<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT #1 TO
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 15, 2000
Date of Report being amended hereby (July 21, 2000)
DIGITALTHINK, INC.
--------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 000-28687 94-3244366
-------------------------------- ------------------------ -----------------
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
1098 HARRISON STREET
SAN FRANCISCO, CALIFORNIA 94103
(Address of principal executive offices)
(415) 625-4000
(Registrant's telephone number, including area code)
N/A
--------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
================================================================================
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Effective July 6, 2000, DigitalThink, Inc. ("DigitalThink" or the "Company")
acquired 100% of the outstanding stock and assumed all outstanding stock options
of Arista Knowledge Systems, Inc. ("Arista"), an emerging leader in providing
Internet-based learning management systems, in exchange for approximately
746,000 shares of DigitalThink common stock. The total cost of the acquisition,
including transaction costs, was approximately $24.6 million. The acquisition
was accounted for as a purchase business combination.
This report amends the report on 8-K filed with the Securities and Exchange
Commission on July 21, 2000 (the "Prior 8-K") to add the required financial
statements. This report is qualified in its entirety by reference to the Prior
8-K and to the Agreement and Plan of Merger which was attached as Exhibit 99.1
to the Prior 8-K.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
The following financial statements and pro forma financial information are being
provided in accordance with the instructions to this item.
(a) Financial Statements of Business Acquired.
Report of Independent Public Accountants.
Balance sheets of Arista at June 30, 2000 and December 31, 1999
and 1998.
Statements of operations of Arista for the six months ended June
30, 2000 and 1999, the years ended December 31, 1999 and 1998,
and the period from inception (July 14, 1997) through December
31, 1999.
Statements of changes in stockholders' deficit of Arista for the
years ended December 31, 1999 and 1998, and the period from
inception (July 14, 1997) through December 31, 1999.
Statements of cash flows of Arista for the six months ended June
30, 2000 and the years ended December 31, 1999 and 1998, and the
period from inception (July 14, 1997) through December 31, 1999.
(b) Pro Forma Financial Information.
Unaudited pro forma condensed Balance sheet as of March 31, 2000
and accompanying explanatory notes.
Unaudited pro forma condensed statement of operations for the
year ended March 31, 2000 and accompanying explanatory notes.
Unaudited pro forma condensed statement of operations for the
quarter ended June 30, 2000 and accompanying explanatory notes.
(c) Exhibits:
Exhibit
<PAGE> 3
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
99.1 ** Agreement and Plan of Merger between DigitalThink,
Inc. and Arista dated July 5, 2000.
23.1 Consent of Independent Public Accountants.
</TABLE>
** Incorporated by reference to the Company's form 8-K filed with the Securities
and Exchange Commission on July 21, 2000.
<PAGE> 4
Report of Independent Public Accountants
To the Board of Directors of
Arista Knowledge Systems, Inc.:
We have audited the accompanying balance sheets of Arista Knowledge Systems Inc.
(a Delaware corporation in the development stage) as of December 31, 1999 and
1998, and the related statements of operations, stockholders' deficit and cash
flows for the years then ended and for the period from inception (July 14, 1997)
through December 31, 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Arista Knowledge Systems, Inc.
as of December 31, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended and for the period from inception (July 14, 1997)
through December 31, 1999 in conformity with accounting principles generally
accepted in the United States.
/s/ Arthur Andersen LLP
San Jose, California
May 16, 2000
(except with respect to Note 11, as
to which the date is July 6, 2000)
<PAGE> 5
ARISTA KNOWLEDGE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
Financial Statements
As of December 31, 1999 and 1998
Balance Sheets -- December 31, 1999 and 1998
Assets
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 140,034 $ 1,833,819
Prepaid expenses and other current assets 140,049 70,137
----------- -----------
Total current assets 280,083 1,903,956
----------- -----------
Property and Equipment, net 276,255 198,021
Other Assets
Restricted cash 70,259 67,159
Other assets 75,515 145,921
----------- -----------
Total assets $ 702,112 $ 2,315,057
=========== ===========
Liabilities and Stockholders' Deficit
Current Liabilities:
Capital lease obligations, current portion $ 26,772 $ 53,126
Line of credit, current portion 26,523 --
Accounts payable 60,605 15,454
Accrued liabilities 203,185 71,734
----------- -----------
Total current liabilities 317,085 140,314
----------- -----------
Capital Lease Obligations, net of current portion 6,677 31,461
Line of Credit, net of current portion 35,841
Notes Payable and Accrued Interest Due to a Related Party 1,319,344 --
----------- -----------
Total liabilities 1,678,947 171,775
----------- -----------
Commitments (Note 6)
Mandatorily Redeemable Convertible Preferred Stock, $0.001 par value:
Authorized--10,000,000 and 7,500,000 shares at December 31, 1999 and
1998, respectively
Issued and outstanding--4,550,000 shares at December 31, 1999 and 1998,
liquidation preference of $3,999,450 at December 31, 1999 and 1998 3,953,907 3,940,895
----------- -----------
Stockholders' Deficit:
Common stock, $0.001 par value:
Authorized--18,000,000 shares and 15,000,000 shares at December 31, 1999
and 1998, respectively
Issued--3,100,000 shares at December 31, 1999 and 1998 3,100 3,100
Treasury common stock, 60,000 shares, at cost, at December 31, (60) (60)
1999 and 1998
Additional paid-in capital 659,964 299,464
Notes receivable from stockholders (45,461) (61,948)
Deficit accumulated during the development stage (5,548,285) (2,038,169)
----------- -----------
Total stockholders' deficit (4,930,742) (1,797,613)
----------- -----------
Total liabilities and stockholders' deficit $ 702,112 $ 2,315,057
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 6
ARISTA KNOWLEDGE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Operations
For The Years Ended December 31, 1999 and 1998
and the period from inception (July 14, 1997)
to December 31, 1999
<TABLE>
<CAPTION>
Period from
Inception
(July 14, 1997)
to
December 31,
1999 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenue $ 244,995 $ 412,065 $ 675,060
Cost of Revenue (222,300) (384,402) (623,836)
----------- ----------- -----------
Gross profit 22,695 27,663 51,224
----------- ----------- -----------
Operating Expenses:
Research and development 1,387,942 347,673 1,735,844
Sales and marketing 1,453,502 583,991 2,108,536
General and administrative 572,320 718,750 1,647,852
----------- ----------- -----------
Total operating expenses 3,413,764 1,650,414 5,492,232
----------- ----------- -----------
Loss from Operations (3,391,069) (1,622,751) (5,441,008)
Other Income (Expense), net (106,035) 18,276 (87,759)
----------- ----------- -----------
Net Loss (3,497,104) (1,604,475) (5,528,767)
Mandatory Redeemable Convertible
Preferred Stock
Accretion (13,012) (6,506) (19,518)
----------- ----------- -----------
Net Loss Attributable to
Common Stock $(3,510,116) $(1,610,981) $(5,548,285)
=========== =========== ===========
Basic and Diluted Net Loss
Attributable to Common Stock
per Share $ (1.61) $ (0.73)
=========== ===========
Shares used in Computing Basic
and Diluted Net Loss Attributable
