characterized by
increasing competition, economic globalization and technological change. To
compete effectively, businesses must improve business processes, reduce
operating costs, extend barriers to entry and shorten product development
cycles. The adoption of the Internet as a business platform has accelerated
these trends, rewarding speed and penalizing laggards in nearly every industry.
Our experience indicates that senior executives at leading companies
realize that a principal source of competitive advantage is the depth,
consistency and currency of knowledge possessed by their employees,
distributors, suppliers and customers. We believe learning has evolved from
being viewed as a cost center to an integral part of implementing business
strategies successfully. Employees who know more about a company's business are
generally able to perform more effectively. Distributors who understand the
benefits of a company's services make better resellers. Customers who learn to
use all of a product's features tend to be more loyal and less expensive to
support. Driving knowledge to the extended enterprise effectively reduces the
time-to-market of new products and services, improves the productivity of sales
channels and reduces customer support costs, resulting in increased operating
efficiency and higher profitability.
In an attempt to address today's competitive business challenges,
businesses are investing increasing amounts on learning and skills development.
In 1997, the Department of Education estimated that in the United States alone
business spent nearly $55 billion annually on learning programs. These
investments, however, have yielded uncertain results and in many cases have
failed to address and satisfy strategic business objectives. To date, investment
in learning has consisted
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primarily of in-person, instructor-led training programs. Traditional
methodologies tend to be inadequate because they are:
- Difficult to deploy across an organization and its extended
enterprise. Many businesses find it difficult to effectively deliver
up-to-date content in a timely and consistent manner to large,
geographically-dispersed groups. The traditional solution of scheduling
corporate education programs at specific times in single locations
results in logistical challenges and opportunity costs that often lower
participation rates and limit a company's ability to extend knowledge to
its extended enterprise.
- Difficult to customize and update. Instructor-led content is often
prepared in advance to provide for the production and distribution of
printed or videotaped materials, which are then updated at fixed
intervals and delivered using an instructor-led, standardized curriculum
of pre-scheduled meetings in set physical locations. As a result,
print-based content cannot be updated and distributed to learners as
rapidly as a Web-based content, and instructor-led sessions using these
materials may fail to incorporate the latest information on new products,
strategies and processes for specific uses or customers.
- Difficult to personalize on a large scale. Instructor-led learning
programs are typically designed to address the needs of large groups,
which can impair the effectiveness of the individual learning experience.
If a participant cannot have his or her individual question answered or
cannot access supplemental tutoring after the course sessions have
concluded, learning may not actually occur. For example, the cost of
assembling a large group in a central location is often justified because
of the economics of presenting material to a mass audience. This approach
may not provide sufficient time for individuals to be tutored and
critiqued.
- Unable to track and monitor learning effectiveness. Tracking student
performance in traditional classroom programs typically requires
additional expenses for manual test administration, grading and
recording. Many businesses have chosen to avoid these costs by simply
recording participant attendance. As a result, they are unable to track
and certify levels of competency directly resulting from instruction and
correlate learning investments with business results.
- Costly and slow. Traditional learning initiatives require prolonged
absences of valuable employees due to travel to course locations and
attendance at scheduled course meetings, resulting in significant
opportunity costs due to lost work. In addition, course materials must be
printed and delivered using traditional means. As a result, businesses
are unable to continuously educate their extended enterprises on new
products, strategies and processes in a timely manner. With online
courses, participants can learn at anytime from a computer, without
having to schedule classrooms or meetings, and without having to travel
to a classroom facility.
In response to these limitations, many businesses are seeking more
effective learning solutions. The Internet is transforming the corporate
learning marketplace by offering innovative ways to design and deliver
knowledge. According to International Data Corporation, the online corporate
learning market is projected to grow from $550 million in 1998 to more than
$11.4 billion in 2003. By leveraging the Internet, businesses can instantly and
simultaneously deploy content to a broad, global audience. This content can be
easily and continuously accessed, modified and refreshed and learning programs
can be enhanced as participants use e-mail and chat rooms to establish
interactive relationships with instructors and peers. Web-based technologies can
also offer real-time tracking of participant performance.
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Internal training organizations and external corporate learning providers
are geared to instructor-led training and their set of skills is limited to
classroom scheduling and instruction. To compete effectively in the e-learning
market, these organizations would need to develop a broad range of competencies,
including technology development, content creation, Web-hosting and online
community management. Companies are seeking outsourced and integrated e-learning
solutions as a means of more effectively educating their extended enterprise.
THE DIGITALTHINK SOLUTION
We provide corporate e-learning courses and services that address the
strategic imperative of knowledge. Executives of leading companies use our
solutions to improve competitiveness by driving knowledge to the extended
enterprise. Our online learning courses and services combine powerful Internet
delivery technologies, customized content, dedicated tutors and tools to track
and report on course registrations and measure student participant and
performance. Because we host our online courses, they can be easily deployed to
thousands of participants. We deliver over 180 high quality courses to more than
200 companies in a number of industries, including high technology, financial
services, healthcare, government, retail and manufacturing. The advantages of
our solutions include:
Innovative Delivery Model. We deliver outsourced solutions that overcome
the shortcomings of traditional learning methods. Our courses are completely
Web-based and we host and centrally manage all software and content from our
servers. Central hosting and delivery reduces our customers' expenses because
they avoid the need to build e-learning delivery systems and staff and manage
large teams to design, develop and produce e-learning content. In addition, our
centrally hosted system enables us to deploy e-learning solutions rapidly and
broadly to course participants who have an Internet connection and standard Web
browser. We also provide our customers with the tools necessary to support and
track participant performance and progress. Our customers can monitor
registrations, each time a course is accessed, the date a participant's last
accessed the course, percentage of course completion, and the participant's
performance on exercises and exams. This information can be viewed online,
interfaced with our customers' internal databases and correlated with our
customers' business performance data.
Powerful e-Commerce Capability. Our e-commerce tools enable our customers
and partners to develop revenue generating businesses around our e-learning
solutions. We have entered into revenue sharing agreements with some of these
customers. To date these arrangements have generated limited revenues, although
we have revenue-sharing projects underway. We implement these projects by first
establishing a Web site branded for our customers, where learning related
services are located. Using our Web-based tools, our customers can use this
e-learning portal to register and bill online the distributors, suppliers and
customers in their extended enterprise, providing course participants with a
customer-branded learning experience which is delivered and tracked from our
centrally-hosted Web servers.
High-Quality Content. We offer courses from our catalog of delivered
learning titles and from custom courseware. Our staff of trained instructional
designers work with subject matter experts to create our courses. Using a
Web-based deployment system allows us to continually update content, and avoids
the need to ship or recall physical materials such as books or CD-ROMs. This
ability to rapidly deploy courses from a central location allows our customers
to better ensure that course content remains aligned with business needs, and
that courses do not remain in use or circulation if they are outdated or
factually incorrect.
Web-Based Instructional Design. Courses designed for our e-learning
environment leverage the unique communications and interactive capabilities of
the Internet. This Web-based approach results in an engaging and compelling
student experience resulting from increased interactivity through the use of
Internet technologies such as Java applets within the course material,
discussion boards, online
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labs, simulations, e-mail and chat rooms. These elements allow a student to
learn course material by actively participating in the learning experience. For
example, a course participant might read a lesson, watch a Java applet in order
to view the steps of a described process, and then complete an exercise applying
that same process to a business scenario which is electronically submitted to a
tutor for grading. The student might further discuss the process in an online
discussion. This level of personalization represents an improvement over
instructor-led curricula that may not offer the equivalent, extended opportunity
for interaction with tutors or peers.
Interactive Tutor Support. Our courses are interactive, self-paced and can
be accessed at any time. The learning experience benefits from quick responses
from tutors and direct interaction via e-mail and the Internet. On average,
participants receive responses to their submissions within a few hours.
Participants are required to complete exercises and can ask questions or solicit
feedback from the tutor. The majority of our tutor support is accomplished using
e-mail. We believe that written responses are more in-depth and considered than
real-time telephone or in-person conversations, and that the documented reply
features of e-mail allow our tutors to create written records of correspondence
with participants.
Robust and Scalable Technology Framework. Participants have access to our
courses at anytime from anywhere using standard Web browser software. Our open,
standards-based solution allows participants to access courses online without
any proprietary plug-ins or other software. Our technology can easily expand to
support our customers as they deploy learning throughout their extended
enterprises.
Enterprise Tracking and Reporting Tools. We offer Web-based tools that are
used by our customers to track and monitor each participant's progress in order
to measure course completion and knowledge acquisition. Managers can assess the
performance of their employees and correlate this information with business
results to evaluate the effectiveness of any course.
STRATEGY
Our objective is to be the leading provider of e-learning solutions. Key
elements of our strategy include:
Enhance our e-learning solutions. We intend to continually add
functionality and features to enhance our comprehensive e-learning solutions to
meet our customers' evolving needs. For example, we plan to integrate our
services more closely with the internal systems of our customers to facilitate
our customers' ability to correlate learning data, such as course completion
rates and student assessment scores, with organizational and performance
metrics. Examples of these performance metrics include sales per employee,
customer satisfaction and manager evaluations. We also plan to devote
significant resources to expanding the breadth of our course offerings and
improving the reporting and tracking features of our solutions.
Develop long-term strategic relationships with our customers. We believe
that e-learning solutions will become increasingly critical to businesses'
ability to compete successfully. As an existing provider of e-learning
solutions, we become a strategic partner for our customers. We plan to extend
our presence within our customers' enterprises by helping our customers
understand the value and applicability of our solutions to a broad range of
operational initiatives. In addition, we will continue to develop new solutions
that are aligned with our customers' evolving business objectives.
Expand our course offerings. We intend to continually introduce new courses
and leverage our existing courses across multiple customers and industries. In
many instances, we will modify content developed for existing customers in order
to provide similar courses to customers in different
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industries. This approach allows us to generate additional revenue opportunities
while leveraging previous course development efforts.
Leverage development alliances and reseller relationships. We plan to grow
both our direct and indirect sales channels to better service our existing
markets and penetrate new markets such as healthcare, life sciences, consumer
products, telecommunications and government.
Expand our international presence. As the rate of Internet adoption
accelerates overseas, we believe that significant international market demand
will exist for e-learning solutions, especially in Europe and Asia. To that end,
we have begun delivering our e-learning solutions in strategically targeted
international locations, using courseware and tutor support in English. We plan
to expand our reach into both Europe and Asia by developing direct and indirect
sales channels and curriculum support capabilities in these regions.
CUSTOMER BENEFITS AND CASE STUDIES
Our customers can use our e-learning solutions to compress the learning
cycle, increase knowledge throughout the extended enterprise, enhance brand
equity and customer service and reduce operational costs. The following case
studies illustrate these benefits:
KPMG CONSULTING -- one of the world's largest consulting operations, with
worldwide revenue of over $3 billion in 1998.
<TABLE>
<S> <C>
Challenge: Accelerate the application of new Internet technologies and
skills for 22,000 worldwide employees.
Realizing that learning must keep pace with the rate of
Solution: technological change, KPMG chose our e-learning solution to
provide its employees with a comprehensive curriculum to
teach them the skills required to perform e-commerce
consulting engagements. From a single Web environment hosted
by us, KPMG staff can register for our e-learning courses
and access online documents. Student progress and
performance levels are automatically tracked by our
reporting system, allowing KPMG to validate proficiency
levels and help ensure that KPMG's internal competency
standards are met.
</TABLE>
ADOBE SYSTEMS -- a leading provider of graphic design, publishing and
imaging software for Web and print production, and the second largest desktop
software company in the world.
<TABLE>
<S> <C>
Challenge: Improve the quality and efficiency of Adobe's sales and
customer support organizations.
We provide Adobe with fully-outsourced online e-learning
Solution: courses that Adobe has used to create an internal "virtual
university" for delivering product knowledge to Adobe's
sales force, resellers and customer support personnel
worldwide. In addition, we host a training management system
that enables Adobe to track and generate reports on
participants' performance data, as measured by course
exercises and exams. Using this data, Adobe is able to
certify the actual knowledge levels attained by its
employees and resellers. The result is a comprehensive
e-learning solution that requires no technical or systems
support by Adobe personnel.
</TABLE>
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NEW HORIZONS COMPUTER LEARNING CENTERS is the world's largest independent
information technology training company, with more than 2.4 million students
taught worldwide in 1999.
<TABLE>
<S> <C>
Challenge: Enable the leading classroom-based information technology
training company to provide branded e-learning courses to
its clients.
We have entered into an agreement with New Horizons to
Solution: resell a full catalog of more than 130 of our information
technology courses, each of which is delivered in a New
Horizons branded learning environment. This environment
allows the New Horizons Web site to link seamlessly to our
site, providing the New Horizons course participants with
the impression that online courses are being delivered from
the New Horizons site. In fact, all course hosting and tutor
support are provided by us, allowing New Horizons to
concentrate on sales and marketing of its e-learning
offering instead of investing in technology and courseware
development.
</TABLE>
In addition, our solutions enable New Horizons to provide its worldwide
network of franchised training centers with full student registration and
reporting capabilities, while simultaneously monitoring course sales by each
individual New Horizons location. This functionality is accomplished by
providing each training center with a unique user ID and password to our
registration tool, which is centrally hosted by us. Each training center can use
this system to "sign up" New Horizons course participants, triggering
transactions in our system which provide participants with their own user ID's
and passwords to a New Horizons branded learning environment and courses.
CUSTOMERS
As of December 31, 1999, we have sold courses to over 200 customers. Our
customers use our e-learning solutions to address workforce transformation,
sales performance and customer advocacy. The following customers each have
accounted for more than $50,000 of our revenues since we began selling our
e-learning solutions in fiscal 1998 or currently account for more than $250,000
in bookings for the first three quarters of fiscal 2000.
<TABLE>
<S> <C>
WORKFORCE TRANSFORMATION SALES PERFORMANCE
Amdahl Corporation 3Com Corporation
Bowne & Co., Inc. Adobe Systems Incorporated
Breakaway Solutions, Inc. Cisco Systems, Inc.
Cambridge Technology Partners, Inc. E.piphany, Inc.
Complete Business Solutions, Inc. Hewlett-Packard Company
Deutsche Bank - Bankers Trust Seagate Technology Inc.
KPMG LLP
Media One Group, Inc.
New Horizons Computer Learning CUSTOMER ADVOCACY
Centers, Inc. Charles Schwab & Co., Inc.