to Common Stock per Share 2,183,765 2,211,265
=========== ===========
</TABLE>
<PAGE> 7
ARISTA KNOWLEDGE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Stockholders' Deficit
For the Period from inception (July 14, 1997) to December 31, 1999
<TABLE>
<CAPTION>
Common Stock Treasury Common Stock
----------------------- ------------------------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance of Inception, July 14, 1997 -- $ -- -- $ --
Issuance of common stock for notes receivable
at $0.001 per share in July 1997 2,500,000 2,500 -- --
Issuance of common stock at $0.50 per share
for services and note receivable in
July 1997 600,000 600 -- --
Repayment of notes receivable form July 1997
through December 1997 -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1997 3,100,000 3,100 -- --
Repurchase of common stock at $0.62
per share in June 1998 -- -- 600,000 (600)
Issuance of common stock from treasury for cash
at $0.62 per share in June 1998 -- -- (434,132) 434
Issuance of common stock from treasury for notes
receivable at $0.62 per share in June 1998 -- -- (105,868) 106
Repayment of notes receivable from
May 1998 through December 1998 -- --
Deferred stock-based compensation in June 1998 -- -- -- --
Amortization of deferred stock-based compensation
from June 1998 though December 1998 -- -- -- --
Mandatorily Redeemable Convertible Stock accretion
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1998 3,100,000 3,100 60,000 (60)
Repayment of notes receivable from
January 1999 through May 1999 -- -- -- --
Fair value of Series B preferred stock
warrants in July 1999 -- -- -- --
Fair value of common stock warrants
in December 1999 -- -- -- --
Mandatorily Redeemable Convertible Stock accretion -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1999 3,100,000 $ 3,100 60,000 $ (60)
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Deficit
Notes Accumulated
Additional Receivable Deferred During the
Paid In From Stock Development
Capital Stockholders Compensation Stage Total
---------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance of Inception, July 14, 1997 $ -- $ -- $ -- $ -- $ --
Issuance of common stock for notes receivable
at $0.001 per share in July 1997 (2,500) -- -- --
Issuance of common stock at $0.50 per share
for services and note receivable in
July 1997 300,00 (600) -- -- 300,000
Repayment of notes receivable form July 1997
through December 1997 -- 1,600 -- -- 1,500
Net loss -- -- -- (427,186) (427,188)
---------- ---------- ---------- ----------- ------------
Balance at January 1, 1998 300,000 (1,600) -- (427,188) (125,688)
Repurchase of common stock at $0.62
per share in June 1998 (371,400) -- -- -- (372,000)
Issuance of common stock from treasury for cash
at $0.62 per share in June 1998 268,734 -- -- -- 269,168
Issuance of common stock from treasury for notes
receivable at $0.62 per share in June 1998 65,532 (65,638) -- -- --
Repayment of notes receivable from
May 1998 through December 1998 -- 5,290 -- -- 5,290
Deferred stock-based compensation in June 1998 36,598 -- (36,598) -- --
Amortization of deferred stock-based compensation
from June 1998 though December 1998 -- -- 36,598 -- 36,598
Mandatorily Redeemable Convertible Stock accretion -- -- -- (6,506) (6,506)
Net loss -- -- -- (1,604,475 (1,604,475)
---------- ---------- ---------- ----------- ------------
Balance at December 31, 1998 299,464 (61,948) -- (2,038,169) (1,797,613)
Repayment of notes receivable from
January 1999 through May 1999 -- 16,487 -- -- 16,487
Fair value of Series B preferred stock
warrants in July 1999 309,107 -- -- -- 309,107
Fair value of common stock warrants
in December 1999 51,393 -- -- -- 51,393
Mandatorily Redeemable Convertible Stock accretion -- -- -- (13,012) (13,012)
Net loss -- -- -- (3,497,104) (3,497,104)
---------- ---------- ---------- ------------ ------------
Balance at December 31, 1999 $ 659,964 $ (45,461) $ -- $(5,548,285) $(4,930,742)
========== =========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 8
ARISTA KNOWLEDGE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Cash Flows
For the Years Ended December 31, 1999 and 1998
and the period from inception (July 14, 1997)
to December 31, 1999
<TABLE>
Period from Inception
(July 14, 1997) to
1999 1998 December 31, 1999
----------- ----------- ---------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss attributable to common stock $(3,510,116) $(1,610,981) $(5,548,285)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation 71,803 18,864 90,667
Issuance of common stock for services -- -- 300,000
Loss on disposal of property and equipment 2,374 -- 2,374
Amortization of deferred stock-based compensation -- 36,598 36,598
Amortization of warrants issued with notes payable 67,726 -- 67,726
Mandatorily redeemable convertible preferred stock
accretion 13,012 6,506 19,518
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (18,519) (69,271) (88,656)
Other assets 70,406 (145,921) (75,515)
Accounts payable 45,151 (109,807) 60,605
Accrued liabilities 192,176 70,136 263,910
----------- ----------- -----------
Net cash used in operating activities (3,065,987) (1,803,876) (4,871,058)
----------- ----------- -----------
Cash Flows from Investing Activities:
Purchases of property and equipment (79,724) (156,460) (236,184)
Proceeds from sale-leaseback transaction -- 33,795 33,795
----------- ----------- -----------
Net cash used in investing activities (79,724) (122,665) (202,389)
----------- ----------- -----------
Cash Flows from Financing Activities:
Increase in restricted cash (3,100) (67,159) (70,259)
Proceeds from issuance of notes payable to a related
party 1,500,000 -- 1,500,000
Principal payments on line of credit (10,323) -- (10,323)
Principal payments under capital lease obligations (51,138) (9,633) (60,771)
Proceeds from issuance of preferred stock, net -- 3,934,389 3,934,389
Proceeds from sale of common stock -- 269,168 269,168
Proceeds from repayment of stockholder notes
receivable 16,487 5,290 23,277
Repurchase of common stock -- (372,000) (372,000)
----------- ----------- -----------
Net cash provided by financing activities 1,451,926 3,760,055 5,213,481
----------- ----------- -----------
Net (Decrease) Increase in Cash and Cash Equivalents (1,693,785) 1,833,514 140,034
Cash and Cash Equivalents, beginning of period 1,833,819 305 --
----------- ----------- -----------
Cash and Cash Equivalents, end of period $ 140,034 $ 1,833,819 $ 140,034
=========== =========== ===========
Supplemental Disclosure Of Cash Flow Information:
Cash paid for income taxes $ 800 $ 1,600 $ 2,400
=========== =========== ===========
Cash paid for interest $ 9,624 $ 2,041 $ 11,665
=========== =========== ===========
Supplemental Disclosure On Noncash Investing and
Financing Activities:
Issuance of common stock for notes receivable $ -- $ 65,638 $ 68,738
=========== =========== ===========
Acquisition of property and equipment under capital
leases $ -- $ 94,220 $ 94,220
=========== =========== ===========
Acquisition of property and equipment through
issuance of notes payable $ 72,687 $ -- $ 72,687
=========== =========== ===========
Fair value of warrants issued $ 372,986 $ -- $ 372,986
=========== =========== ===========
</TABLE>
<PAGE> 9
ARISTA KNOWLEDGE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
December 31, 1999
1. Organization and Operations of the Company
Arista Knowledge Systems, Inc. (the "Company") was originally incorporated in
Oregon on July 14, 1997 under the name Eduventures, Inc. Upon resolutions
amending and restating the Company's Certificate of Incorporation, the Company
was reincorporated in Delaware and the name of the Company was changed to Arista
Knowledge Systems, Inc. effective December 25, 1998. The Company provides
software solutions for the management of Internet, network based and other
technology driven learning activities.