Ryder TRS Intel Corporation
Silicon Graphics, Inc. J.P. Morgan & Co. Incorporated
Sun Microsystems, Inc. Lawson Software
The Alliance for Employee Growth Optimark Technologies, Inc.
and Development, Inc. Texas Instruments Incorporated
</TABLE>
The specific categories for each type of customer are designated according
to the desired outcomes of the e-learning courses from which the majority of
that customer's revenue is received. For example, a company categorized as a
workforce transformation customer uses our e-learning solutions in order to
achieve a particular strategic learning objective. Sales performance customers
seek to improve the sales performance of either their internal or external sales
channels, or both.
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Customer advocacy customers use our products and services to provide e-learning
to their external customers. In some cases, customers purchase e-learning
products or services from us that would fall into more than one of these
categories.
CONTENT AND COURSES
We currently offer our customers more than 180 self-paced courses. Each
course consists of twelve to twenty hours of student work, including lessons,
quizzes, interactive applets, simulations, and hands-on participant exercises
which are graded and commented upon by our tutors before being returned via
email to participants. All of our courses have been designed to take advantage
of our e-learning environment and leverage Internet technologies, such as e-mail
and discussion boards, in order to provide participants with an engaging
learning experience and extensive interaction with our tutors. In addition to
pre-developed courses, we develop customized content for our customers. These
customized courses incorporate the significant domain knowledge of our clients
and can be rapidly redesigned for other customers in the same industry. We
typically retain all intellectual rights to our content and can reuse it for
other customers. In a few cases, however, we have agreed not to sell that
content to third parties.
PRODUCTS AND TECHNOLOGY
Our e-learning environment consists of technologies that we have designed
and created to function as an integrated solution. By employing standard
Internet technologies and a hosted content delivery model, we are able to
provide our customers with a high quality, efficient means to educate their
extended enterprise.
Content Delivery System
We host the e-learning environments of our customers. By centralizing all
infrastructure and hosting requirements, our customers derive the following
significant benefits:
- customers do not need to install or manage any software;
- content can be updated and infrastructure technology can be improved
continuously without impacting our clients and at a minimal cost to us;
- customers avoid the need to make significant investments in technology
infrastructure such as servers, databases, technical staff or technical
support; and
- participants can access course content at anytime, from anywhere, through
the use of a standard modem and browsers.
System Architecture
Our e-learning architecture is designed to scale rapidly to provide large
student populations with tutor-supported e-learning content. In addition, we
have developed our content delivery system using standard Internet technologies
such as Java and HTML, facilitating the delivery of our content to our
customers' Web browsers. We utilize a single code base to deliver content. As a
result, any improvement made in our software for one customer automatically
benefits all other customers.
Our content is stored in a database as structured "learning elements." We
have developed a templating system that automatically controls the graphical
presentation, or "look & feel", of a course, as well as course navigation. This
content storage and delivery approach allows us to personalize the content for
individuals in each course and minimizes content or formatting errors. In
addition, this structure enables the rapid customization of course content for
different customers. Our technology was not ported from a legacy application,
nor was it an adaptation of a previously existing
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learning delivery system. The following diagram depicts the architecture of our
end-to-end e-learning solutions.
[Description of Content Delivery System Architecture]
Course Enrollment Options
Our customers can choose several different methods to allow participants to
access our courses. Enrollments can be managed by authorized personnel using our
corporate administration system. Alternatively, participants can self-enroll
using an intranet or Internet e-commerce option. Our system can also be
integrated with third-party enterprise software applications to allow automated
enrollments using a training management or other back-office systems.
Tracking and Reporting System
Each participant's learning activities are fully tracked in our database.
This comprehensive tracking ability allows a participant to start a course at
work, and continue at home or while traveling. Regardless of their location, our
system recognizes each participant, tracks their course progress and records
their performance. Using only a standard Web browser, managers can run both
standardized and custom reports on participant enrollments and progress, gaining
visibility into the learning status of their extended enterprise.
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Course Tutoring
Our technology allows us to increase the efficiency and scalability of our
tutoring resources. The ability of tutors worldwide to interact with
participants through standard Internet communication methodologies significantly
increases the pool of tutor candidates we can recruit. In addition, our database
system allows multiple tutors to support the same course as grading and exercise
submissions can be accessed and responded to by any tutor. Duplication of tutor
work is prevented by our message queuing technology.
Collaboration Tools
We host and make available to our customers proprietary and third-party
collaboration tools, currently include instant messaging software, e-mail
solutions, chat rooms and discussion boards. These collaboration tools are
designed to create a learning environment that fosters collaboration between
peers and a high degree of interaction between participants and tutors.
Testing and Assessment
Our system offers comprehensive testing and assessment capabilities, which
can be customized for specific learning solutions and customers. Assessment and
testing capabilities include multiple choice, multiple answer quizzes with
randomized question sets, tutor-scored and commented exercises, and interactive
testing applets and simulations.
Full Integration with Corporate Infrastructures
Our e-learning solutions can be fully integrated with our customers'
corporate information technology systems, including their Web sites and
intranets. As a result, course participants do not necessarily realize that they
are accessing content hosted from our servers. Our integration layer provides
adapters for training management systems. We design our course content to be
compatible with our customer's security concerns and bandwidth limitations. As a
result, it is highly unusual for participants at our corporate clients to be
unable to access our courses.
Scalable Architecture
Our system has been designed to scale rapidly and to consistently deliver
content to large numbers of participants. We use extensive load testing to
measure our system capacity and identify potential bottlenecks. Our delivery
system has scaled to support more than 150,000 seats of learning delivered
worldwide. Constant improvements to our system architecture continue to increase
system capacity well beyond the current demands.
High-Availability Systems
Our systems have been designed to maximize availability, with redundancy in
the areas in which we believe failures are most likely to occur. We have also
implemented redundant network connections to the Internet, a load-balanced
redundant web server and a highly-redundant storage array to safeguard our
information. In addition, locating our Web servers with Exodus, a leading
Web-hosting firm, provides us with backup power, constant monitoring, physical
security, seismic resistance, fire suppression and climate control systems. We
are vulnerable to certain types of failures, including catastrophic failure of
the Exodus site due to natural disasters or other events and simultaneous
failure of our primary and redundant systems.
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SALES AND MARKETING
We sell our e-learning solutions primarily through our own direct sales
organization. We also sell through learning resellers, consulting firms,
customer/development partners and Internet portal partners. Our direct sales
organization focuses on developing long-term relationships with major corporate
customers while our e-commerce Web site sells directly to consumers and
individual buyers. Our learning resellers, including New Horizons, PPI Canada,
Hungry Minds, Training Net, Net Learning and BlueU., create a leveraged
distribution model to reach large customer bases, international markets and
consumers. Consulting firm partners, including KPMG and Cambridge Technology
Partners jointly sell e-learning solutions. With development partners and
customers, including Lawson Software and Microsoft, we enter into revenue
sharing relationships to jointly develop and sell e-learning solutions to their
customers and channels. Our Internet portal partners, including Intraware and
Fatbrain, resell our courses as components of their solution offerings targeted
at specific industries.
COMPETITION
The e-learning market is evolving quickly and is subject to rapid
technological change, shifts in customer demands and evolving learning
methodologies. To succeed, we must continue to expand our course offerings,
upgrade our technology and distinguish our solution. As competition continues to
intensify, we expect the e-learning market to undergo significant price
competition. We expect to face increasing price pressures from competitors as
our potential customers demand more value for their education budgets.
The e-learning market is highly fragmented with no single competitor
accounting for a dominant market share, and competition is intense. In addition
to competing with other suppliers of technology-based learning solutions, we
also compete with third-party suppliers of instructor-led education and learning
and internal education departments.
Our competitors vary in size and in the scope and breadth of the courses
and services they offer. Several of our competitors have longer operating
histories and significantly greater financial, technical and marketing
resources. In addition, larger companies may enter the e-learning market through
the acquisition of our competitors. We anticipate that the lack of significant
entry barriers to the e-learning market will allow other competitors to enter
the market, increasing competition.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Our success depends, in part, on our ability to protect our proprietary
rights and technology. We rely on a combination of copyrights, trademarks,
service marks, trade secret laws and employee and third-party nondisclosure
agreements to protect our proprietary rights. We have registered the trademark
DigitalThink and we own the domain name digitalthink.com. It is possible,
however, that third parties could acquire trademarks or domain names that are
substantially similar or conceptually similar to our trademarks or domain names.
This could decrease the value of our trademarks or domain names and could hurt
our business. The regulation of domain names in the United States and in foreign
countries is subject to change. The relationship between regulations governing
domain names and laws protecting trademarks and similar proprietary rights is
unclear.
We obtain the content for many of our courses from our customers and often
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 generally seek indemnification from our customers
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
customers may assert that some of the courses we develop for our general catalog
or under contract with other customers may improperly use their proprietary
content. Our involvement in any litigation to resolve intellectual
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property ownership matters would require us to incur substantial costs and
divert management's attention and resources. In addition, we cannot predict the
effect of a failure to prevail in any litigation of this kind.
EMPLOYEES
As of December 31, 1999, we employed 200 persons. Of these employees, there
were 91 in course development, 50 in sales and marketing, 30 in research and
development, 14 in Web delivery and customer support and 15 in general and
administration. Each of our employees was granted options to purchase shares of
our common stock upon joining us.
Our success will depend in large part upon our ability to attract and
retain employees. We face competition in this regard from other companies, but
we believe that we maintain good relations with our employees. None of our
employees are members of organized labor groups.
FACILITIES
We are currently leasing a total of approximately 51,000 square feet of
office space in two locations in San Francisco, California. We believe that our
current San Francisco facilities will meet our space requirements for at least
the next 12 months. The lease for our principal San Francisco facility expires
in October 2009.
LEGAL PROCEEDINGS
We are not presently a party to any material legal proceeding.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth, as of December 31, 1999, certain
information concerning our executive officers, directors and other key
management personnel:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Peter J. Goettner......................... 35 President, Chief Executive Officer, Chairman of
the Board
Umberto Milletti.......................... 34 General Manager of Products
Steven C. Zahm............................ 35 Vice President
Michael W. Pope........................... 33 Vice President, Chief Financial Officer
Todd A. Clyde............................. 35 Vice President, Learning Solutions
Michael W. Lodato......................... 35 Vice President, Marketing and Business
Development
J. Adriaan Theron......................... 51 Vice President, Sales
Linda T. Drumright........................ 39 Vice President, Engineering
Lyle E. Nevels............................ 36 Vice President, Operations
Paul J. Pastrone.......................... 39 Vice President, Global Business Development
Adam D. Levy.............................. 37 General Counsel
Samuel D. Kingsland(1)(2)................. 30 Director
Steven L. Eskenazi(1)..................... 37 Director
William H. Lane, III(1)(2)................ 61 Director
E. Follett Carter(1)(2)................... 57 Director
</TABLE>
- -------------------------
(1) Member of the compensation committee.
(2) Member of the audit committee.
Peter J. Goettner has served as our President, Chief Executive Officer and
Chairman of our Board of Directors since he co-founded DigitalThink in April
1996. From January 1996 to April 1996, Mr. Goettner was developing the business
and financing plan for DigitalThink. From November 1993 to December 1995, Mr.
Goettner served as Director of Marketing for Knowledge Revolution, a developer
of educational and engineering software. Mr. Goettner holds a B.S. in Electrical
Engineering from the University of Michigan and an M.B.A. from the Haas School
of Business at the University of California at Berkeley.
Umberto Milletti is one of our co-founders and has served as our General
Manager of Products since April 1996. From March 1993 to March 1996, Mr.
Milletti was Director of Product Development at Knowledge Revolution. Mr.
Milletti holds a B.S. in Electrical Engineering from Tufts University and an
M.S. in Electrical Engineering and Computer Science from the University of
California at Berkeley.
Steven C. Zahm is one of our co-founders and has served as our Vice
President since April 1996. From November 1992 to March 1996, Mr. Zahm was
Director of Digital Media/High-Tech Consulting at Prophet Brand Strategy, a
strategic management consulting firm. Mr. Zahm holds a B.A. in History and
Economics from Stanford University and an M.B.A. from the Haas School of
Business at the University of California at Berkeley.
Michael W. Pope has served as our Vice President, Chief Financial Officer
since October 1999. From June 1992 to October 1999, Mr. Pope served in various
positions at Dionex Corporation, a
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<PAGE> 44
manufacturer and marketer of chromatography systems and related products for
chemical analysis, most recently as Chief Financial Officer from April 1994 to
October 1999. Mr. Pope holds a B.A. in Quantitative Economics from Stanford
University and an M.B.A. from the Haas School of Business at the University of
California at Berkeley.
Todd A. Clyde has served as our Vice President, Learning Solutions since
March 1998. From October 1986 to March 1998, Mr. Clyde held several positions
with Andersen Consulting, most recently Senior Manager. Mr. Clyde holds a B.A.
in Management Science from the University of California at San Diego.
Michael W. Lodato has served as our Vice President, Marketing and Business
Development since April 1999. From October 1996 to April 1999, Mr. Lodato held
several positions at Siebel Systems, a sales and customer support software
developer, including Senior Director, Strategic Accounts and Senior Director,
Product Marketing. From June 1994 to October 1996, Mr. Lodato was a Director,
Enterprise Architecture and Strategy at Sybase, Inc., a database software
provider. Mr. Lodato holds a B.A. in Management Science from the University of
California at San Diego.
J. Adriaan Theron has served as our Vice President, Sales since March 1999.
From January 1997 to February 1999, Mr. Theron was the Vice President of Sales
and Marketing for Plexus Technology, a division of BancTec, Inc., a systems
integration and services company. From August 1995 to December 1996, Mr. Theron
served as Vice President of Marketing and Regional Sales Manager of SQL
Financials International, an e-commerce software company. From January 1993 to
July 1995, Mr. Theron was the Corporate Vice President, Sales and Marketing for
Learnsoft Corporate Training, Inc., a provider of technical training. Mr. Theron
attended Pretoria University in South Africa.
Linda T. Drumright has served as our Vice President, Engineering since
October 1999. From August 1998 to October 1999, Ms. Drumright served as Vice
President, Budgeting, Planning and Forecasting Application Product Development
for Hyperion Solutions Corporation, a developer of enterprise analytic
application software. Prior to that, from July 1997 to August 1998, she was the
Senior Director of the Tools and Applications Division at Arbor Software Corp.,
a database software developer, and from June 1990 to July 1997, she held several
technical positions, including Senior Manager, at Sybase, Inc. Ms. Drumright
holds a B.A. in Computer Science from the University of California at Berkeley.
Lyle E. Nevels has served as our Vice President, Operations since June 1999
and our Director of Support Operations from May 1998 to May 1999. From April
1996 to April 1998, Mr. Nevels was Director, Customer Satisfaction Center at
AutoDesk, Inc., a developer of design and drafting software and multimedia
tools. Prior to that, from November 1983 to March 1996, Mr. Nevels held various
senior management positions at Apple Computer for over 13 years, most recently
as Senior Manager of Licensing Operations. Mr. Nevels holds a B.S. in
Organizational Behavior from the University of San Francisco.
Paul J. Pastrone has served as our Vice President, Global Business
Development since July 1999. From January 1998 to July 1999, Mr. Pastrone was
Vice President and Research Director of Software, Systems and Internet at
Gartner Group, Inc., a market research organization. From September 1988 to
December 1997, Mr. Pastrone was a Senior Vice President at International Data
Corporation, a market research organization. Mr. Pastrone received a B.A. from
the University of California at Berkeley and an M.A. in International Business
Relations from the Fletcher School of Law & Diplomacy.
Adam D. Levy has served as our General Counsel since October 1999. From
September 1994 through October 1999, Mr. Levy was an Associate at the law firm
of Wilson Sonsini Goodrich and Rosati. Mr. Levy holds a B.A. in Economics from
Haverford College and a J.D. from Georgetown University.
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<PAGE> 45
Samuel D. Kingsland has been a member of our board of directors since
August 1996. Mr. Kingsland is a founding member of H & Q Venture Associates,
LLC, a venture capital firm formed in July 1998. From January 1991 to July 1998,
Mr. Kingsland held several positions, most recently as Principal, within the
venture capital group of Hambrecht & Quist, Inc., an investment banking firm.
Mr. Kingsland is a director of several private companies. Mr. Kingsland received
a B.A. from Dartmouth College.
Steven L. Eskenazi has been a member of our board of directors since June
1997. Since March 1997, Mr. Eskenazi has been a General Partner of the Walden
Group, a venture capital firm. From February 1990 to March 1997, Mr. Eskenazi
was Managing Director in charge of New Media Research for Deutsche Banc Alex.
Brown, an investment banking company. Mr. Eskenazi also serves on the board of
several private companies. Mr. Eskenazi holds a B.S. in Applied Mathematics from
Union College and an M.B.A. from the Amos Tuck School of Management at Dartmouth
College.
William H. Lane, III has been a member of our board of directors since
February 1999. Since 1996, Mr. Lane has been the President of Canyon Vista,
Inc., a management consulting company. Mr. Lane retired from Intuit Inc., a
financial software company, in July 1996, having served as its Vice President,
Chief Financial Officer, Secretary and Treasurer from January 1994 to April
1996. Mr. Lane served in a similar capacity at ChipSoft, Inc., a tax preparation
software company, from July 1991 until its acquisition by Intuit in December
1993. Mr. Lane is also a director of public companies Cyberian Outpost, Inc.,
MetaCreations Corp. and International Microcomputer Software, Inc. and several
private companies. Mr. Lane holds an A.B. from Columbia University.
E. Follett Carter has been a member of our board of directors since June
1999. From October 1996 to his retirement in October 1999, Mr. Carter was the
President of Gartner Group Distribution, a subsidiary of the Gartner Group,
Inc., and Gartner Group's Chief Marketing Officer. From October 1993 to
September 1996, Mr. Carter was the Executive Vice President, Sales and Marketing
for the Gartner Group, Inc. Mr. Carter is also a director of several private
companies. Mr. Carter holds a B.A. from Case Western Reserve University and an
M.B.A. from Columbia University.
BOARD OF DIRECTORS
Our bylaws currently authorize five directors. Our certificate of
incorporation and bylaws that become effective upon the completion of this
offering provide that our board will be divided into three classes, Class I,
Class II and Class III, with each class serving staggered three-year terms. The
Class I directors, Messrs. Kingsland and Eskenazi, will stand for reelection at
the 2000 annual meeting of stockholders. The Class II directors, Messrs. Lane
and Carter, will stand for reelection at the 2001 annual meeting of
stockholders. The Class III director, Mr. Goettner, will stand for reelection at
the 2002 annual meeting of stockholders. Any additional directorships resulting
from an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one-third of
the directors. This staggered classification of the board of directors may have
the effect of delaying or preventing changes in control or management. There are
no family relationships among any of our directors, officers or key employees.
Committees
Our compensation committee consists of Messrs. Kingsland, Eskenazi, Lane
and Carter. The compensation committee makes recommendations regarding our
various incentive compensation and benefit plans and determines salaries for our
executive officers and incentive compensation for our employees and consultants.
Our audit committee consists of Messrs. Carter, Kingsland and Lane. The
audit committee makes recommendations to the board of directors regarding the
selection of our independent auditors,
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<PAGE> 46
reviews the results and scope of the audit and other services provided by our
independent auditors and reviews and evaluates our control functions.
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee was, at any time since
our formation, one of our officers or employees. None of our executive officers
serves as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving as a member of our board
of directors or compensation committee.
Compensation
We do not currently pay any cash or non-cash compensation to our directors
for their services, although we reimburse them for travel expenses in connection
with attending our board and committee meetings. We do not provide additional
compensation for committee participation or special assignments of the board of
directors. On two occasions, we have granted our outside directors options to
purchase shares of our common stock under the 1996 Stock Plan. In July 1999, we
granted Mr. Carter an option to purchase 40,000 shares of our common stock at a
per share exercise price of $1.00. In October 1999, we granted Mr. Lane an
option to purchase 40,000 shares of our common stock at a per share exercise
price of $1.50. We plan to offer similar grants to new outside directors when
they first join our board.
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 all of
our directors, other than Mr. Goettner, are independent directors for this
purpose.
EXECUTIVE OFFICERS
Our executive officers are appointed by our board of directors and serve
until their successors are elected or appointed.
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<PAGE> 47
Compensation
The following table sets forth the compensation paid by us during the
fiscal year ended March 31, 1999, to our Chief Executive Officer and to our four
other most highly compensated executive officers who earned more than $100,000
during our last fiscal year. This prospectus refers to these executives as the
Named Executive Officers.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
--------------------------- -------- ------- ------------
<S> <C> <C> <C>
Peter J. Goettner.................................... $100,000 $ 9,385 150,000
President, Chief Executive
Officer and Chairman of the Board of Directors
Todd A. Clyde........................................ 75,000 59,653 225,000
Vice President, Learning Solutions
Steven C. Zahm....................................... 100,000 6,009 125,000
Vice President
Umberto Milletti..................................... 100,000 10,224 125,000
General Manager of Products
Lyle E. Nevels....................................... 76,666 32,714 70,000
Vice President, Operations
</TABLE>
Option Grants in Last Fiscal Year
The following table provides information relating to stock options awarded
to each of the Named Executive Officers during the year ended March 31, 1999.
All of these options were awarded under our 1996 Stock Plan. Options generally
vest over four years from the date of grant. Percent of total options granted in
fiscal 1999 is based on an aggregate of 1,461,250 options granted in the year
ended March 31, 1999 to our employees, directors and consultants, including the
Named Executive Officers. Options were granted at an exercise price equal to the
fair market value per share of common stock on the grant date as determined by
our board of directors. The potential realizable value is calculated based on
the term of the option at its time of grant (10 years). In accordance with the
rules of the Securities and Exchange Commission, the following table also sets
forth the potential realizable value over the term of the options (the period
from the grant date to the expiration date) based on assumed rates of stock
appreciation of 5% and 10% compounded annually. These amounts do not
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<PAGE> 48
represent our estimate of future stock price performance. Actual realizable
values, if any, of stock options will depend on the future performance of the
common stock.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED FOR OPTIONS TERM
OPTIONS IN FISCAL EXERCISE EXPIRATION ---------------------
NAME GRANTED 1999 PRICE DATE 5% 10%
---- ---------- ------------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Goettner............. 75,000 5.13% $0.075 4/1/08 $ 3,538 $ 8,965
75,000 5.13 0.25 1/12/09 11,792 29,883
Todd A. Clyde................. 100,000 6.84 0.075 4/1/08 4,717 11,953
125,000 8.55 0.50 2/9/09 39,306 99,609
Steven C. Zahm................ 50,000 3.42 0.075 4/1/08 2,358 5,977
75,000 5.13 0.25 1/12/09 11,792 29,883
Umberto Milletti.............. 50,000 3.42 0.075 4/1/08 2,358 5,977
75,000 5.13 0.25 1/12/09 11,792 29,883
Lyle E. Nevels................ 50,000 3.42 0.075 5/13/08 2,358 5,977
20,000 1.37 0.25 1/12/09 3,144 7,969
</TABLE>
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
None of the Named Executive Officers exercised options during the fiscal
year ended March 31, 1999. The following table sets forth the number and value
of securities underlying unexercised options held at March 31, 1999. The "Value
of Unexercised In-the-Money Options at March 31, 1999" is based on a value of
$0.50 per share, the fair market value of our common stock as of March 12, 1999,
as determined by the board of directors, less the per share exercise price,
multiplied by the number of shares issued upon exercise of the option. All
options were granted under our 1996 Stock Plan.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT MARCH 31, 1999 MARCH 31, 1999
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Peter J. Goettner......................... 3,125 146,875 $ 781 $49,844
Todd A. Clyde............................. 27,604 197,396 10,625 31,875
Steven C. Zahm............................ 3,125 121,875 781 39,219
Umberto Milletti.......................... 102,083 222,917 45,026 84,974
Lyle E. Nevels............................ 833 69,167 208 26,042
</TABLE>
STOCK PLANS
1996 Stock Plan
Our 1996 stock plan was adopted by the board of directors in May 1996 and
approved by our stockholders in May 1996. In October 1999, the 1996 Stock Plan
was amended to increase the number of shares of common stock reserved for
issuance thereunder to 6,375,000 shares. As of December 31, 1999, options to
purchase an aggregate of 4,017,729 shares were outstanding, 560,199 shares of
common stock had been purchased pursuant to exercises of stock options and stock
purchase rights and 1,797,072 shares were available for future grant.
The number of shares reserved for issuance under the 1996 stock plan will
increase, beginning in fiscal year 2001, by an annual increase equal to the
lesser of 2.0 million shares, 5.0% of the
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<PAGE> 49
outstanding shares on the date of the annual increase, or a lesser amount
determined by our board of directors.
Our 1996 Stock Plan provides for the grant of incentive stock options (as
defined in Section 422 of the Internal Revenue Code) to employees and
nonstatutory stock options, stock purchase rights and stock bonus rights to
employees, directors and consultants. This plan may be administered by the board
of directors or a committee appointed by the board. The option administration
committee may make final and binding determinations regarding the terms and
conditions of the awards granted, including the exercise price, the number of
shares subject to the award and the exercisability thereof, forms of agreement
for use under the plan and interpretation of plan terms.
The exercise price of incentive stock options granted under the 1996 Stock
Plan must be at least equal to the fair market value of our common stock on the
date of grant. However, for any employee holding more than 10% of the voting
power of all classes of our stock, the exercise price will be no less than 110%
of the fair market value. The exercise price of nonqualified stock options for
any person holding more than 10% of the voting power of all classes of our
stock, including the stock of any parent or subsidiary, the exercise price will
be no less than 110% of the fair market value. For any other service provider,
the exercise price of a non-qualified option will be no less than 85% of the
fair market value. The maximum term of options granted under the 1996 Stock Plan
is ten years, except that options granted to officers, directors and consultants
share a maximum term of five years.
An optionee whose relationship with us or any related corporation ceases
for any reason, other than death or total and permanent disability, may exercise
options in the three-month period following such cessation, or such other period
of time as determined by the administrator, unless such options terminate or
expire sooner, or for nonstatutory stock options, later, by their terms. The
three-month period is extended to twelve months for terminations due to death or
total and permanent disability. In the event of our merger, sale or
reorganization into another corporation which results in a change of control,
the successor company may either assume outstanding options or issue substitute
options. If any options are not assumed or substituted, the options will
terminate. The 1996 Stock Plan will terminate in November 2006, unless sooner
terminated by the board of directors.
The board of directors may also grant stock purchase rights to employees
and consultants under the 1996 Stock Plan. Such grants are made pursuant to a
restricted stock purchase agreement, and the price to be paid for the shares
granted thereunder is determined by the administrator. We are generally granted
a repurchase option exercisable on the voluntary or involuntary termination of
the purchaser's employment with us for any reason, including death or
disability. The repurchase price shall be the original purchase price paid by
the purchaser. The repurchase option shall lapse at a rate determined by the
administrator. Once the stock purchase right has been exercised, the purchaser
shall have the rights equivalent to those of a stockholder.
1999 Employee Stock Purchase Plan
Our board of directors adopted our 1999 Employee Stock Purchase Plan in
December 1999. This plan provides our employees with an opportunity to purchase
our common stock through accumulated payroll deductions.
A total of 200,000 shares of common stock has been reserved for issuance
under the purchase plan. In addition, the purchase plan provides for annual
increases in the number of shares available for issuance under the purchase plan
on the first day of each fiscal year, beginning with fiscal 2001, equal to the
lesser of 1% of the outstanding shares of common stock on the first day of the
fiscal year or 400,000 shares or such lesser amount as may be determined by the
board.
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<PAGE> 50
The board of directors or a committee appointed by the board administers
the purchase plan. The board or its committee has full and exclusive authority
to interpret the terms of the purchase plan and determine eligibility.
Employees are eligible to participate if they are customarily employed by
us or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, an employee may not be granted an
option to purchase stock under the purchase plan if such an employee:
- immediately after grant owns stock possessing five percent or more of the
total combined voting power or value of all classes of our capital stock,
or
- whose rights to purchase stock under all employee stock purchase plans of
ours accrues at a rate which exceeds $25,000 worth of stock for each
calendar year.
The purchase plan, which is intended to qualify under Section 423 of the
Internal Revenue Code of 1986, as amended, contains consecutive, overlapping
24-month offering periods. Each offering period includes four six-month purchase
periods. The offering periods generally start on the first trading day on or
after May 1 and November 1 of each year, except for the first such offering
period, which will commence on the first trading day on or after the effective
date of this offering and will end on the last trading day on or before November
1, 2001.
The purchase plan permits participants to purchase common stock through
payroll deductions of up to 10% of the participant's "compensation."
Compensation is defined as the participant's base straight time gross earnings
and commissions but excludes payments for overtime, shift premium payments,
incentive compensation, incentive payments, bonuses and other compensation. The
maximum number of shares a participant may purchase during a single offering
period is 5,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the purchase plan is 85% of the lower of the fair market value
of the common stock at the beginning or end of the offering period. If the fair
market value at the end of a purchase period is less than the fair market value
at the beginning of the offering period, participants will withdraw from the
current offering period following the exercise and will automatically re-enroll
in a new offering period. Participants may end their participation at any time
during an offering period, and they will be paid their payroll deductions to
date. Participation ends automatically upon termination of employment with us.
A participant may not transfer rights granted under the purchase plan other
than by will, the laws of descent and distribution or as otherwise provided
under the purchase plan.