In March 2000, the Company changed its fiscal year end from March 31 to December
31. The financial statements presented herein have been adjusted to reflect the
change in fiscal year end.
The Company is subject to a number of risks including, but not limited to, the
need for additional financing to fund its future growth and development of its
principal products, uncertain profitability and competition from larger
companies, and ability to attract and retain employees. As of December 31, 1999,
the Company has not completed the development of its principal product and has
incurred operating losses since inception. Management's projections indicate
that additional cash will be required to fund operations through December 31,
2000. As discussed in Note 11, the Company was acquired by DigitalThink, Inc.
(DigitalThink) in July 2000. As the parent of the Company, DigitalThink has
committed to provide the funds required for continued operations of the Company
during fiscal year 2000.
2. Summary of Significant Accounting Policies
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less from the date of purchase to be cash
equivalents. As of December 31, 1999 and 1998, the Company's cash and
cash equivalents consisted of cash deposited in checking and money
market accounts.
Restricted Cash
Restricted cash is in the form of a certificate of deposit with a bank
and relates to a letter of credit issued by the bank securing a lease
deposit on the Company's current facilities.
Accounting for the Impairment of Long-Lived Assets
The Company periodically assesses the realizability of its long-term
assets in accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). SFAS No.
121 establishes the recognition and measurement standards related to the
impairment of long-lived assets. Recognition of asset impairment
writedowns has not had a material impact on the Company's financial
statements for any periods presented.
Research and Development Costs
<PAGE> 10
Research and development expenditures are charged to operations as
incurred. SFAS No. 86, "Accounting for Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed," requires the capitalization of
certain software development costs subsequent to the establishment of
technological feasibility. Based on the Company's product development
process, technological feasibility is established upon completion of a
working model. Costs incurred by the Company between completion of a
working model and the point at which the product is ready for general
release have been insignificant. Through December 31, 1999, all research
and development costs have been expensed.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets, which typically range from three to five years. Leasehold
improvements are amortized over the shorter of the lease term or useful
life of the related asset.
Included in property and equipment at December 31, 1999 and 1998 are
assets acquired under capital lease obligations with an original cost of
approximately $94,000. Accumulated amortization on the leased assets was
approximately $15,000 and $3,000 at December 31, 1999 and 1998,
respectively.
Property and equipment consists of the following at December 31, 1999
and 1998:
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Computer and related equipment $ 256,644 $ 163,560
Computer software 75,416 44,945
Office furniture and fixtures 28,434 2,694
Leasehold improvements 5,686 5,686
--------- ---------
366,180 216,885
Less: Accumulated depreciation and
amortization (89,925) (18,864)
--------- ---------
$ 276,255 $ 198,021
========= =========
</TABLE>
Accrued Liabilities
Accrued Liabilities consisted of the following at December 31, 1999 and
1998:
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Accrued Vacation $ 43,452 $ 30,681
Accrued Bonuses 80,622 --
Other accrued 79,111 41,053
--------- ---------
$ 203,185 $ 71,734
========= =========
</TABLE>
Revenue Recognition
In July 1997, the Company entered into an agreement with a customer to
develop certain web-based educational content. In October 1997, the
Company subcontracted the development services under this agreement (see
Note 8). The subcontract agreements entitled the Company to fees
comprising 2.5 percent to 10 percent of the proceeds received under the
original contract. The Company was the principal in this arrangement,
and was responsible for performance of the services and bore the risk of
credit loss. Consequently, revenue under this contract is recognized at
the gross amount of the billings under the contract when modules are
delivered in accordance with the original agreement. Cost of revenue is
the difference between the gross amount of the billing and the Company's
margin percentage based on its arrangements with subcontractors. All
revenue recorded by the Company for the period from inception through
December 31, 1999 has been derived from this contract agreement.
Stock-Based Compensation
In 1998, the Company adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation." As permitted under this standard, the Company
has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting For Stock Issued to Employees" in accounting for its stock
options and other stock-based employee awards (see Note 7).
Fair Value of Financial Instruments
<PAGE> 11
The carrying amounts of the Company's financial assets and liabilities,
including cash and cash equivalents, accounts receivable, accounts
payable, capital leases, and short-term borrowings, at December 31, 1999
and 1998, approximate fair value because of the short maturity of these
instruments.
The fair value of the Company's long term borrowings equaled their
carrying value at December 31, 1999.
Comprehensive Income (Loss)
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The
objective of SFAS No. 130 is to report a measure of all changes in
equity of an enterprise that result from transactions and other economic
events of the period other than transactions with stockholders
("comprehensive income"). Comprehensive income is the total of net
income and all other non-owner changes in equity. For all periods from
inception (July 14, 1997) to December 31, 1999, the Company's
comprehensive loss was equal to its net loss.
Net loss attributable to common stock per share
Basic and diluted net loss attributable to common stock per share are
presented in conformity with SFAS No. 128 ("SFAS 128"), "Earnings Per
Share," for all periods presented. Pursuant to SEC Staff Accounting
Bulletin No. 98, common stock and convertible preferred stock issued or
granted for nominal consideration prior to the anticipated effective
date of an IPO must be included in the calculation of basic and diluted
net loss attributable to common stock per share as if such stock had
been outstanding during the years ended December 1998 and 1999. To date
the Company has had no issuances or grants for nominal consideration.
In accordance with SFAS 128, basic net loss attributable to common stock
per share has been computed using the weighted average number of shares
of common stock outstanding during the period, less shares subject to
repurchase. Diluted net loss attributable to common stock per share is
computed on the basis of the weighted average number of shares and
common equivalent shares outstanding during the period. Common
equivalent shares result from the assumed exercise of outstanding stock
options that have a dilutive effect when applying the treasury stock
method. The Company has excluded all convertible preferred stock,
outstanding stock options and shares subject to repurchase from the
calculation of diluted net loss attributable common stock per share for
the years ended December 31, 1999 and 1998, because all such securities
are antidilutive. Accordingly, diluted net loss attributable to common
stock per share approximates basic net loss attributable to common stock
per share for all years presented.
The total number of shares excluded from the calculations of diluted net
loss attributable to common stock per share were 5,738,649 and 3,393,297
shares for the years ended December 31, 1999 and 1998, respectively.