The purchase plan provides that, if we merge with or into another
corporation or sell substantially all of our assets, a successor corporation may
assume or substitute for each outstanding purchase right. If the successor
corporation refuses to assume or substitute for the outstanding purchase rights,
the offering period then in progress will be shortened, and a new exercise date
will be set.
The purchase plan will terminate in 2009. However, the board of directors
has the authority to amend or terminate the purchase plan, except that, subject
to some exceptions described in the purchase plan, no such action may adversely
affect any outstanding rights to purchase stock under the purchase plan.
401(k) PLAN
In April 1997, our board of directors adopted a Retirement Savings and
Investment Plan covering our full-time employees located in the United States.
This plan is intended to qualify under
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<PAGE> 51
Section 401(k) of the Internal Revenue Code of 1986, as amended, so that
contributions to this plan by employees, and the investment earnings thereon,
are not taxable to employees until withdrawn. Pursuant to this plan, employees
may elect to reduce their current compensation by up to the lesser of 20% of
their annual compensation or the statutorily prescribed annual limit ($10,000 in
1999) and to have the amount of such reduction contributed to this plan. We do
not currently make additional matching contributions on behalf of plan
participants.
CHANGE OF CONTROL AGREEMENTS
We have entered into a change of control agreement with Michael Pope, our
chief financial officer. In the event of a change in our control and the actual
termination of Mr. Pope's employment or Mr. Pope's resignation following a
reduction in his responsibilities or compensation or a relocation of his place
of employment, the vesting of all outstanding stock options issued to Mr. Pope
will be accelerated. Mr. Pope will not be entitled to accelerated vesting if we
terminate his employment for cause, which includes acts of dishonesty or willful
misconduct.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION
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 liability for the following:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or involving intentional misconduct
or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in such capacity, regardless of
whether the bylaws would permit indemnification.
We have entered into agreements to indemnify our directors, executive
officers and controller, in addition to the indemnification provided for in our
bylaws. These agreements, among other things, provide for indemnification of our
directors and executive 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 rights, arising out
of such person's services as a director or executive officer to us, any of our
subsidiaries or any other company or enterprise to which the person provides
services at our request. We believe that these provisions and agreements are
necessary to attract and retain qualified persons as directors and executive
officers.
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<PAGE> 52
TRANSACTIONS WITH RELATED PARTIES
PURCHASES OF STOCK
We sold 1,544,400 shares of our common stock to Peter J. Goettner, our
President and CEO, at a per share price of $0.001, in May 1996. We sold
1,069,200 shares of our common stock to Umberto Milletti, our General Manager of
Products, at a per share price of $0.001, in May 1996. We sold 1,346,400 shares
of our common stock to Steven C. Zahm, our Vice President, at a per share price
of $0.001, in May 1996.
We sold an aggregate of 3,184,000 shares of our Series A preferred stock,
at a per share price of $0.50, in August 1996 for aggregate proceeds of $1.6
million. We sold an aggregate of 7,726,668 shares of our Series B preferred
stock, at a per share price of $0.75, in June 1997 for aggregate proceeds of
$5.8 million. We sold an aggregate of 7,904,306 shares of our Series C and
Series C-1 preferred stock, at a per share price of $1.50, in November 1998,
February 1999 and June 1999 for aggregate proceeds of $11.9 million. We sold an
aggregate of 3,999,617 shares of our Series D preferred stock, at a per share
price of $6.50, in November 1999 for aggregate proceeds of $26.0 million. Each
of these financings involved other investors that were not related parties. The
following executive officers, directors or holders of more than five percent of
our voting securities purchased preferred stock in these financings in the
amounts set forth below.
<TABLE>
<CAPTION>
PREFERRED STOCK
-------------------------------------------
PREFERRED STOCKHOLDER SERIES A SERIES B SERIES C SERIES D
--------------------- -------- --------- --------- --------
<S> <C> <C> <C> <C>
TI Ventures, L.P................................ 666,667 1,333,334 777,778 307,693
Adobe Ventures, L.P............................... 666,666 1,333,334 777,778 307,693
H&Q Digital Think Investors, L.P................ 666,667 1,333,334 598,748 261,432
The Walden Group................................ -- 2,000,000 500,000 200,000
Torstar Corporation............................. -- -- 2,000,000 76,923
Peter J. Goettner............................... 30,000 -- -- --
William H. Lane, III............................ 50,000 20,000 -- 3,077
E. Follett Carter............................... -- -- 80,000 --
Michael W. Pope................................. -- -- -- 15,385
</TABLE>
Samuel D. Kingsland, one of our directors, is a Manager of the General
Partner of TI Ventures, L.P., a Limited Partner of the General Partner of Adobe
Ventures, L.P., and a Manager of the General Partner of H&Q Digital Think
Investors, L.P., each of which is a greater than 5% stockholder. Mr. Kingsland
disclaims beneficial ownership of the securities held by each of these entities.
Steven L. Eskenazi, one of our directors, is a General Partner of The
Walden Group. The Walden Group consists of Walden Media and Information
Technology Fund, L.P., Walden-SBIC, L.P., Walden EDB Partners, L.P., Walden EDB
Partners II, L.P. and Walden Technology Ventures II, L.P. Mr. Eskenazi disclaims
beneficial ownership of the securities held by each of these entities.
Each share of our preferred stock will convert into one share of common
stock upon the completion of this offering.
Investor Rights Agreement. The preferred stockholders described above have
entered into an agreement with us, pursuant to which these and other preferred
stockholders will have registration rights with respect to their shares of
common stock following this offering. For additional information regarding these
registration rights, please see "Description of Capital Stock -- Registration
Rights of Certain Holders." Upon the completion of this offering, all shares of
our outstanding preferred stock will be automatically converted into an equal
number of shares of common stock.
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<PAGE> 53
We have entered into indemnification agreements with our directors and
officers for the indemnification of and advancement of expenses to these persons
to the full extent permitted by law. We also intend to execute these agreements
with our future directors and officers.
On various occasions during 1999 and the two preceding fiscal years, we
granted the following options to purchase our common stock to the following
executive officers, directors and stockholders who beneficially own five percent
or more of our securities:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
NAME DATE OF GRANT OPTIONS PRICE/SHARE
- -------------------------------------------------------- ------------- --------- -----------
<S> <C> <C> <C>
Peter J. Goettner....................................... 4/1/98 75,000 $0.075
1/12/99 75,000 0.250
10/15/99 600,000 1.500
Umberto Milletti........................................ 6/19/97 200,000 0.050
4/1/98 50,000 0.075
1/12/99 75,000 0.250
Steven C. Zahm.......................................... 4/1/98 50,000 0.075
1/12/99 75,000 0.250
Michael W. Pope......................................... 10/27/99 275,000 1.500
Todd A. Clyde........................................... 4/1/98 100,000 0.075
2/9/99 125,000 0.500
10/15/99 75,000 1.500
J. Adriaan Theron....................................... 3/12/99 250,000 0.500
Lyle E. Nevels.......................................... 5/13/98 50,000 0.075
1/12/99 20,000 0.250
6/11/99 50,000 0.750
William H. Lane, III.................................... 11/21/96 5,000 0.050
10/15/99 40,000 1.500
E. Follet Carter........................................ 7/12/99 40,000 1.000
</TABLE>
In February 1999, we entered into an agreement with Adobe Systems
Incorporated, a limited partner of Adobe Ventures, L.P., a holder of 5% or more
of our shares of common stock, for the provision of custom course services
relating to project management, development of course content, production of
courseware and delivery of online courses via the Internet. Under the agreement
we are providing these course development services on our standard terms. The
agreement will continue until February 16, 2002 unless terminated earlier. In
fiscal 1999, we generated revenues of $110,000 under our agreement with Adobe.
In 1997, we entered into an agreement with Texas Instruments Incorporated,
a limited partner of TI Ventures, L.P., a holder of 5% or more of our shares of
common stock, for the provision of services relating to project management
resources and development of course syllabus for a Texas Instrument's course of
instruction for delivery worldwide via the Internet. Under the agreement we are
providing these course development services on our standard terms. The agreement
will continue until December 31, 2002 unless terminated earlier. In fiscal 1999,
we generated revenues of $161,000 under our agreement with Texas Instruments.
During fiscal 1998 and fiscal 1999, Mario M. Rosati, a member of Wilson
Sonsini Goodrich & Rosati, our outside legal counsel, was a director of ours. We
paid legal fees of $28,600 in fiscal 1998 and $123,000 in fiscal 1999 to Wilson
Sonsini Goodrich & Rosati.
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<PAGE> 54
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of December 31, 1999, by the following
individuals or groups:
- each person, or group of affiliated persons, whom we know beneficially
owns more than 5% of our outstanding stock;
- each Named Executive Officer;
- each of our directors; and
- all of our directors and executive officers as a group.
Unless otherwise indicated, the address for each stockholder on this table
is c/o DigitalThink, Inc., 1098 Harrison Street, San Francisco, California
94103. Except as otherwise noted, and subject to applicable community property
laws, to the best of our knowledge, the persons named in this table have sole
voting and investing power with respect to all of the shares of common stock
held by them.
This table lists applicable percentage ownership based on 27,374,789 shares
of common stock outstanding as of December 31, 1999, as adjusted to reflect the
conversion of all outstanding shares of preferred stock upon the closing of this
offering, and also lists applicable percentage ownership based on 31,374,789
shares of common stock outstanding after completion of this offering. Options to
purchase shares of our common stock that are exercisable within 60 days of
December 31, 1999 are deemed to be beneficially owned by the person holding
these options for the purpose of computing percentage ownership of that person,
but are not treated as outstanding for the purpose of computing any other
person's ownership percentage.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY OWNED
NUMBER OF SHARES --------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
------------------------------------ ------------------ --------------- --------------
<S> <C> <C> <C>
Samuel D. Kingsland(1)........................ 9,031,124 33.0% 28.8%
H&Q Venture Associates, LLC
One Bush Street
San Francisco, CA 94104
TI Ventures, L.P.............................. 3,085,472 11.3 9.8
H&Q Venture Associates, LLC
One Bush Street
San Francisco, CA 94104
H&Q Digital Think Investors, L.P.(2).......... 2,996,662 11.0 9.6
H&Q Venture Associates, LLC
One Bush Street
San Francisco, CA 94104
Adobe Ventures, L.P.(3)....................... 2,948,990 10.8 9.4
H&Q Venture Associates, LLC
One Bush Street
San Francisco, CA 94104
The Walden Group(4)........................... 2,700,000 9.9 8.6
750 Battery Street, Suite 700
San Francisco, CA 94111
Steven L. Eskenazi(5)......................... 2,700,000 9.9 8.6
The Walden Group
750 Battery Street, Suite 700
San Francisco, CA 94111
Torstar Corporation........................... 2,076,923 7.6 6.6
One Young Street, Sixth Floor
Toronto, Canada M5E1P9
Attn: David Wetherald
</TABLE>
52
<PAGE> 55
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY OWNED
NUMBER OF SHARES --------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
------------------------------------ ------------------ --------------- --------------
<S> <C> <C> <C>
Peter J. Goettner(6).......................... 1,629,087 5.9 5.2
Steven C. Zahm(7)............................. 1,411,129 5.2 4.5
Umberto Milletti(8)........................... 1,245,762 4.5 4.0
Todd A. Clyde(9).............................. 85,417 * *
Michael W. Pope............................... 84,134 * *
E. Follett Carter............................. 80,000 * *
William H. Lane, III.......................... 78,077 * *
Lyle E. Nevels(10)............................ 35,625 * *
Michael W. Lodato............................. 15,385 * *
All directors and executive officers as a
group (10 persons).......................... 16,374,491 59.1% 51.6%
</TABLE>
- -------------------------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 3,085,472 shares held by TI Ventures, L.P., 282,828 shares held by
Adobe Ventures, L.P., 43,512 shares held by Adobe Ventures III, L.P. and
17,172 shares held by H&Q Adobe Ventures Management, L.P., 116,667 shares
held by H&Q Adobe Ventures Management II, LLC, 2,860,181 shares held by H&Q
Digital Think Investors, L.P. and 2,642 shares held by HQVA Adobe Ventures
Management III, LLC. Mr. Kingsland disclaims beneficial ownership of such
shares.
(2) Includes 17,172 shares held by H&Q Adobe Ventures Management, L.P., 116,667
shares held by H&Q Adobe Ventures Management II, LLC, 2,860,181 shares held
by H&Q Digital Think Investors, L.P. and 2,642 shares held by HQVA Adobe
Ventures Management III, LLC.
(3) Includes 282,828 shares held by Adobe Ventures, L.P., 43,512 shares held by
Adobe Ventures III, L.P. and 2,622,650 shares held by Adobe Incentive
Partners.
(4) Includes 1,550,000 shares held by Walden Media Information Technology Fund,
L.P., 220,000 shares held by Walden EDB Partners, L.P., 17,600 shares held
by Walden EDB Partners II, L.P., 765,727 shares held by Walden-SBIC, L.P.
and 146,673 shares held by Walden Technology Ventures II, L.P.
(5) Includes 1,550,000 shares held by Walden Media Information Technology Fund,
L.P., 220,000 shares held by Walden EDB Partners, L.P., 17,600 shares held
by Walden EDB Partners II, L.P., 765,727 shares held by Walden-SBIC, L.P.
and 146,673 shares held by Walden Technology Ventures II, L.P. Mr. Eskenazi
disclaims beneficial ownership of such shares.
(6) Includes 54,687 stock options exercisable within 60 days of December 31,
1999 and 75,000 shares beneficially owed by the Goettner-Shmunes 1999
Children's Trust UTA Dated July 26, 1999.
(7) Includes 43,229 stock options exercisable within 60 days of December 31,
1999 and 100,000 shares held by the Zahm Children's Trust Dated September
3, 1999.
(8) Includes 168,562 stock options exercisable within 60 days of December 31,
1999, 839,200 shares held by the Umberto Milletti and Julie Milletti Trust
Dated March 10, 1999 and 200,000 shares held by Vincent Vitiello, Trustee
of the Milletti Children's Trust UTA Dated August 13, 1999.
(9) Includes 27,084 stock options exercisable within 60 days of December 31,
1999.
(10) Includes 10,917 stock options exercisable within 60 days of December 31,
1999.
53
<PAGE> 56
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our certificate of incorporation that becomes effective upon the closing of
this offering authorizes the issuance of up to 100,000,000 shares of common
stock, $0.001 par value, and authorizes the issuance of 10,000,000 shares of
undesignated preferred stock, no par value. From time to time, our board of
directors may establish the rights and preferences of the preferred stock. As of
December 31, 1999, 4,560,199 shares of common stock were issued and outstanding
and held by 79 stockholders, and 22,814,590 shares of preferred stock were
issued and outstanding and held by 70 stockholders. Upon the closing of this
offering, all outstanding shares of preferred stock will convert into an
aggregate of 22,814,590 shares of common stock. The following is a summary
description of our capital stock. We encourage you to refer to our certificate
of incorporation and bylaws, which are included as exhibits to the registration
statement of which this prospectus forms a part, and applicable provisions of
Delaware law for a more complete description.