Subsequent to December 31, 1999, the Company issued warrants to purchase
1,403,482 shares of the Company's common stock and granted stock options
to purchase 1,658,267 shares of the Company's common stock. These grants
would have changed the number of common shares and potential common
shares outstanding at December 31, 1999, if the transactions had
occurred before the end of the period.
The following table presents the calculation of basic and diluted net
loss attributable to common stock per share:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1999 1998
----------- -------------
<S> <C> <C>
Basic and diluted:
Weighted average shares of common stock outstanding $ 3,040,000 $ 3,067,500
Less: Weighted average shares of common stock subject to
repurchase (856,235) (856,235)
------------ ------------
Weighted average shares of common stock used in
computing net loss attributable to common stock
per share 2,183,765 2,211,265
------------ ------------
Net loss attributable to common stock $ (3,510,116) $ (1,610,981)
============ ============
Net loss attributable to common stock per share $ (1.61) $ (0.73)
============ ============
</TABLE>
Segment Reporting
In June 1997, the FASB issued SFAS No. 131 ("SFAS 131"), "Disclosures
About Segments of an Enterprise and Related information." SFAS 131 was
adopted by the Company beginning on January 1998. SFAS 131 establishes
standards for disclosures about operating segments, products and
services, geographic areas and major customers. The Company is organized
and operates as one operating segment. Revenue by geographic area is
attributed to the country from which the sale is made. The Company's
chief decision maker monitors the Company's operations based upon the
information reflected in the accompanying combined statements of
operations. To date all of the Company's transactions have been
originated from one geographic area, the United States. Currently all
long-lived assets are located in one geographic area, the United States.
3. Line of Credit
In February 1999, the Company entered into an equipment line of credit (the
"Equipment Line") with a leasing firm providing for total available borrowings
up to $200,000 to finance the purchase of eligible equipment through December
31, 1999. The effective interest rate on each advance is 10.67 percent.
Borrowings under each line are payable in 36 monthly installments of principal,
plus interest, beginning on the next month after each borrowing. At the end of
the payment term, the Company will be required to remit a balloon payment of
accrued interest equal to 15 percent of the total amount borrowed. Borrowings
under the Equipment Line are secured by the underlying assets purchased with the
monies borrowed under the agreement. The Agreement requires the Company to
comply with certain affirmative covenants. As of December 31, 1999, the Company
had $62,364 outstanding under the Equipment Line.
Aggregate principal maturities under the Equipment Line are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, Amount
----------------------- --------
<S> <C>
2000 $ 26,523
2001 25,191
2002 10,650
--------
$ 62,364
========
</TABLE>
4. Notes Payable and Accrued Interest Due to a Related Party
In July 1999, the Company entered into a note payable agreement (the "Note")
with a stockholder of the Company (collectively, with its subsidiaries,
"Safeguard") to borrow up to $1.5 million for working capital purposes. Interest
on the Note accrues at prime plus 1 percent (9.5 percent at December 31, 1999)
and was approximately $60,000 at December 31, 1999. Principal and accrued
interest on this Note are payable upon the earlier of (i) July 15, 2001, (ii)
the consummation of an initial public offering ("IPO") by the Company or (iii)
the sale of substantially all of the Company's assets or outstanding shares of
capital stock. At any time on or after July 16, 2001, and at the option of
Safeguard, any remaining outstanding principal and accrued interest on the Note
may be converted into shares of the Company's Series B Preferred Stock at a
conversion price of $1.10 per share. Borrowings under the Note are secured by
virtually all of the Company's assets. As of December 31, 1999 the Company had
$1.5 million outstanding and no available borrowings under the Note.
<PAGE> 12
5. Notes Payable
In December 1999, the Company entered into a bridge loan agreement (the "Loan")
with a lender providing for borrowings up to $2 million to be used for working
capital purposes through April 30, 2000. Interest on the Loan is at prime plus
1.5 percent (10 percent at December 31, 1999) and is payable monthly based on
the average daily outstanding balance under the Loan for the preceding month.
Principal and accrued interest are payable upon the earlier of (i) April 30,
2000 or (ii) an equity event, as defined in the agreement. Borrowings under the
Loan are secured by virtually all of the Company's assets. As of December 31,
1999, the Company had no monies outstanding under the Loan and had $2 million
available for future borrowings. As of May 16, 2000, the Company had $1.7
million outstanding under this agreement.
6. Commitments
The Company leases its facilities and certain office equipment under operating
and capital lease agreements expiring through August 2002. Rent expense for all
operating leases totaled $178,457 and $89,226 for the year ended December 31,
1999 and 1998, respectively.
During the year ended December 31, 1998, the Company entered into a capital
lease obligations of approximately $94,000 for various equipment. These capital
leases provide for monthly payments ranging from $207 to $2,245.
Minimum future lease payments under all noncancellable capital and operating
leases as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Operating Capital
December 31, Leases Leases
----------------- --------- --------
<S> <C> <C>
2000 $ 229,150 $ 28,794
2001 233,759 5,240
2002 233,759 1,153
2003 19,480 --
--------- --------
Total minimum payments $ 716,148 35,187
=========
Amount representing interest expense at 7.5% to
23.0% (1,738)
--------
Present value of net minimum lease payments 33,449
Less: Current portion 26,772
--------
Long term portion of capital lease obligations $ 6,677
========
</TABLE>
7. Mandatorily Redeemable Convertible Preferred Stock
The Company has authorized the issuance of up to 10,000,000 shares of preferred
stock of which 6,825,000 shares have been designated as Series A Preferred Stock
("Series A"). Of the 6,825,000 shares designated as Series A, 2,275,000 have
been reserved for stock dividends on the Series A. In June 1998, the Company
raised $3,934,389, net of issuance costs of $65,061, through the sale of
4,550,000 shares of Series A at an issuance price of $0.879 per share.
In July 1999, the Company authorized 2,500,000 shares be designated as Series B
Preferred Stock ("Series B", collectively with the Series A, the "Preferred
Stock"). No shares of Series B preferred stock have been issued to date.
The rights and preferences of the Preferred Stock are as follows:
- If and when dividends or distributions are declared by the Board of
Directors, the holders of the Preferred Stock shall be entitled to receive
cumulative dividends at the rate of $0.07, per annum per share. No
dividends have been declared by the Company
- Beginning four years after the respective original issue date of the Series
A and Series B, the holders of the outstanding Preferred Stock shall be
entitled to receive quarterly dividends payable in additional shares of
Preferred Stock. On each quarterly payment date, such holders shall be
entitled to receive 0.02 shares of Preferred Stock for each share of
Preferred Stock held on the original issue date.
- In the event of any liquidation, dissolution or winding up of the
corporation, either voluntary or involuntary, the holders of the Preferred
Stock will be entitled to receive out of the assets of the corporation, for
each share, prior and in preference to any distribution to the holders of
the common stock, the greater of (i) an amount equal to the original
purchase price of the Preferred Stock plus interest equal to 8% per annum
compounded annually from the issue date of each share or (ii) the amount
that would be received with respect to one share of Preferred Stock if all
shares were converted into common stock, as adjusted. In addition, the
holders of Preferred Stock shall be entitled to an amount equal to all
declared by unpaid dividends. The liquidation preference for Series A and
Series B at December 31, 1999 was $0.98 per share and $1.10 per share,
respectively.