COMMON STOCK
Each holder of common stock is entitled to one vote for each share held on
all matters to be voted upon by the stockholders and there are no cumulative
voting rights. Subject to preferences that may be applicable to any outstanding
preferred stock, holders of common stock are entitled to receive ratably such
dividends, if any, as may be declared time to time by the board of directors out
of funds legally available for that purpose. See "Dividend Policy." In the event
of a liquidation, dissolution or winding up of DigitalThink, the holders of
common stock are entitled to share in our assets remaining after the payment of
liabilities and the satisfaction of any liquidation preference granted to the
holders of any outstanding shares of preferred stock. Holders of common stock
have no preemptive or conversion rights or other subscription rights. There are
no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable. The rights,
preferences and privileges of the holders of common stock are subject to, and
may be adversely affected by the rights of the holders of shares of any series
of preferred stock that we may designate in the future.
PREFERRED STOCK
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may be
greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of such preferred stock. However, the effects
might include, among other things:
- restricting dividends on the common stock;
- diluting the voting power of the common stock;
- impairing the liquidation rights of the common stock; or
- delaying or preventing a change in our control without further action by
the stockholders.
Upon the closing of this offering, no shares of preferred stock will be
outstanding, and we have no present plans to issue any shares of preferred
stock.
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<PAGE> 57
REGISTRATION RIGHTS OF CERTAIN HOLDERS
After this offering, holders of 22,814,590 shares of common stock (the
"registrable securities") or their transferees are entitled to certain rights
with respect to the registration of such shares under the Securities Act. These
rights are provided under the terms of an agreement between DigitalThink and the
holders of the registrable securities. Beginning 180 days following the date of
this prospectus, holders of at least 30% of the registrable securities may
require on no more than two occasions, that we use our best efforts to register
the registrable securities for public resale. We are obligated to register these
shares only if the outstanding registrable securities have an anticipated public
offering price of at least $10,000,000. Also, holders of registrable securities
may require, no more than once during any six-month period, that we register
their shares for public resale on Form S-3 or similar short-form registration if
the value of the securities to be registered is at least $1,000,000.
Furthermore, in the event we elect to register any of our shares of common stock
for purposes of effecting any public offering, the holders of registrable
securities are entitled to include their shares of common stock in that
registration, but we may reduce the number of shares proposed to be registered
in view of market conditions. These registration rights have been waived with
respect to this offering. DigitalThink will bear all expenses in connection with
any registration, other than underwriting discounts and commissions. All
registration rights will terminate five years following the consummation of this
offering provided that the aggregate proceeds of such registration exceed
$15,000,000 at a per share issuance price of at least $8.00 per share, or with
respect to each holder of registrable securities, at such time as the holder is
entitled to sell all of the holder's then held shares in any 90-day period under
Rule 144 of the Securities Act.
CERTAIN CHARTER AND BYLAW PROVISIONS AND DELAWARE LAW
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make the following more difficult:
- our acquisition by a tender offer;
- our acquisition by a proxy contest; or
- the removal of our incumbent officers and directors.
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.
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.
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<PAGE> 58
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.
Delaware Anti-takeover Law
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless the business combination or the transaction in
which the person became an interested stockholder is approved in a prescribed
manner. 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
its 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
Our certificate of incorporation eliminates the right of stockholders to
act by written consent without a meeting.
No Cumulative Voting
Our certificate of incorporation and bylaws do not provide for cumulative
voting in the election of directors.
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 the success of any attempt to change our control.
These and other provisions may have the effect of deferring 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.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Norwest Bank
Minnesota N.A. Norwest's telephone number for stockholder inquiries is (800)
468-9716.
56
<PAGE> 59
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
we cannot assure you that a significant public market for the common stock will
develop or be sustained after this offering. Future sales of substantial amounts
of common stock, including shares issued upon exercise of outstanding options,
in the public market following this offering could adversely affect market
prices prevailing from time to time and could impair our ability to raise
capital through sale of our equity securities. As described below, no shares
currently outstanding will be available for sale immediately after this offering
because of certain contractual restrictions on resale. Sales of substantial
amounts of our common stock in the public market after the restrictions lapse
could adversely affect the prevailing market price and our ability to raise
equity capital in the future.
Upon completion of this offering, we will have outstanding 31,374,789
shares of common stock based upon shares outstanding as of December 31, 1999,
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options that do not expire prior to completion of this offering.
Of these shares, the 4,000,000 shares sold in this offering will be freely
tradable without restriction under the Securities Act, except for any shares
purchased by our "affiliates" as Rule 144 under the Securities Act defines that
term. The remaining 27,374,789 shares of common stock held by existing
stockholders are "Restricted Shares" as Rule 144 defines that term. All such
Restricted Shares are subject to lock-up agreements providing that, with certain
limited exceptions, the stockholder will not offer, sell, contract to sell or
otherwise dispose of any common stock or any securities that are convertible
into common stock for a period of 180 days after the date of this prospectus
without the prior written consent of Credit Suisse First Boston Corporation. As
a result of these lock-up agreements, notwithstanding possible earlier
eligibility for sale under the provisions of Rules 144, 144(k) and 701, none of
these shares will be resellable until 181 days after the date of this
prospectus. Beginning 181 days after the date of this prospectus, approximately
23,377,182 Restricted Shares will be eligible for sale in the public market, all
of which are subject to volume limitations under Rule 144, except 8,560,662
shares eligible for sale under Rule 144(k) and 560,199 shares eligible for sale
under Rule 701 (subject in some cases to repurchase rights in our favor).
In addition, as of December 31, 1999, there were options outstanding to
purchase 4,017,729 shares of common stock, some of which will be exercised prior
to this offering. After this offering, we intend to file a registration
statement on Form S-8 registering shares of common stock subject to outstanding
options or reserved for future issuance under our stock plans. However, all
options are subject to lock-up agreements. Credit Suisse First Boston
Corporation may, in their sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned Restricted
Shares for at least one year, including the holding period of any prior owner
except an affiliate, would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding which will
equal approximately 250,000 shares immediately after this offering; or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us. Under Rule 144(k), a person who is not deemed to have been an
affiliate of ours at any time during the three months preceding a sale, and who
has beneficially owned the shares proposed to be sold for at least two years
57
<PAGE> 60
including the holding period of any prior owner except an affiliate, is entitled
to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits resales of shares in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any employee, officer or director of or
consultant to DigitalThink who purchased shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. All holders of
Rule 701 shares are required to wait until 90 days after the date of this
prospectus before selling such shares or until expiration of lock-ups, as
discussed above.
Also, beginning six months after the date of this offering, holders of
22,814,590 Restricted Shares will be entitled to certain rights with respect to
registration of such shares for sale in the public market. See "Description of
Capital Stock -- Registration Rights." Registration of such shares under the
Securities Act would result in such shares becoming freely tradable without
restriction under the Securities Act, except for shares purchased by affiliates,
immediately upon the effectiveness of such registration.
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<PAGE> 61
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000 we have agreed to sell to the
underwriters named below, for whom Credit Suisse First Boston Corporation,
Hambrecht & Quist LLC and FleetBoston Robertson Stephens Inc. are acting as
representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Hambrecht & Quist LLC.......................................
FleetBoston Robertson Stephens Inc..........................
---------
Total............................................. 4,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 600,000 additional shares at the initial public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay. The compensation we will pay to the underwriters will consist solely
of the underwriting discount, which is equal to the initial public offering
price per share of common stock less the amount the underwriters pay to us per
share of common stock.
<TABLE>
<CAPTION>
Per Share Total
------------------------------- -------------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts and
Commissions paid by us............. $ $ $ $
Expenses payable by us............... $ $ $ $
</TABLE>
59
<PAGE> 62
The principal components of the offering expenses payable by us will
include the fees and expenses of our accountants and attorneys, the fees of our
registrar and transfer agent, the cost of printing this prospectus, The Nasdaq
Stock Market listing fee and filing fees paid to the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc.
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
Hambrecht & Quist LLC, one of the underwriters, may be deemed to be our
affiliate. The offering is, therefore, being conducted in accordance with the
applicable provisions of Rule 2720 of the National Association of Securities
Dealers, Inc. Conduct Rules. Rule 2720 requires that the initial public offering
price of the shares of common stock not be higher than that recommended by a
"qualified independent underwriter" meeting certain standards. Accordingly,
Credit Suisse First Boston Corporation is assuming the responsibilities of
acting as the qualified independent underwriter in pricing the offering and
conducting due diligence. The initial public offering price of the shares of
common stock is no higher than the price recommended by Credit Suisse First
Boston Corporation.
We and our executive officers, directors and other of our security holders
have agreed that we will not offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, or file with the Securities and Exchange
Commission a registration statement under the Securities Act relating to, any
shares of common stock or securities convertible into or exchangeable or
exercisable for any common stock, or publicly disclose the intention to make any
offer, sale, pledge disposition or filing without the prior written consent of
Credit Suisse First Boston Corporation for a period of 180 days after the date
of this prospectus, except in the case of issuances pursuant to the exercise of
employee stock options outstanding on the date hereof. We can, however, issue
stock pursuant to the exercise of currently outstanding options.
The underwriters have reserved for sale, at the initial public offering
price up to 600,000 shares of the common stock for executive officers, directors
and other persons and entities with which we have business relationships who
have expressed an interest in purchasing common stock in this offering. The
number of shares available for sale to the general public in this offering will
be reduced to the extent these persons purchase the reserved shares. Any
reserved shares not so purchased will be offered by the underwriters to the
general public on the same terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
We have made application to list the shares of common stock on The Nasdaq
Stock Market's National Market under the symbol "DTHK."
H&Q Digital Think Investors, L.P. and Hambrecht & Quist Employee Venture
Fund, LP II, affiliates of Hambrecht & Quist LLC, one of the representatives of
the underwriters, holds shares of preferred stock of DigitalThink that will
convert into 2,872,980 shares of common stock upon the closing of the offering.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price include:
- the information in this prospectus and otherwise available to the
underwriters;
- the history and the prospects for the industry in which we will compete;
- the ability of our management;
- the prospects for our future earnings;
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<PAGE> 63
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids in accordance with Regulation
M under the Exchange Act.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
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<PAGE> 64
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under the securities laws, (ii) where required
by law, such purchaser is purchasing as principal and not as agent, and (iii)
such purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or these persons. All or a substantial portion of the assets of the
issuer and these persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the issuer or such persons in
Canada or to enforce a judgment obtained in Canadian courts against the issuer
or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. This report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
in respect of common stock acquired on the same date and under the same
prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
62
<PAGE> 65
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters with this offering will be passed upon for the
underwriters by Morrison & Foerster, LLP, Palo Alto, California. As of the date
of this prospectus, WS Investments, an investment partnership composed of
current and former members of and persons associated with Wilson Sonsini
Goodrich & Rosati, Professional Corporation, beneficially owned an aggregate of
63,000 shares of common stock of DigitalThink. Mario M. Rosati, our secretary
and a member of our board of directors from our inception through February 1999,
is a member of Wilson Sonsini Goodrich & Rosati. Mr. Rosati owns 7,000 shares of
DigitalThink's common stock.
EXPERTS
The Financial Statements of DigitalThink, Inc. at March 31, 1998 and 1999
and for the period from April 22, 1996 (inception) through March 31, 1997 and
the years ended March 31, 1998 and 1999 included in this prospectus and the
related Financial Statement schedule included elsewhere in the registration
statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in the registration
statement, and are included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
DigitalThink has filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act with respect to the
common stock offered hereby. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to DigitalThink and our
common stock, reference is made to the registration statement and the exhibits
and schedules filed as a part thereof. Statements contained in this prospectus
as to the contents of any contract or any other document referred to are not
necessarily complete. In each instance, reference is made to the copy of such
contract or document filed as an exhibit to the registration statement, and each
such statement is qualified in all respects by such reference. Copies of the
registration statement, including exhibits and schedules thereto, may be
inspected without charge at the Securities and Exchange Commission's principal
office in Washington, D.C., or obtained at prescribed rates from the Public
Reference Section of the Securities and Exchange Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. The Securities and Exchange Commission maintains a
World Wide Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Securities and Exchange Commission. The address of the site is
http://www.sec.gov.
Following this offering, we will become subject to the reporting
requirements of the Securities Exchange Act of 1934. Under this act, we will
file with the SEC quarter reports on Form 10-Q and annual reports on Form 10-K.
Copies of these filings will be available from the SEC, either through its
principal office and its Public Reference Section, or at the SEC's World Wide
Web site.
63
<PAGE> 66
DIGITALTHINK, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets as of March 31, 1998 and 1999 and December
31, 1999 (unaudited)........................................ F-3
Statements of Operations for the Period from April 22, 1996
(Inception) Through March 31, 1997, the Years Ended March
31, 1998 and 1999 and Nine Months Ended December 31, 1998
(unaudited) and 1999 (unaudited).......................... F-4
Statements of Shareholders' Deficit for the Period from
April 22, 1996 (Inception) Through March 31, 1997, the
Years Ended March 31, 1998 and 1999 and Nine Months Ended
December 31, 1998 (unaudited) and 1999 (unaudited)........ F-5
Statements of Cash Flows for the Period from April 22, 1996
(Inception) Through March 31, 1997, the Years Ended March
31, 1998 and 1999 and Nine Months Ended December 31, 1998
(unaudited) and 1999 (unaudited).......................... F-6
Notes to Financial Statements for the Period from April 22,
1996 (Inception) Through March 31, 1997, the Years Ended
March 31, 1998 and 1999 and Nine Months Ended December 31,
1998 (unaudited) and 1999 (unaudited)..................... F-7
</TABLE>
F-1
<PAGE> 67
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of DigitalThink, Inc.