- Each holder of the Preferred Stock is entitled to a number of votes equal
to the number of shares of common stock into which such stockholder's
shares of convertible preferred stock could be converted.
- Upon closing of an IPO of common stock in which aggregate proceeds are at
least $15 million and the price per share is at least $3.52 per share, all
outstanding shares of Preferred Stock will automatically convert into
shares of common stock at the conversion ratio in effect on such date. At
December 31, 1999 and 1998, each share of Preferred Stock was convertible
into one share of common stock.
- Each holder of Preferred Stock may, at any time, and from time to time,
convert any or all of such holder's shares into fully-paid and
non-assessable shares of common stock at the conversion ratio in effect at
that date. At December 31, 1999 and 1998, each share of Preferred Stock was
convertible into one share of common stock.
- At any time on or after the fifth anniversary of the original issue date,
the holders of the Preferred Stock may elect to have the outstanding
preferred stock redeemed. The amount per share payable upon redemption on
the Series A and Series B will be $0.879 and $1.10 per share, respectively.
8. Stockholders' Equity
Common Stock
At December 31, 1999, shares of common stock were reserved for future
issuances as follows:
<TABLE>
<S> <C>
Class A common stock 600,000
Series A convertible redeemable preferred stock 6,825,000
1998 stock option plan 1,716,667
Warrants to purchase Series B preferred stock 681,800
Warrants to purchase common stock 79,787
---------
9,903,254
=========
</TABLE>
Shares Subject to Repurchase
The Company issued 856,235 shares of common stock to certain employees
of the Company that are subject to repurchase rights. These repurchase
rights expire upon the earlier of (i) the closing of an IPO or (ii) the
closing of an acquisition of the Company by a public entity. As of
December 31, 1999, all of these shares are subject to repurchase by the
Company at the fair
<PAGE> 13
market value of the Company's common stock at the date of repurchase as
determined by the Company's Board of Directors.
Class A Common Stock
The Company has authorized the issuance of up to 600,000 shares of Class
A common stock ("Class A Common"). The Class A Common has the same
rights and preferences as common stock with the exception of a
liquidation preference. The liquidation preference entitles the holders
of the Class A Common to $0.50 per share in the event of a liquidation,
dissolution or winding up of the corporation, voluntary or involuntary,
after payment of full preferential amounts to the holders of the
Company's preferred stock and prior to any amounts being distributed to
the remaining common stockholders. As of December 31, 1999, no Class A
Common has been issued; however, 600,000 shares of common stock held by
an original investor in the Company are currently convertible into Class
A Common.
<PAGE> 14
Warrants
On July 15, 1999, in connection with the borrowings secured under the
Note, the Company granted warrants to purchase 681,800 shares of Series
B stock at $1.10 per share. The warrants are exercisable beginning in
July 2001 and expire in July 2004. The fair value of the warrants was
estimated using the Black-Scholes model using the following assumptions:
risk-free interest rate of 5.8 percent, volatility of 53 percent,
expected life of 3 years, and no expected dividends. The Company
recorded approximately $309,000 related to the valuation of these
warrants, which is being amortized as additional interest expense over
the term of the Note. As of December 31, 1999, the Company had recorded
approximately $67,000 of interest expense related to these warrants,
which is included in interest expense in the accompanying statement of
operations. Subsequent to year end, this warrant agreement was amended
(see Note 11).
On December 31, 1999, in connection with the Loan, the Company issued
warrants to purchase 79,787 shares of common stock at $0.94 per share.
The warrants were exercisable immediately and expire in December 2004.
As of December 31, 1999, no warrants had been exercised. The fair value
of the warrants was estimated using the Black-Scholes model with the
following assumptions: risk-free interest rate of 6.14 percent,
volatility of 80 percent, expected life of 5 years, and no expected
dividends. The Company recognized approximately $51,000 related to the
valuation of these warrants, which was recorded as debt issuance costs
and included in other current assets in the accompanying balance sheet.
In January 2000, when the Company initially borrowed monies under the
Loan, this amount was reclassified as a discount on the Loan, and is
being amortized as additional interest expense over the term of the
Loan. As of December 31, 1999, no amortization had been recorded on
these warrants.
Stockholder Receivables
Certain employees and founders have been issued common stock in exchange
for full recourse stockholder notes receivables. These receivables
accrue interest at 8 percent per annum and are payable in monthly
installments through June 2000. As of December 31, 1999 and 1998, the
Company had approximately $45,000 and $62,000 due from such notes
receivables. These notes receivables are secured by the underlying stock
issued under such arrangements.
Stock Option Plan
In June 1998, the Company adopted the 1998 stock option plan (the
"Plan"). Under the Plan, the Company authorized the issuance of up to
1,716,667 shares to employees, directors and consultants. Under the
Plan, the Board of Directors may grant incentive and nonqualified stock
options to employees, directors and consultants of the Company. The
exercise price per share for a stock option cannot be less than 100
percent of the fair market value, as determined by the Board of
Directors, on the date of grant. Options generally vest 12.5 percent
upon completion of six months of service by the optionee and ratably
over a three-and-a-half year period thereafter and expire ten years
after the date of grant.
Stock option activity under the Plan for the years ended December 31,
1999 and 1998 was as follows:
<TABLE>
<CAPTION>
Options Outstanding
------------------------------
Available Number Weighted Average
For Grant of Shares Exercise Price
--------- --------- ----------------
<S> <C> <C> <C>
Balance, December 31, 1997 -- -- $ --
Authorized 1,716,667 -- $ --
</TABLE>
<PAGE> 15
<TABLE>
<S> <C> <C> <C>
Granted (1,081,200) 1,081,200 $0.62
Exercised -- -- $ --
Canceled/Repurchased 90,000 (90,000) $0.62
--------- ---------
Balance, December 31, 1998 725,467 991,200 $0.62
Granted (261,200) 261,200 $0.92
Exercised -- -- $ --
Canceled 127,000 (127,000) $0.63
--------- ---------
Balance, December 31, 1999 591,267 1,125,400 $0.63
========= =========
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.01 120,000 8.39 $ 0.01 60,000 $ 0.01
$ 0.62 755,900 8.43 $ 0.62 703,170 $ 0.62
$ 0.94 249,500 9.74 $ 0.94 3,000 $ 0.94
--------- -------
1,125,400 8.72 $ 0.63 766,170 $ 0.57
========= =======
</TABLE>
The Company accounts for stock options issued to non-employees in
accordance with SFAS 123. The compensation expense related to the value
of options granted to non-employees has been immaterial for all periods
presented.
The weighted average fair value of options granted to employees during
the years ended December 31, 1999 and 1998 estimated on the date of
grant using the Black-Scholes option pricing model was $0.20 and $0.06,
respectively. The fair value of the 1999 and 1998 options granted is
estimated on the date of grant using the following assumptions:
risk-free interest rate range of 5.87 to 5.98 percent, depending on the
grant date, expected life of 4 years, no volatility and no expected
dividends.
The Company accounts for this Plan under APB 25. In accordance with APB
25, the Company recorded compensation expense of approximately $0 and
$37,000 for the years ended December 31, 1999 and 1998, respectively.
Had compensation expense for the Plan been determined consistent with
SFAS 123, the Company's net loss attributable to common stock would have
been increased to the following pro forma amounts for the years ended
December 31, 1999 and 1998, and for the period from inception (July 14,
1997) to December 31, 1999:
<TABLE>
<CAPTION>
Period from
Inception
(July 14, 1997) to
December 31,
1999 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
As Reported $3,510,116 $1,610,981 $5,548,285
Pro Forma $3,555,661 $1,643,981 $5,626,830
</TABLE>
9. Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", ("SFAS 109"). SFAS 109 provides for an
asset and liability approach to account for income taxes under which
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities, and their
respective tax bases. Deferred tax assets and liabilities are
<PAGE> 16
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not
that some or all portion of the deferred tax assets will not be
recognized. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period of enactment.
The net deferred income tax asset consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Deferred income tax assets:
Federal net operating loss carryforward $ 1,806,289 $ 631,464
State net operating loss carryforward 309,959 108,359
Temporary differences:
Research and development credits 189,152 41,721
Start-up costs 122,307 159,940
Other 61,363 9,004
----------- -----------
2,489,070 950,488
Valuation allowance (2,489,070) (950,488)
----------- -----------
Deferred income tax asset, net $ -- $ --
=========== ===========
</TABLE>
Net operating loss carryforwards for Federal and state income tax
purposes at December 31, 1999 and 1998, were approximately $5.3 million
and $1.9 million, respectively. The net operating loss carryforwards
expire on various dates through the year 2019. The Internal Revenue
Service Code contains provisions which may limit the net operating
losses and credit carryforwards to be used in any given year upon the
occurrence of certain events, including a significant change in
ownership interest. The Company believes significant uncertainty exists
regarding the realizability of the net operating losses and credit
carryforwards and other timing differences at December 31, 1999 and
1998, and, accordingly, has provided a full valuation allowance.
As of December 31, 1999 and 1998, respectively, the Company also had
available research and development credits carryforwards of
approximately $90,000 and $23,000 for Federal income tax purposes and
$76,000 and $19,000 for state income tax purposes. The Federal research
and development credits expire on various dates through the year 2019
and the state research and development credits carryforward
indefinitely.
10. Related Party Transactions
In July 1997, the Company entered into a contract with the Institute for
Defense Education and Analysis ("IDEA") at the Naval Postgraduate School
whereby the Company would develop certain web-based technology content
for the IDEA. In October 1997, the Company entered into a subcontract
agreement with one of its shareholders to provide the services under the
contract. As of December 31, 1999, all services under the contract have
been performed and all related revenue had been recognized.
11. Subsequent Events
In May 2000, in connection with a guaranty by Safeguard of the Loan, the
Company issued warrants to purchase 390,909 shares of the Company's
common stock at an exercise price of $0.94 per share. These warrants are
exercisable beginning in May 2000 and expire in May 2005.
In June 2000, the Company entered into a line of credit with Safeguard
to provide for borrowings up to $1.6 million to be used for working
capital purposes. Interest on this line accrues at prime plus 1 percent.
All outstanding principal and accrued interest under this line of credit
shall be due and payable upon the earlier of (i) September 30, 2000,
(ii) an IPO or a private equity offering of at least $5 million, or
(iii) the sale of substantially all of the Company's assets or shares of
capital stock. Borrowings under this line of credit are secured by
virtually all of the Company's assets. In connection with this line of
credit agreement, the Company issued warrants to purchase 727,273
<PAGE> 17
shares of the Company's common stock to Safeguard at an exercise price
of $0.94 per share. These warrants are exercisable beginning in June
2000 and expire in June 2005.
In June 2000, the Company entered into a loan agreement with Safeguard
to provide for borrowings up to $300,000 to be used for working capital
purposes. Interest on this loan accrues at prime plus 1 percent. All
outstanding principal and accrued interest under this loan shall be due
and payable upon the earlier of (i) June 3, 2001, (ii) 60 days after the
demand for payment by the lender, or (iii) upon the closing of a sale of
substantially all of the Company's assets. In connection with this loan
agreement, the Company issued warrants to purchase 136,364 shares of the
Company's common stock to Safeguard at an exercise price of $0.94 per
share. These warrants are exercisable beginning in June 2000 and expire
in June 2005.
In June 2000, the Company entered into a forbearance agreement in
connection with violation of certain stipulations in its original Loan
agreement dated December 1999. Under the amended terms of this
agreement, the lender agreed to forbear any action against the Company
for these violations until July 31, 2000. In consideration of this
forbearance agreement, the Company issued warrants to purchase 148,936
shares of the Company's common stock at an exercise price of $0.94 per
share. These warrants are exercisable beginning in June 2000 and expire
in June 2005.
In July 2000, the Company amended its Note to allow Safeguard the right
to convert any outstanding principal and accrued interest on the Note
into fully-paid and non-assessable shares of the Company's common stock
at a conversion price of $1.10 per share. The Company also amended the
underlying warrant agreement on the Note to allow Safeguard to purchase
from the Company up to 681,800 shares of the Company's common stock at a
purchase price of $1.10 per share provided, however, that in the event
of a merger of the Company with or into another entity prior to July 15,
2001, the warrants shall be exercisable only for up to 340,900 shares of
the Company's common stock. These warrants are in place of, and not in
addition to, the warrants issued in the original agreement as discussed
in Note 8.
In July 2000, the Company entered into an agreement to be acquired by
DigitalThink effective July 6, 2000. Under the terms of the agreement,
each share of the Company's common stock and preferred stock will be
converted into .0588 shares of DigitalThink's common stock. The
transaction will be accounted for by DigitalThink using the purchase
method. Subsequent to the acquisition, the Company will cease business
operations on a stand-alone basis.
<PAGE> 18
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
Effective July 6, 2000, DigitalThink, Inc. ("DigitalThink" or the "Company")
acquired 100 percent of the outstanding stock and assumed all outstanding stock
options of Arista Knowledge Systems, Inc. ("Arista"), an emerging leader in
providing Internet-based learning management systems, in exchange for
approximately 746,000 shares of DigitalThink common stock. The total cost of the
acquisition, including transaction costs, was approximately $24.6 million. The
acquisition was accounted for as a purchase business combination.
Attached are the unaudited pro forma condensed financial statements, which
include the unaudited pro forma condensed balance sheet as of June 30, 2000 and
the unaudited pro forma condensed statements of operations of the Company and
Arista for the quarter ended June 30, 2000 and of the Company for the year ended
March 31, 2000, and Arista for the year ended December 31, 1999. The unaudited
pro forma condensed balance sheet assumes the acquisition took place on June 30,
2000. The unaudited pro forma condensed statements of operations, assume the
acquisition had been consummated on April 1, 1999. The unaudited pro forma
condensed financial information reflects the allocation of purchase price of
Arista based upon current estimates of fair values of assets acquired and
liabilities assumed. The final allocation of the purchase price may vary as
additional information is obtained and, accordingly, the ultimate allocation may
differ from that used in the unaudited pro forma condensed financial
information.