We have audited the accompanying balance sheets of DigitalThink, Inc. as of
March 31, 1998 and 1999, and the related statements of operations, shareholders'
deficit and cash flows for the period from April 22, 1996 (inception) through
March 31, 1997 and the years ended March 31, 1998 and 1999. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of DigitalThink, Inc. at March 31, 1998 and
1999, and the results of its operations and its cash flows for the period from
April 22, 1996 (inception) through March 31, 1997 and the years ended March 31,
1998 and 1999 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
/s/ DELOITTE & TOUCHE LLP
San Jose, California
June 4, 1999
(January 12, 2000 as to Note 11)
F-2
<PAGE> 68
DIGITALTHINK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, PRO FORMA
-------------------------- DECEMBER 31, DECEMBER 31,
1998 1999 1999 1999
----------- ------------ ------------ ------------
(NOTE 1)
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents............................. $ 2,862,350 $ 9,455,050 $ 23,343,983
Restricted cash.................................. -- -- 1,800,000
Accounts receivable, net of allowance for
doubtful accounts of $10,000, $75,108 and
$215,108, respectively......................... 250,698 1,115,423 2,510,704
Prepaid expenses and other current assets........ 51,139 34,395 743,425
----------- ------------ ------------
Total current assets...................... 3,164,187 10,604,868 28,398,112
Property and equipment, net........................ 384,743 698,469 3,109,379
Other assets....................................... 31,500 26,500 37,866
----------- ------------ ------------
Total assets.............................. $ 3,580,430 $ 11,329,837 $ 31,545,357
=========== ============ ============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable................................. $ 78,430 $ 374,906 $ 1,097,458
Accrued liabilities.............................. 225,886 711,210 2,336,939
Deferred revenues................................ 244,711 1,165,343 3,748,585
----------- ------------ ------------
Total current liabilities................. 549,027 2,251,459 7,182,982
----------- ------------ ------------
Commitments and contingencies (Note 10)
Redeemable convertible preferred stock:
Redeemable convertible preferred stock -- no par
value; shares authorized:
25,000,000 (aggregate redemption value of
$24,583,187 and aggregate liquidation value
of $19,123,488 at March 31, 1999):
Series A, 6,600,000 shares designated;
3,184,000 shares issued and outstanding (none
pro forma)................................... 2,337,568 2,921,960 3,460,776 --
Series B, 8,000,000 shares designated;
7,726,668 shares issued and outstanding (none
pro forma)................................... 6,991,625 8,710,780 10,333,782 --
Series C, 9,333,334 shares designated;
7,824,305 shares issued and outstanding at
March 31, 1999 and 7,904,305 shares at
December 31, 1999 (none pro forma)........... -- 12,950,447 15,405,194 --
Series D, 4,000,000 shares designated;
3,999,617 shares issued and outstanding at
December 31, 1999 (none pro forma)........... -- -- 27,015,094 --
----------- ------------ ------------ ------------
Total redeemable convertible preferred
stock................................... 9,329,193 24,583,187 56,214,846 --
Shareholders' equity (deficit):
Common stock -- no par value; shares authorized:
51,500,000; shares issued and outstanding:
4,057,000 in 1998, 4,130,848 at March 31, 1999,
4,560,199 at December 31, 1999 and 27,374,789
pro forma...................................... 6,810 400,414 9,601,004 $ 65,815,850
Deferred stock compensation...................... -- (331,681) (7,378,581) (7,378,581)
Accumulated deficit.............................. (6,304,600) (15,573,542) (34,074,894) (34,074,894)
----------- ------------ ------------ ------------
Total shareholders' equity (deficit)...... (6,297,790) (15,504,809) (31,852,471) 24,362,375
----------- ------------ ------------ ------------
Total liabilities, redeemable convertible
preferred stock and shareholders' equity
(deficit)............................... $ 3,580,430 $ 11,329,837 $ 31,545,357 $ 31,545,357
=========== ============ ============ ============
</TABLE>
See notes to financial statements.
F-3
<PAGE> 69
DIGITALTHINK, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 22,
1996 NINE MONTHS ENDED
(INCEPTION) YEARS ENDED MARCH 31, DECEMBER 31,
TO MARCH 31, ------------------------- --------------------------
1997 1998 1999 1998 1999
------------ ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Delivered Learning fees.................. $ 4,751 $ 147,679 $ 1,033,888 $ 684,571 $ 3,055,661
Learning Solutions services............ 20,000 52,500 812,667 472,500 3,432,086
----------- ----------- ----------- ----------- ------------
Total revenues.................. 24,751 200,179 1,846,555 1,157,071 6,487,747
Costs and expenses:
Content production and development..... 261,564 925,487 2,018,364 1,106,612 4,595,232
Web delivery and customer support...... 29,030 363,271 854,490 569,412 1,454,383
Selling and marketing.................. 187,915 1,399,897 2,970,092 2,037,680 7,218,351
Research and development............... 299,128 664,922 1,005,069 715,068 2,365,032
General and administrative............. 157,142 418,511 622,475 424,314 1,519,328
Depreciation and amortization.......... 10,351 83,086 235,750 153,411 524,573
Stock-based compensation(*)............ -- -- 57,582 3,163 2,096,453
----------- ----------- ----------- ----------- ------------
Total costs and expenses........ 945,130 3,855,174 7,763,822 5,009,660 19,773,352
----------- ----------- ----------- ----------- ------------
Loss from operations..................... (920,379) (3,654,995) (5,917,267) (3,852,589) (13,285,605)
Interest and other income................ 32,251 185,715 165,861 73,755 349,356
----------- ----------- ----------- ----------- ------------
Net loss................................. $ (888,128) $(3,469,280) $(5,751,406) $(3,778,834) $(12,936,249)
=========== =========== =========== =========== ============
Accretion of redeemable convertible
preferred stock........................ $ 278,055 $ 1,669,137 $ 3,517,536 $ 2,194,419 $ 5,565,103
----------- ----------- ----------- ----------- ------------
Loss attributable to common
shareholders........................... $(1,166,183) $(5,138,417) $(9,268,942) $(5,973,253) $(18,501,352)
=========== =========== =========== =========== ============
Basic and diluted loss per common
share.................................. $ (0.29) $ (1.27) $ (2.26) $ (1.46) $ (4.32)
=========== =========== =========== =========== ============
Shares used in basic and diluted loss per
common share........................... 4,010,353 4,035,909 4,095,116 4,088,316 4,280,139
=========== =========== =========== =========== ============
Pro forma basic and diluted loss per
common share (Note 1).................. $ (0.56) $ (0.39) $ (0.77)
=========== =========== ============
Shares used in pro forma basic and
diluted loss per common share (Note
1)..................................... 16,686,553 15,240,384 23,930,004
=========== =========== ============
(*) Stock-based compensation:
Content production and development... -- -- $ 7,451 $ 1,034 $ 212,024
Web delivery and customer support.... -- -- 3,116 -- 98,472
Selling and marketing................ -- -- 25,240 820 606,779
Research and development............. -- -- 12,770 1,223 230,101
General and administrative........... -- -- 9,005 86 949,077
----------- ----------- ----------- ----------- ------------
Total.............................. $ -- $ -- $ 57,582 $ 3,163 $ 2,096,453
=========== =========== =========== =========== ============
</TABLE>
See notes to financial statements.
F-4
<PAGE> 70
DIGITALTHINK, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- DEFERRED STOCK ACCUMULATED
SHARES AMOUNT COMPENSATION DEFICIT TOTAL
--------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances, April 22, 1996 (inception)..... -- $ -- $ -- $ -- $ --
Issuance of founders' common stock for
cash in May 1996 at $0.001 per share..... 3,960,000 3,960 3,960
Issuance of common stock in May 1996..... 40,000 -- --
Exercise of stock options................ 27,000 1,350 1,350
Accretion for redemption value on Series
A preferred stock...................... (278,055) (278,055)
Net loss................................. (888,128) (888,128)
--------- ---------- ----------- ------------ ------------
Balances, March 31, 1997................. 4,027,000 5,310 -- (1,166,183) (1,160,873)
Exercise of stock options................ 30,000 1,500 1,500
Accretion for redemption value on Series
A and B preferred stock................ (1,669,137) (1,669,137)
Net loss................................. (3,469,280) (3,469,280)
--------- ---------- ----------- ------------ ------------
Balances, March 31, 1998................. 4,057,000 6,810 -- (6,304,600) (6,297,790)
Exercise of stock options................ 73,848 4,341 4,341
Accretion for redemption value on Series
A, B and C preferred stock............. (3,517,536) (3,517,536)
Deferred stock compensation.............. 389,263 (389,263) --
Amortization of deferred stock
compensation........................... 57,582 57,582
Net loss................................. (5,751,406) (5,751,406)
--------- ---------- ----------- ------------ ------------
Balances, March 31, 1999................. 4,130,848 400,414 (331,681) (15,573,542) (15,504,809)
Exercise of stock options*............... 429,351 57,237 57,237
Accretion for redemption value of Series
A, B, C and D preferred stock*......... (5,565,103) (5,565,103)
Deferred stock compensation*............. 9,143,353 (9,143,353) --
Amortization of deferred stock
compensation*.......................... 2,096,453 2,096,453
Net loss*................................ (12,936,249) (12,936,249)
--------- ---------- ----------- ------------ ------------
Balances, December 31, 1999*............. 4,560,199 $9,601,004 $(7,378,581) $(34,074,894) $(31,852,471)
========= ========== =========== ============ ============
</TABLE>
* (Unaudited)
See notes to financial statements.
F-5
<PAGE> 71
DIGITALTHINK, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 22,
1996
(INCEPTION) NINE MONTHS ENDED
THROUGH YEARS ENDED MARCH 31, DECEMBER 31,
MARCH 31, -------------------------- ---------------------------
1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.......................... $ (888,128) $(3,469,280) $(5,751,406) $(3,778,834) $(12,936,249)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization................ 10,351 83,086 235,750 153,411 524,573
Amortization of deferred stock
compensation................ -- -- 57,582 3,163 2,096,453
Changes in assets and
liabilities:
Restricted cash............. -- -- -- -- (1,800,000)
Accounts receivable......... (1,502) (249,196) (864,725) (163,009) (1,395,281)
Prepaid expenses and other
current assets........... (3,377) (47,762) 16,744 28,972 (709,030)
Accounts payable............ 40,498 37,932 296,476 15,113 722,552
Accrued liabilities......... 16,645 209,241 485,324 175,140 1,625,729
Deferred revenue............ 20,000 224,711 920,632 426,262 2,583,242
---------- ----------- ----------- ----------- ------------
Net cash used in
operating activities... (805,513) (3,211,268) (4,603,623) (3,139,782) (9,288,011)
---------- ----------- ----------- ----------- ------------
Cash flows from investing
activities:
Purchases of property and
equipment..................... (108,343) (369,837) (549,476) (293,141) (2,935,483)
Other assets.................... (3,116) (28,384) 5,000 5,000 (11,366)
---------- ----------- ----------- ----------- ------------
Net cash used in
investing activities... (111,459) (398,221) (544,476) (288,141) (2,946,849)
---------- ----------- ----------- ----------- ------------
Cash flows from financing
activities:
Proceeds from borrowing......... 137,000 -- -- -- --
Proceeds from sale of preferred
stock......................... 1,455,000 5,790,001 11,736,458 8,537,552 26,066,556
Proceeds from sale of common
stock......................... 5,310 1,500 4,341 2,590 57,237
---------- ----------- ----------- ----------- ------------
Net cash provided by
financing activities... 1,597,310 5,791,501 11,740,799 8,540,142 26,123,793
---------- ----------- ----------- ----------- ------------
Net increase in cash and
equivalents..................... 680,338 2,182,012 6,592,700 5,112,219 13,888,933
Cash and equivalents, beginning of
period.......................... -- 680,338 2,862,350 2,862,350 9,455,050
---------- ----------- ----------- ----------- ------------
Cash and equivalents, end of
period.......................... $ 680,338 $ 2,862,350 $ 9,455,050 $ 7,974,569 $ 23,343,983
========== =========== =========== =========== ============
Supplemental disclosure of cash
flow information --
Conversion of loans payable to
preferred stock............... $ 137,000 $ -- $ -- $ -- $ --
========== =========== =========== =========== ============
</TABLE>
See notes to financial statements.
F-6
<PAGE> 72
DIGITALTHINK, INC.
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM APRIL 22, 1996 (INCEPTION) THROUGH MARCH 31, 1997, YEARS ENDED
MARCH 31, 1998 AND 1999 AND NINE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
AND 1999 (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization -- DigitalThink, Inc. (the Company) was incorporated in
California on April 22, 1996 to provide Web-based training courses and training
delivery technology. The Company completed the development of its delivery
technology and initial content, and began substantial sales and marketing
efforts in fiscal year 1998. The Company's operations are currently conducted in
the United States exclusively.
Unaudited Interim Financial Information -- The interim financial
information as of December 31, 1999 and for the nine months ended December 31,
1998 and 1999 is unaudited and has been prepared on the same basis as the
audited financial statements. In the opinion of management, such unaudited
information includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the interim information.
Operating results for the nine months ended December 31, 1999 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 2000.
Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues
and expenses as of the dates and for the periods presented. Actual results could
differ from those estimates.
Cash and Equivalents -- The Company considers all highly liquid debt
instruments purchased with a remaining maturity of three months or less to be
cash equivalents.
Customer Concentrations -- Accounts receivable are unsecured, and the
Company is at risk to the extent that such amounts become uncollectible. At
March 31, 1999, three accounts represented 19%, 14% and 11% of gross accounts
receivable, respectively.
In fiscal 1998, revenues from two customers accounted for 37% and 31% of
total revenues. In fiscal 1999, no customer accounted for more than 10% of total
revenues.
Property and Equipment -- Property and equipment is stated at cost.
Depreciation is computed using the straight line method over estimated useful
lives of three to four years.
Long-Lived Assets -- The Company reviews for the impairment of long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of that asset may not be recoverable. An impairment loss would be
recognized when the sum of the undiscounted future net cash flows expected to
result from the use of the asset and its eventual disposition is less than its
carrying amount.
Revenue Recognition -- Tuition payments (delivered learning fees) allow
access to training systems, courses hosted by the Company, tutor support and
other learning materials for a fixed period, typically six months. Delivered
learning fees are recognized ratably over this access period. Revenues for
custom course development (learning solutions services) are recognized in
accordance with Statement of Position (SOP) 81-1, Accounting for Performance of
Construction/Production-Type Contracts, as development progresses based on
percentage of completion, measured in terms of costs. Deferred revenues
represent customer prepayments for both delivered learning fees and learning
solution services.
F-7
<PAGE> 73
DIGITALTHINK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM APRIL 22, 1996 (INCEPTION) THROUGH MARCH 31, 1997, YEARS ENDED
MARCH 31, 1998 AND 1999 AND NINE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
AND 1999 (UNAUDITED)
Costs and Expenses -- Web delivery and customer support expenses relate to
delivered learning fee revenues. Content production and development expenses
relate to both delivered learning fee revenues and learning solution service
revenues.
Royalty payments to course authors are expensed as incurred as the
recoverability of such royalties against future revenues is uncertain. Royalty
expenses are included in content production and development expenses in the
accompanying financial statements.
Research and development expenses are charged to operations as incurred and
include costs of web site development.
Income Taxes -- The Company accounts for income taxes using an asset and
liability approach. Deferred tax liabilities are recognized for future taxable
amounts and deferred tax assets are recognized for future deductions and
operating loss carryforwards, net of a valuation allowance to reduce net
deferred tax assets to amounts that are more likely than not to be realized.
Stock-Based Awards -- The Company accounts for stock-based awards to
employees under its stock option plan and employee stock purchase plan using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees.
Loss per Common Share -- Basic loss per common share excludes dilution and
is computed by dividing loss attributable to common shareholders by the weighted
average number of common shares outstanding during the period. Diluted loss per
common share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock. Common share equivalents are excluded from the computation in loss
periods as their effect would be antidilutive.
Pro Forma Net Loss per Common Share -- Pro forma basic and diluted loss per
common share is computed by dividing loss attributable to common shareholders by
the weighted average number of shares outstanding for the period and the
weighted average number of common shares resulting from the assumed conversion
of outstanding shares of redeemable convertible preferred stock.
Unaudited Pro Forma Information -- The unaudited pro forma balance sheet
information assumes that the conversion upon closing of an initial public
offering of each share of preferred stock to one share of common stock had
actually occurred at December 31, 1999. Estimated proceeds from the common
shares to be issued as a result of such initial public offering are excluded.
Recently Issued Accounting Standards -- In June 1997, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income, which requires an
enterprise to report by major components and as a single total, the change in
its net assets during the period from nonowner sources; and SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information, which
establishes annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic areas
and major customers. The Company had no items of other comprehensive income to
report through December 31, 1999. The Company currently operates in one
reportable segment under SFAS No. 131. Adoption of these statements did not
impact the Company's financial position, results of operations or cash flows.
F-8
<PAGE> 74
DIGITALTHINK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM APRIL 22, 1996 (INCEPTION) THROUGH MARCH 31, 1997, YEARS ENDED
MARCH 31, 1998 AND 1999 AND NINE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
AND 1999 (UNAUDITED)
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which defines derivatives, requires that all
derivatives be carried at fair value, and provides for hedge accounting when
certain conditions are met. SFAS No. 133 is effective for the Company in fiscal
2002. The Company does not believe that adoption of this statement will have a
material impact on the Company's financial position or results of operations.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
-------------------- DECEMBER 31,
1998 1999 1999
-------- --------- ------------
<S> <C> <C> <C>
Furniture and fixtures....................... $ 25,133 $ 28,164 $ 28,164
Computer hardware and software............... 434,807 954,443 3,101,162
Leasehold improvements....................... 18,239 45,048 823,539
Accumulated depreciation..................... (93,436) (329,186) (843,486)
-------- --------- ----------
Property and equipment, net........ $384,743 $ 698,469 $3,109,379
======== ========= ==========
</TABLE>
3. ACCRUED LIABILITIES
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------- DECEMBER 31,
1998 1999 1999
-------- -------- ------------
<S> <C> <C> <C>
Payroll and related expenses.................. $ 70,612 $204,955 $ 943,117
Royalties..................................... 22,500 78,279 146,249
Deferred rent................................. -- 10,000 340,938
Other......................................... 132,774 417,976 906,635
-------- -------- ----------
Total accrued liabilities........... $225,886 $711,210 $2,336,939
======== ======== ==========
</TABLE>
4. INCOME TAXES
No income taxes were provided for any of the periods presented due to the
Company's net losses.
F-9
<PAGE> 75
DIGITALTHINK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM APRIL 22, 1996 (INCEPTION) THROUGH MARCH 31, 1997, YEARS ENDED
MARCH 31, 1998 AND 1999 AND NINE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
AND 1999 (UNAUDITED)
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accruals and reserves................................ $ 150,546 $ 90,755
Net operating losses and tax credits carried
forward......................................... 1,565,235 3,789,381
Depreciation....................................... 4,461 2,544
----------- -----------
Total gross deferred tax asset before
valuation allowance..................... 1,720,242 3,882,680
Valuation allowance.................................. (1,720,242) (3,882,680)
----------- -----------
Deferred tax liabilities -- depreciation............. -- --
----------- -----------
Net deferred tax asset............................... $ -- $ --
=========== ===========
</TABLE>
At March 31, 1999, the Company had available federal and California state
net operating loss carryforwards of approximately $9.5 million and $9.6 million,
respectively, to offset future taxable income through 2019 and 2005,
respectively. At March 31, 1998 and 1999, the net deferred tax assets have been
fully reserved due to the uncertainty surrounding the realization of such
benefits.
Current tax laws impose substantial restrictions on the utilization of net
operating loss and credit carryforwards in the event of an "ownership change,"
as defined by the Internal Revenue Code. If there should be an ownership change,
the Company's ability to utilize its carryforwards could be limited.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable Convertible Preferred Stock
In July 1996, the Company issued 2,910,000 shares of Series A preferred
stock for cash at $0.50 per share. In December 1996, 274,000 shares of Series A
preferred stock were issued upon conversion of $137,000 of convertible notes. In
June 1997, the Company issued 7,726,668 shares of Series B preferred stock for
$0.75 per share. In December 1998 and March 1999, the Company issued 7,824,305
shares of Series C preferred stock for $1.50 per share.
Significant terms of the outstanding Series A, Series B and Series C
preferred stock are as follows:
- Shares are redeemable at the option of the holders of a majority of the
outstanding preferred shares beginning on July 19, 2001 if the Company
has not completed a public offering of more than $15,000,000 of Company
stock for not less than $5.00 per share. The redemption price of Series A
preferred stock is $0.50 per share plus a 25% compound annual rate of
return from July 19, 1996 (as adjusted for any stock dividends,
combinations, or splits), resulting in an aggregate redemption value of
$2,921,960 at March 31, 1999. The redemption price of Series B preferred
stock is $0.75 per share plus a 25% compound annual rate of return from
June 1, 1997, resulting in an aggregate redemption value of $8,710,780 at
March 31, 1999. The redemption price of Series C preferred stock is $1.50
per share plus a 25% compound
F-10
<PAGE> 76
DIGITALTHINK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM APRIL 22, 1996 (INCEPTION) THROUGH MARCH 31, 1997, YEARS ENDED
MARCH 31, 1998 AND 1999 AND NINE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
AND 1999 (UNAUDITED)
annual rate of return from October 30, 1998, resulting in an aggregate
redemption value of $12,950,447 at March 31, 1999. Series B and Series C
preferred stock are also redeemable at the option of each of the
shareholders in accordance with the terms above, in the event that the
Company enters into a substantial new business, as defined by the
Company's board. The redemption value is being accreted over the
redemption period. Accretion for Series A was $278,055, $467,514 and
$584,392 in fiscal 1997,1998 and 1999, respectively. Accretion for Series
B was $1,201,623 and $1,719,154 in fiscal 1998 and 1999, respectively.
Accretion for Series C was $1,213,989 in fiscal 1999.
- Each share is convertible into one share of common stock at the option of
the shareholder. Such shares will be converted automatically upon an
underwritten public offering of the Company's common stock meeting
certain criteria.
- Each share has voting rights equivalent to the number of shares of common
stock into which it is convertible.
- Shareholders of Series A, Series B and Series C preferred stock are
entitled to dividends of $0.04, $0.06 and $0.12 per share per annum,
respectively, as declared by the board of directors. No dividends have
been declared or paid.
- In the event of liquidation, dissolution or winding up of the Company,
shareholders of Series B and Series C preferred stock are entitled to
receive $0.75 and $1.50 per share, respectively, plus any declared but
unpaid dividends prior to any distribution to holders of Series A
preferred stock or common stock. Holders of Series A preferred stock are
entitled to receive $0.50 per share plus any declared but unpaid
dividends prior to any distribution to the common shareholders.
6. SHAREHOLDERS' DEFICIT
Common Stock
Upon inception of the Company, the Company issued 3,960,000 shares of
common stock to founders for cash at $0.001 per share, resulting in proceeds of
$3,960. The Company also issued 40,000 shares of common stock to a founding
board member of the Company for no consideration.
Stock Option Plan
The Company's stock option plan provides for the grant of up to 3,375,000
incentive or nonstatutory stock options to officers, employees, directors and
consultants. Options vest over four years and expire over terms up to ten years.
F-11
<PAGE> 77
DIGITALTHINK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM APRIL 22, 1996 (INCEPTION) THROUGH MARCH 31, 1997, YEARS ENDED
MARCH 31, 1998 AND 1999 AND NINE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
AND 1999 (UNAUDITED)
A summary of option activity under the Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
<S> <C> <C>
Balances, April 1, 1996..................................... -- $ --
Granted (weighted average fair value of $0.013)............. 285,500 0.050
Exercised................................................... (27,000) 0.050
--------- ------
Balances, March 31, 1997 (10,000 shares exercisable at a
weighted average exercise price of $0.05 per share)....... 258,500 0.050
Granted (weighted average fair value of $0.014)............. 843,000 0.067
Canceled.................................................... (81,367) 0.050
Exercised................................................... (30,000) 0.050
--------- ------
Balances, March 31, 1998 (72,501 shares exercisable at a
weighted average exercise price of $0.054 per share)...... 990,133 0.065
Granted (weighted average fair value of $0.03).............. 1,461,250 0.289
Canceled.................................................... (192,486) 0.093
Exercised................................................... (73,848) 0.059
--------- ------
Balances, March 31, 1999 (397,626 shares exercisable at
weighted average exercise price of $0.074 per share)...... 2,185,049 0.230
Granted (weighted average fair value of $3.82).............. 2,469,300 1.530
Canceled.................................................... (207,269) 0.450
Exercised................................................... (429,351) 0.130
--------- ------
Balances, December 31, 1999 (431,960 shares exercisable at a
weighted average exercise price of $0.49 per share)
(unaudited)............................................... 4,017,729 $ 1.01
========= ======
</TABLE>
At March 31, 1999, 445,736 shares were available for future grant under the
Plan.
The following table summarizes information as of March 31, 1999 concerning
options outstanding:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING
EXERCISE OPTIONS CONTRACTUAL LIFE
PRICES OUTSTANDING (YEARS) EXERCISABLE
-------- ----------- ---------------- -----------
<S> <C> <C> <C>
$0.050............................. 359,041 7.99 197,667
0.075............................. 838,458 8.95 180,208
0.250............................. 444,800 9.71 16,188
0.500............................. 542,750 9.91 3,563
--------- -------
2,185,049 397,626
========= =======
</TABLE>
F-12
<PAGE> 78
DIGITALTHINK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM APRIL 22, 1996 (INCEPTION) THROUGH MARCH 31, 1997, YEARS ENDED
MARCH 31, 1998 AND 1999 AND NINE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
AND 1999 (UNAUDITED)
Additional Stock Plan Information
As discussed in Note 1, the Company accounts for its stock-based awards
using the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
interpretations.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), requires the disclosure of pro forma net
income had the Company adopted the fair value method. Under SFAS 123, the fair
value of stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including expected time to
exercise, which greatly affect the calculated values. The Company's calculations
were made using the minimum value pricing method with the following weighted
average assumptions: expected life, 4 years in fiscal 1997, 4 years in fiscal
1998 and 2.7 years in fiscal 1999; average risk-free interest rate, 6% in fiscal
1997, 6% in fiscal 1998 and 5% in fiscal 1999; and no dividends during the
expected term. The Company's calculations are based on a multiple option
valuation approach, and forfeitures are recognized as they occur.
If the computed minimum values of the Company's stock-based awards to
employees had been amortized to expense over the vesting period of the awards as
specified under SFAS No. 123, loss attributable to common shareholders and basic
and diluted loss per share on a pro rata basis (as compared to such items as
reported) would have been:
<TABLE>
<CAPTION>
PERIODS ENDED MARCH 31,
---------------------------------------
1997 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
Net loss:
As reported.............................. $(888,128) $(3,469,280) $(5,751,406)
Pro forma.............................. $(891,714) $(3,473,029) $(5,756,522)
Basic and diluted net loss per share:
As reported............................ $ (0.29) $ (1.27) $ (2.26)
Pro forma.............................. $ (0.29) $ (1.27) $ (2.26)
</TABLE>
At March 31, 1999, the Company had reserved shares of common stock for
issuance as follows:
<TABLE>
<S> <C>
Conversion of outstanding preferred stock................... 18,734,973
Issuance under stock option plan............................ 2,630,785
----------
Total.................................................. 21,365,758
==========
</TABLE>
Stock-Based Compensation
During the nine months ended December 31, 1999, the Company issued
2,469,300 common stock options at a weighted average price of $1.53 per share,
which was less than the deemed weighted average fair value of $5.16 per share.
Accordingly, the Company recorded $8,963,353 as the value of such options. In
addition, during the nine months ended December 31, 1999, the Company recorded
$180,000 of deferred stock compensation related to the issuance of preferred
stock at less
F-13
<PAGE> 79
DIGITALTHINK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM APRIL 22, 1996 (INCEPTION) THROUGH MARCH 31, 1997, YEARS ENDED
MARCH 31, 1998 AND 1999 AND NINE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
AND 1999 (UNAUDITED)
than fair value. Stock-based compensation of $2,096,453 was amortized to expense
in the nine months ended December 31, 1999 and at December 31, 1999, the Company
had $7,378,581 in unamortized deferred stock compensation related to options,
which will be amortized to expense through fiscal 2004.
During fiscal 1999, the Company issued 966,500 common stock options at a
weighted average price of $.39 per share, which were at prices less than the
fair value of its common stock. The weighted average fair value of the common
stock was $.79 per share. Accordingly, the Company recorded $389,263 as the
value of such options in 1999. Stock-based compensation of $57,582 was amortized
to expense in fiscal 1999 and at March 31, 1999 the Company had $331,681 in
unamortized deferred stock compensation related to such options.
During fiscal 1997 and 1998, the Company issued common stock options at
exercise prices equal to the fair value of its common stock. Accordingly, no
stock-based compensation was recorded for those periods.
7. NET LOSS PER SHARE
For the period from April 22, 1996 (inception) to March 31, 1997, fiscal
1998 and 1998 and the nine months ended December 31, 1999, the Company had
securities outstanding which could potentially dilute basic earnings per share
in the future, but were excluded in the computation of diluted net loss per
share in the periods presented, as their effect would have been antidilutive.
Such outstanding securities consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------- DECEMBER 31,
1997 1998 1999 1999
--------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Redeemable convertible
preferred stock.................. 3,184,000 10,910,668 18,734,973 22,814,590
Stock options...................... 258,500 990,133 2,185,049 4,017,729
--------- ---------- ---------- ----------
Total.................... 3,442,500 11,900,801 20,920,022 26,832,319
========= ========== ========== ==========
</TABLE>
8. RELATED PARTY TRANSACTIONS
During fiscal years 1998 and 1999, the Company incurred legal expenses of
$28,600 and $123,000 with a firm of which a board member is a partner.