The unaudited pro forma condensed financial statements are based on the
historical financial statements of the Company and Arista. They are not
necessarily indicative of the combined entity's operations had the acquisition
actually occurred on the dates indicated, nor are they necessarily indicative of
future operations. The pro forma adjustments and the assumptions on which they
are based are described in the accompanying notes to these statements.
The unaudited pro forma condensed financial statements are based on and should
be read in conjunction with the historical consolidated financial statements and
related notes thereto of the Company for the year ended March 31, 2000 and the
quarter ended June 30, 2000 and the accompanying historical consolidated
financial statements and the notes thereto of Arista for the year ended December
31, 1999 and the six months ended June 30, 2000 and 1999.
<PAGE> 19
DIGITALTHINK, INC.
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 2000
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Pro Forma
DigitalThink Arista Adjustments Pro Forma
Historical Historical (Note 2) Combined
------------ ---------- ----------- --------
<S> <C> <C> <C> <C>
Current assets:
Cash and equivalents $ 27,302 $ 360 $ 27,662
Marketable securities 66,489 - 66,489
Accounts receivable, net 7,292 17 7,309
Prepaid expenses and other current assets 1,600 82 1,000 b 2,682
--------- ------ -------- --------
Total current assets 102,683 459 1,000 104,142
Property and equipment, net 7,600 279 - 7,879
Intangibles - - 24,750 b 17,632
(7,118) b
Other assets - 94 94
--------- ------ -------- --------
TOTAL ASSETS $ 110,283 $ 832 $ 18,632 $ 129,747
========= ====== ======== =========
Current liabilities:
Accounts payable $ 4,010 $ 348 $ 4,358
Accrued liabilities 3,499 545 500 b 4,644
100 a
Capital lease obligations, current portion - 31 31
Deferred revenues 10,905 57 10,962
Notes payable - 2,009 2,009
--------- ------ -------- --------
Total current liabilities 18,414 2,990 600 22,004
Capital lease obligations, net of current portion - 42 42
Notes payable and accrued interest - 3 3
--------- ------ -------- --------
Total long-term liabilities - 45 - 45
Mandatorily redeemable convertible preferred stock - 3,967 (3,967) c -
Common Stock 149,249 3,993 (3,993) c 173,748
24,499 a
Deferred stock compensation (6,403) (569) 569 c (7,955)
(1,552) b
Notes receivable from stockholders - (51) 51 c -
Accumulated deficit (50,977) (9,543) 9,543 c (58,095)
(7,118) b
--------- ------ -------- --------
Total stockholders' equity (deficit) 91,869 (6,170) 21,999 107,698
TOTAL LIABILITIES AND EQUITY $ 110,283 $ 832 $ 18,632 $ 129,747
========= ====== ======== =========
</TABLE>
<PAGE> 20
DIGITALTHINK, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 2000
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
DigitalThink Arista
Historical Historical Pro Forma
(Year ended (Year ended Adjustments Pro Forma
3/31/00) 12/31/99) (Note 3) Combined
------------ ----------- ----------- --------
<S> <C> <C> <C> <C>
REVENUES:
Delivered Learning fees $ 4,994 $ - $ - $ 4,994
Learning Solution services 5,821 245 - 6,066
------------ ----------- ----------- --------
Total revenues 10,815 245 - 11,060
------------ ----------- ----------- --------
COSTS AND EXPENSES:
Cost of Delivered Learning fees 2,409 - - 2,409
Cost of Learning Solution services 3,337 222 - 3,559
Content research and development 4,082 - - 4,082
Technology research and development 3,687 1,355 - 5,042
Selling and marketing 11,596 1,431 - 13,027
General and administrative 2,342 556 - 2,898
Depreciation and amortization 915 72 - 987
Amortization of intangibles - - 4,408 d 4,408
Stock-based compensation 3,663 - 931 e 4,594
------------ ----------- ----------- --------
Total costs and expenses 32,031 3,636 5,339 41,006
------------ ----------- ----------- --------
Loss from operations (21,216) (3,391) (5,339) (29,946)
Interest and other income (expense) 1,055 (106) - 949
------------ ----------- ----------- --------
Net loss $ (20,161) $ (3,497) $ (5,339) $ (28,997)
============ =========== =========== ========
Shares used in basic and diluted loss per common share 7,164 7,910
Basic and diluted loss per common share $ (3.87) $ (4.63)
</TABLE>
<PAGE> 21
DIGITALTHINK, INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 2000
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Pro Forma
DigitalThink Arista Adjustments Pro Forma
Historical Historical (Note 3) Combined
------------ ---------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Delivered Learning fees $ 2,395 - - $ 2,395
Learning Solution services 3,867 - - 3,867
------------ ---------- ----------- ---------
Total revenues 6,262 - - 6,262
------------ ---------- ----------- ---------
COSTS AND EXPENSES:
Cost of Delivered Learning fees 1,012 - - 1,012
Cost of Learning Solution services 2,281 - - 2,281
Content research and development 2,820 - - 2,820
Technology research and development 2,142 1,079 - 3,221
Selling and marketing 3,921 568 - 4,489
General and administrative 1,174 279 - 1,453
Depreciation and amortization 562 77 - 639
Amortization of intangibles - - 1,102 d 1,102
Stock-based compensation 1,549 28 233 e 1,810
------------ ---------- ----------- ---------
Total costs and expenses 15,461 2,031 1,335 18,827
------------ ---------- ----------- ---------
Loss from operations (9,199) (2,031) (1,335) (12,565)
Interest and other income (expense) 1,549 (505) - 1,044
------------ ---------- ----------- ---------
Net loss $ (7,650) $ (2,536) $ (1,335) $ (11,521)
============ ========== =========== =========
Shares used in basic and diluted loss per common share 33,867 34,613
Basic and diluted loss per common share $ (0.23) $ (0.33)
</TABLE>
1. GENERAL
The Company will account for the acquisition as a purchase business
combination. The accompanying unaudited pro forma condensed financial
statements reflect an estimated aggregate purchase price of approximately
$24.6 million, consisting of the fair value of common stock and options
issued ($24.5 million) as well as transaction costs.
2. UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
The accompanying unaudited pro forma condensed balance sheet has been
prepared as if the acquisition was consummated on June 30, 2000. Pro Forma
adjustments were made:
(a) To record consideration given in acquisition of Arista:
<PAGE> 22
<TABLE>
<S> <C>
Stock issued to Arista stockholders $20,523
Stock options assumed 3,976
Transaction costs 100
-------
Total purchase price $24,599
</TABLE>
(b) To record allocation of purchase price to assets of Arista:
<TABLE>
<S> <C>
In-process research and development $ 7,118
Acquired technology, workforce intangible and
goodwill 17,632
Receivable from Arista stockholder 1,000
Assumed compensation payable to Arista employees
From Arista stockholder (500)
Intrinsic value of unvested Arista options
assumed 1,552
Net fair value of tangible assets
acquired and liabilities assumed (2,203)
-------
Net assets acquired $24,599
</TABLE>
The allocation of the purchase price to in-process research and
development, acquired technology and workforce was based upon
independent valuation.