During fiscal year 1999, the Company generated revenues of $110,000,
$161,000, $92,000 and $40,000 from four customers who are investors in the
Company. Related accounts receivable totaled $322,000 at March 31, 1999.
9. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) retirement plan (the Plan) that covers
substantially all employees of the Company. The Plan provides for voluntary
salary reduction contributions of up to 20% of eligible participants' annual
compensation. The Company has not provided matching contributions for any of the
periods presented.
F-14
<PAGE> 80
DIGITALTHINK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM APRIL 22, 1996 (INCEPTION) THROUGH MARCH 31, 1997, YEARS ENDED
MARCH 31, 1998 AND 1999 AND NINE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
AND 1999 (UNAUDITED)
10. COMMITMENTS
The Company leases its principal office facilities under operating leases.
As of March 31, 1999, future minimum payments under facilities operating leases
are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
MARCH 31,
------------------
<S> <C>
2000........................................................ $207,250
2001........................................................ 52,500
Thereafter.................................................. --
--------
Total.................................................. $259,750
========
</TABLE>
Rent expense under operating leases was $103,211, $141,694 and $437,345 for
the years ended March 31, 1998 and 1999 and the nine months ended December 31,
1999, respectively.
11. SUBSEQUENT EVENTS
In June 1999, the Company entered into a facility lease commitment for a
ten-year period with annual lease payments ranging from $1.2 million to $1.4
million. The lease requires the Company to maintain a $1.8 million letter of
credit.
In July 1999, the Company issued 80,000 shares of Series C preferred stock
for $1.50 per share.
In November 1999, the Company completed a Series D preferred stock offering
of 3,999,617 shares at $6.50 per share, resulting in net proceeds of $25.9
million. Also in November 1999, the number of shares available for grant under
the stock option plan was increased by 3,000,000 shares.
On December 2 1999, the Company adopted its 1999 Employee Stock Purchase
Plan (ESPP). Under the ESPP, 200,000 shares of common stock have been reserved
for issuance, with an annual increase in the number of shares reserved on the
first day of each fiscal year. Under the ESPP, eligible employees may purchase
shares of the Company's common stock through payroll deductions of up to 10% of
the participant's compensation.
F-15
<PAGE> 81
LOGO
<PAGE> 82
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all fees and expenses payable by
DigitalThink in connection with the registration of the common stock hereunder.
All of the amounts shown are estimates except for the SEC registration fee, NASD
filing fee and the Nasdaq National Market listing fees.
<TABLE>
<CAPTION>
AMOUNT TO BE
PAID
------------
<S> <C>
SEC Registration Fee........................................ $ 19,800
NASD Filing Fee............................................. 8,000
Nasdaq National Market Listing Fee.......................... 90,000
Printing and Engraving Expenses............................. 125,000
Legal Fees and Expenses..................................... 200,000
Accounting Fees and Expenses................................ 200,000
Transfer Agent and Registrar Fees and Expenses.............. 5,000
Miscellaneous Expenses...................................... 52,200
--------
Total............................................. $700,000
========
</TABLE>
- -------------------------
All of the above-referenced amounts are estimates, other than the SEC
registration fee and the NASD filing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors and any 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. Our Amended and Restated Certificate of Incorporation and our
Amended and Restated Bylaws provide for indemnification of our directors,
officers, employees and other agents to the extent and under the circumstances
permitted by the Delaware General Corporation Law. We have also entered into
agreements with our directors and executive officers that require DigitalThink
among other things to indemnify them against certain liabilities that may arise
by reason of their status or service as directors and executive officers to the
fullest extent permitted by Delaware law. We have also purchased directors and
officers liability insurance, which provides coverage against certain
liabilities, including liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Within the last three years, and through December 31, 1999, we have
issued and sold the following unregistered securities:
(1) Since our inception, we issued and sold an aggregate of 4,000,000
shares of common stock to the founding officers and directors of
DigitalThink and to certain other individuals at a purchase price of $0.001
per share.
(2) Since our inception, we have granted options to purchase 5,059,050
shares of common stock to employees, directors and consultants under our
1996 stock plan at exercise prices ranging from $0.05 to $8.00 per share.
Of the 5,059,050 shares granted, 4,017,729 remain outstanding, 560,199
shares of common stock have been purchased pursuant to exercises of stock
options and 481,122 shares have been canceled and returned to the 1996
stock plan.
II-1
<PAGE> 83
(3) In August 1996, we sold 3,184,000 shares of Series A preferred
stock at a price of $0.50 per share to 27 investors.
(4) In June 1997, we sold an aggregate of 7,726,668 shares of Series B
preferred stock at a price of $0.75 per share to 19 investors.
(5) In November 1998, February 1999 and June 1999 we sold an aggregate
of 7,690,972 shares of Series C preferred stock at a price of $1.50 per
share to 15 investors.
(6) In February 1999, we sold an aggregate of 213,334 shares of Series
C-1 preferred stock at a price of $1.50 per share to 1 investor.
(7) In November 1999, we sold an aggregate of 3,999,617 shares of
Series D preferred stock at a price of $6.50 per share to 29 investors.
The sales and issuances of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act in reliance
upon Section 4(2) of the Securities Act, Regulation D promulgated thereunder or
Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions
by an issuer not involving any public offering or transactions pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under Rule 701. The recipients of securities in each transaction represented
their intentions to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the securities issued in such transactions. All
recipients had adequate access, through their relationship with DigitalThink, to
information about us.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1** Form of Underwriting Agreement
3.1(a)* Amended and Restated Certificate of Incorporation, as in
effect upon filing of the registration statement
3.1(b)* Certificate of Incorporation to be filed upon completion of
the offering
4.1 Specimen certificate for common stock
4.2(a)* Bylaws of the registrant as currently in effect
4.2(b)* Bylaws of the registrant as in effect upon completion of the
offering
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1* Restated Investor Rights Agreement dated November 10, 1999
10.2* 1996 Stock Plan and forms of agreements thereunder
10.3* 1999 Employee Stock Purchase Plan
10.4* Form of Director and Executive Officer Indemnification
Agreement
10.5* Standard Industrial/Commercial Single Tenant Lease dated
June 18, 1998
between DigitalThink and Bruce J. Cardinal, Trustee of the
Robert J.
Cardinal Trust, for office space located at 1064 & 1098
Harrison
Street, San Francisco, California, and addenda and inserts
thereto
10.6* DigitalThink Custom Course Agreement dated March 3, 1999
between
DigitalThink and Adobe Systems Incorporated
10.7* DigitalThink Course Agreement dated March August 19, 1999
between DigitalThink and KPMG LLP
23.1 Consent of Deloitte & Touche LLP, independent accountants
</TABLE>
II-2
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
23.2 Consent of Counsel (included in exhibit 5.1)
23.3 Consent of International Data Corporation
24.1* Power of Attorney (see page II-4)
27.1* Financial Data Schedule
</TABLE>
- -------------------------
* Previously filed.
** To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES
(i) Schedule II. Valuation and Qualifying Accounts.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
ITEM 17. UNDERTAKINGS
Insofar as indemnification by DigitalThink for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of DigitalThink, we have been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by DigitalThink of expenses incurred or paid by a director, officer
or controlling person of DigitalThink in the successful defense of any action,
suit or proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
DigitalThink is against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
We hereby undertake that:
(a) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by DigitalThink pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act, 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.
II-3
<PAGE> 85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
DigitalThink has duly caused this amendment to the Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Francisco, State of California, on the 14th day
of January 2000.
DIGITALTHINK, INC.
By: *
---------------------------------------
Peter J. Goettner
President & Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form S-1 has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* President, Chief Executive Officer January 14, 2000
- ------------------------------------------ and Chairman of the Board of
Peter J. Goettner Directors (principal executive
officer)
/s/ MICHAEL W. POPE Vice President, Chief Financial January 14, 2000
- ------------------------------------------ Officer (principal financial and
Michael W. Pope accounting officer)
* Director January 14, 2000
- ------------------------------------------
E. Follett Carter
* Director January 14, 2000
- ------------------------------------------
Steve L. Eskenazi
* Director January 14, 2000
- ------------------------------------------
Samuel D. Kingsland
* Director January 14, 2000
- ------------------------------------------
William H. Lane, III
*By: /s/ MICHAEL W. POPE January 14, 2000
-----------------------------------
Michael W. Pope
Attorney-in-fact
</TABLE>
II-4
<PAGE> 86
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Board of Directors and Shareholders of DigitalThink, Inc.
We have audited the financial statements of DigitalThink, Inc. as of March
31, 1998 and 1999 and for the period from inception (April 22, 1996) through
March 31, 1997 and the years ended March 31, 1998 and 1999, and have issued our
report thereon dated June 4, 1999 (January 12, 2000 as to Note 11) (included
elsewhere in this registration statement). Our audits also included the
financial statement schedule listed in Item 16(b) of this registration
statement. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
Deloitte & Touche LLP
/s/ DELOITTE & TOUCHE LLP
June 4, 1999
San Jose, California
S-1
<PAGE> 87
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Period from April 22, 1996 (inception)
through March 31, 1997
Allowance for doubtful accounts.............. $ -- $ -- $ -- $ --
Year ended March 31, 1998
Allowance for doubtful accounts.............. $ -- $10,000 $ -- $ 10,000
Year ended March 31, 1999
Allowance for doubtful accounts.............. $10,000 $72,000 $(6,892) $ 75,108
</TABLE>
S-2
<PAGE> 88
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1** Form of Underwriting Agreement
3.1(a)* Amended and Restated Certificate of Incorporation, as in
effect upon filing of the registration statement
3.1(b)* Certificate of Incorporation to be filed upon completion of
the offering
4.1 Specimen certificate for common stock
4.2(a)* Bylaws of the registrant as currently in effect
4.2(b)* Bylaws of the registrant as in effect upon completion of the
offering
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1* Restated Investor Rights Agreement dated November 10, 1999
10.2* 1996 Stock Plan and forms of agreements thereunder
10.3* 1999 Employee Stock Purchase Plan
10.4* Form of Director and Executive Officer Indemnification
Agreement
10.5* Standard Industrial/Commercial Single Tenant Lease dated
June 18, 1998
between DigitalThink and Bruce J. Cardinal, Trustee of the
Robert J.
Cardinal Trust, for office space located at 1064 & 1098
Harrison
Street, San Francisco, California, and addenda and inserts
thereto
10.6* DigitalThink Custom Course Agreement dated March 3, 1999
between
DigitalThink and Adobe Systems Incorporated
10.7* DigitalThink Course Agreement dated March August 19, 1999
between
DigitalThink and KPMG LLP
23.1 Consent of Deloitte & Touche LLP, independent accountants
23.2 Consent of Counsel (included in exhibit 5.1)
23.3 Consent of International Data Corporation
24.1* Power of Attorney (see page II-4)
27.1* Financial Data Schedule
</TABLE>
- -------------------------
* Previously filed.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 4.1
[DIGITALTHINK LOGO]
COMMON STOCK
----------------
NUMBER
INCORPORATED UNDER THE LAWS OF
THE STATE OF DELAWARE
COMMON STOCK
----------------
SHARES
SEE REVERSE FOR
CERTAIN DESCRIPTIONS
CUSIP
THIS CERTIFIES THAT
-------------------------------------------
IS THE OWNER OF
-------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK,
PAR VALUE OF $0.001 PER SHARE, OF
DIGITALTHINK, INC.
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
is not valid until countersigned by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
[CERTIFICATE OF STOCK]
------------------
[SEAL]
/s/ ADAM D. LEVY /s/ PETER J. GOETTNER
- ------------------------ ------------------------
Adam D. Levy Peter J. Goettner
Assistant Secretary
COUNTERSIGNED AND REGISTERED:
NORWEST BANK MINNESOTA, N.A.
TRANSFER AGENT AND REGISTRAR
By:
----------------------------
Authorized Signature
DIGITALTHINK, INC.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF TRANS MIN ACT:______Custodian_______
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with
right of survivorship under Uniform Transfers to Minors
not as tenants in common Act______________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ______________________ hereby sell, assign and transfer unto
PLEASE INDENT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint ________________________________ Attorney to
transfer the said stock on the books of the within named Company with full
power of substitution in the premises.
Dated
--------------------
X
--------------------------------------------------
X
--------------------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATSOEVER.
SIGNATURE(S) GUARANTEED
By:
_______________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED, THE
CORPORATION MAY REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A
REPLACEMENT CERTIFICATE.
<PAGE> 1
EXHIBIT 5.1
[WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
January 13, 2000
DigitalThink, Inc.
1098 Harrison Street
San Francisco, California 94103
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you with
the Securities and Exchange Commission (the "Commission") on December 9, 1999
(as such may be further amended or supplemented, the "Registration Statement"),
in connection with the registration under the Securities Act of 1933, as amended
(the "Act"), of up to 4,600,000 shares of your Common Stock (the "Shares"). The
Shares, which include up to 600,000 shares of Common Stock issuable pursuant to
an over-allotment option granted to the underwriters (the "Underwriters"), are
to be sold to the Underwriters as described in such Registration Statement for
sale to the public. As your counsel in connection with this transaction, we have
examined the proceedings proposed to be taken by you in connection with the
issuance and sale of the Shares.
Based on the foregoing, it is our opinion that, the Shares, when issued and
sold in the manner described in the Registration Statement, will be legally and
validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
which has been approved by us, as such may be further amended or supplemented,
or incorporated by reference in any Registration Statement relating to the
prospectus filed pursuant to Rule 462(b) of the Act.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of DigitalThink, Inc. on
Form S-1 of our report dated December 2, 1999, appearing in the prospectus,
which is part of this registration statement, and of our report dated December
2, 1999 related to the financial statement schedule appearing elsewhere in this
registration statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such prospectus.
/s/ DELOITTE & TOUCHE LLP
- ------------------------------------------
Deloitte & Touche LLP
San Jose, California
December 8, 1999
<PAGE> 1
EXHIBIT 23.3
[INTERNATIONAL DATA CORPORATION LETTERHEAD]
CONSENT OF INTERNATIONAL DATA CORPORATION
We consent to the reference to our company under the captions ""Prospectus
Summary" and "Business Industry," and to the use of the information extracted
from our reports in conjunction therewith, in the registration statement on Form
S-1 (Registration No. 333-92429) and the related prospectus of DigitalThink,
Inc.
International Data Corporation
By: /s/ ALEXA MCCLOUGHAN
------------------------------
Name: Alexa McCloughan
Title: Senior Vice President