(c) To record elimination of Arista's stockholder's equity.
3. UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
The accompanying unaudited pro forma condensed statements of operations have
been prepared as if the acquisition was consummated as of April 1, 1999. Pro
forma adjustments were made to reflect the:
(d) Amortization of acquired intangibles, with amortization periods of four
years for amounts allocated to acquired technology, workforce and the
excess of cost over fair value of net assets acquired.
(e) Amortization of deferred stock compensation, with an amortization
period of up to four years representing the remaining vesting period of
the options assumed using the multiple option amortization approach.
The accompanying unaudited pro forma condensed statements of operations do not
reflect the one-time impact of the charge for purchased in-process research and
development of $7.1 million recorded by the Company in connection with the
acquisition.
The unaudited pro forma condensed statements of operations for the year ended
March 31, 2000 combined the results of DigitalThink for the year ended March
31, 2000 with the results of Arista for the year ended December 31, 1999.
Accordingly, the presentation excluded the results of Arista for the quarter
ended March 31, 2000. Unaudited results of operations of Arista for the quarter
ended March 31, 2000 included zero revenues and net loss of $1.5 million.
<PAGE> 23
ARISTA KNOWLEDGE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
Balance Sheet -- June 30, 2000
(unaudited)
Assets
<TABLE>
<CAPTION>
2000
-----------
<S> <C>
Current Assets:
Cash and cash equivalents $ 359,692
Prepaid expenses and other current assets 98,997
-----------
Total current assets 458,689
-----------
Property and Equipment, net 279,505
Other Assets
Restricted Cash 93,277
Other assets 424
-----------
Total Assets $ 831,895
===========
Liabilities and Stockholders' (Deficit) Equity
Current Liabilities
Capital lease obligations, current portion $ 31,392
Line of credit, current portion 2,009,003
Accounts payable 348,504
Accrued liabilities 601,435
-----------
Total current liabilities 2,990,334
Capital Lease Obligations, net of current portion 41,862
Line of Credit, current portion --
Notes Payable and Accrued Interest Due to a Related Party 3,260
-----------
Total Liabilities 3,035,456
-----------
Commitments
Convertible redeemable Preferred Stock, $.001 par value; Authorized -
10,000,000 and 7,500,000 shares at June 30, 2000 and
1999, respectively.
Issued and outstanding - 4,550,000 shares at June 30, 2000 and
1999, liquidation preference of $3,999,450 at June 30, 2000
and 1999 3,966,919
Stockholders' (Deficit)
Convertible redeemable Preferred Stock, $.001 par value; Authorized -
10,000,000 and 7,500,000 shares at June 30, 2000 and
1999, respectively.
Issued and outstanding - 4,550,000 shares at June 30, 2000 and
1999, liquidation preference of $3,999,450 at June 30, 2000
and 1999 4,550
Common stock, $0.001 par value:
Authorized - 18,000,000 shares and 15,000,00 shares at June 30
2000 and 1999, respectively.
Issued - 3,100,000 shares at June 30, 2000 and 1999 3,164
Treasury common stock, 60,000 shares, at cost, at June 30, 2000 and
1999 (32,534)
Additional paid-in capital 4,022,278
Notes receivable from stockholders (51,082)
Deferred stock compensation (569,248)
Deficit accumulated during the development stage (9,543,058)
-----------
Total Stockholders' (deficit) (6,170,480)
-----------
Total liabilities and stockholders' (deficit) $ 831,895
===========
</TABLE>
<PAGE> 24
ARISTA KNOWLEDGE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Operations
For the 6 months ended June 30, 2000 and 1999
(unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Revenue $ -- $ 227,460
Cost of Revenue -- 279,945
----------- -----------
Gross Profit -- (52,485)
----------- -----------
Operating Expenses:
Research and Development 1,803,523 540,592
Sales and marketing 929,049 545,208
General and administrative 611,925 323,337
----------- -----------
Total operating expenses 3,344,497 1,409,137
----------- -----------
Loss from Operations (3,344,497) (1,461,622)
Other income (expense), net (660,794) 13,708
----------- -----------
Net Loss $(4,005,291) $(1,447,914)
=========== ===========
</TABLE>
<PAGE> 25
ARISTA KNOWLEDGE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Cash Flows
For the 6 Months Ended June 30,2000 and 1999
(unaudited)
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss (4,005,291) (1,447,914)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation 86,904 7,546
Loss on disposal of property and equipment 24,537 --
Amortization of deferred stock-based compensation 28,000 --
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 41,052 (141,833)
Other assets 75,091 73,484
Accounts payable 287,899 (5,764)
Accrued liabilities 398,250 145,388
---------- ----------
Net cash used in operating activities (3,063,558) (1,369,093)
Cash Flows from Investing Activities:
Purchases of property and equipment (114,691) (34,222)
Proceeds from sale-leaseback transaction -- --
---------- ----------
Net cash used in investing activities (114,691) (34,222)
Cash Flows from Financing Activities:
Increase in restricted cash (23,018) (1,648)
Payments of notes payable to a related party (1,316,084) --
Proceeds from line of credit 1,946,639 --
Proceeds received under capital lease obligations 39,805 7,420
Proceeds from sale of common stock 2,788,660 37,304
Payments to/proceeds from repayment of stockholder notes receivable (5,621) 11,959
Purchase of treasury stock (32,474) (37,134)
---------- ----------
Net cash provided by financing activities 3,397,907 17,901
---------- ----------
Net increase (decrease) in Cash and Cash Equivalents 219,658 (1,385,414)
Cash and Cash Equivalents, beginning of period 140,034 1,833,819
---------- ----------
Cash and Cash Equivalents, end of period 359,692 448,405
---------- ----------
</TABLE>
Notes to Condensed Financial Statements (Unaudited)
1 -Basis of Presentation
The condensed financial statements included herein have been prepared by Arista,
Inc., (the Company), without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes the disclosures which are
made are adequate to make the information presented not misleading.
<PAGE> 26
The unaudited condensed financial statements included herein reflect all
adjustments (which include only normal, recurring adjustments) which are, in the
opinion of management, necessary to state fairly the results for the periods
presented. The results for such periods are not necessarily indicative of the
results to be expected for the entire fiscal year ending March 31, 2001.
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
DIGITALTHINK, Inc.
Date: September 15, 2000 By: /s/ Peter J. Goettner
------------------------------
Peter J. Goettner
President and Chief Executive Officer
<PAGE> 27
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
99.1 ** Agreement between DigitalThink, Inc. and Arista, Inc. dated
July 5, 2000.
23.1 Consent of Independent Auditors.
</TABLE>
** Incorporated by reference to the Company's form 8-K filed with the Securities
and Exchange Commission on July 21, 2000.
