<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 2, 2000
REGISTRATION NO. 333-92429
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
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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<S> <C> <C>
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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<S> <C> <C>
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
</TABLE>
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. [ ]
------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE> 2
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 FEBRUARY 2, 2000
4,400,000 Shares
[DIGITALTHINK LOGO]
Common Stock
------------------
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."
Immediately following and contingent upon the sale of the shares in this
offering, GE Capital Equity Investments, Inc. and Tenet Healthcare Corporation
will invest $10,000,000 and $4,000,000, respectively, in a private placement of
our common stock.
The underwriters have an option to purchase a maximum of 660,000 additional
shares of common stock to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 7.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS DIGITALTHINK
------------------- ------------------- -------------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>
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.
<PAGE> 3
DESCRIPTION OF GRAPHICS
[Graphic that, from right to left, depicts a circle inside a circle
connected by lines to three smaller circles connected to circles with ten
customer logos connected by lines to the word "Learners," which is written
vertically across the right-hand-side of the page. On the farthest right in the
inner circle is the DigitalThink logo. The outer circle is split into four equal
sections and labeled: "Content - Specially designed online courses available
from any standard connection to the Internet"; "Technology - Highly scalable
infrastructure, e-commerce functionality, and participant tracking and reporting
capability": "Community - Personalized feedback from tutors and peers in a
Web-based learning community"; and "Services - Outsourced content development,
e-commerce hosting and delivery services". The smaller circles to the right are
labeled: "Workforce Transformation (Learning for internal employees)"; "Sales
Performance (Learning for internal and external sales channels)"; and "Customer
Advocacy (Learning for our customers' customers)". The smaller circles to the
right of the "Workforce Transformation" circle contain the logos of the
following customers: KPMG, Cambridge Technology Partners, Amdahl and
Hewlett-Packard. The smaller circles to the right of the "Sales Performance"
circle contain the logos of the following customers: 3Com, Cisco Systems and
Adobe. The smaller circles to the right of the "Customer Advocacy" circle
contain the logos of the following customers: Charles Schwab, Lawson Software
and Texas Instruments.]
<PAGE> 4
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY................... 3
RISK FACTORS......................... 7
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS................. 18
USE OF PROCEEDS...................... 18
DIVIDEND POLICY...................... 18
CAPITALIZATION....................... 19
DILUTION............................. 20
SELECTED FINANCIAL DATA.............. 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...................... 22
BUSINESS............................. 31
</TABLE>
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PAGE
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<S> <C>
MANAGEMENT........................... 44
TRANSACTIONS WITH RELATED
PARTIES............................ 53
PRINCIPAL STOCKHOLDERS............... 55
DESCRIPTION OF CAPITAL STOCK......... 57
SHARES ELIGIBLE FOR FUTURE SALE...... 61
UNDERWRITING......................... 63
NOTICE TO CANADIAN RESIDENTS......... 66
LEGAL MATTERS........................ 67
EXPERTS.............................. 67
ADDITIONAL INFORMATION............... 67
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 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 products and services 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 and have extended this focus to
develop 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 spending significant amounts each year on learning.
According to the Department of Education, in 1997 businesses spent
approximately $55 billion primarily on in-person, instructor-led training. We
believe e-learning will become a growing part of this market as e-learning is
demonstrated to be more effective than, and becomes a more accepted alternative
to, instructor-led training. Based on the experiences of our customers,
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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<PAGE> 6
We refer to our e-learning offering as a "solution" because we manage all
aspects of e-learning on an end-to-end basis. We offer instructional and
Web-design expertise. We also offer the technology necessary to deploy, deliver,
track and monitor the learning process. In addition we provide access to a
community of mentors and tutors that provide prompt responses to course
participants. Our customers rely on this comprehensive solution to address and
resolve the challenges of deploying e-learning. Our solution consists of
previously developed catalog courses on a variety of topics and custom-designed
courses built to address the specific needs of our customers. Our agreements
generally permit us to use the content we develop for one customer in other
courses.
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, services and delivery software;
- 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,
co-developers 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 as earned 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.
4
<PAGE> 7
THE OFFERING
Common stock offered in this
offering........................... 4,400,000 shares
Common stock offered in the private
placement........................ 1,368,524 shares, at an issue price of
$10.23 per share based on an assumed
initial public offering price of $11.00
per share
Common stock to be outstanding
after this offering and the private
placement........................ 33,143,313 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.
5
<PAGE> 8
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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<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
------ ------- ------- ------- --------
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
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
-------- -------- -----------
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 23,344 $ 23,344 $ 81,656
Working capital............................................. 21,215 21,215 79,527
Total assets................................................ 31,545 31,545 89,857
Redeemable convertible preferred stock...................... 56,214 -- --
Accumulated deficit......................................... (34,075) (34,075) (34,075)
Total stockholders' equity (deficit)........................ (31,852) 24,362 82,674
</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 pro forma as adjusted amounts above give effect to the sale of the
4,400,000 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, and 1,368,524 shares in the private
placement at an assumed price of $10.23 per share, based on an assumed initial
offering price of $11.00 per share.
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 2000 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.
6
<PAGE> 9
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 revenues 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. 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.
7
<PAGE> 10
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 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 course revenues 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 34% 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. In fiscal 1999, no customer accounted for more than 10%
of our revenues although our five largest customers accounted for 40% of our
revenues. 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,
8
<PAGE> 11
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 and we require personnel with both educational
course design experience as well as experience in Web design. The number of
potential candidates with experience in both these areas is limited. 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 December 31, 1999, we spent
$11.8 million on sales and marketing, including 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.
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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;
- 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
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<PAGE> 13
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
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 much of the content
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 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 by using knowledge gained while working with us to develop and offer
similar courses through other Web-based and off-line channels. Although we have
not experienced this competition to date, we believe it may develop and could
materially impact our business as the e-learning market evolves. 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.
Specialized content may include courses or topics related to new technologies,
products or processes in which relatively few qualified experts have the
knowledge required to develop the course. If we are unable to locate these
experts, we may fail to develop the courses our customers demand and as a result
lose opportunities, market share and goodwill. 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
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<PAGE> 14
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 is bound by employment agreements and
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
execute 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
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<PAGE> 15
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
on a profitable basis. In addition, our direct sales force may compete with
these resellers, and we may not be able to manage conflicts across our direct
and indirect sales channels. Our focus on increasing sales through our indirect
channel may divert management resources and attention from direct sales.
Conflicts across sales channels could cause us to encounter pricing pressures
and lose revenue opportunities, which could harm our business and cause our
operating results to decline.
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 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.
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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 15 instances of unscheduled system downtime which on average
have resulted in our Web site being entirely inaccessible to course participants
for approximately 1.5 hours. 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. To date,
however, we have not received revenues from customers outside of the United
States. 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;
- 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 encounter these factors in connection with our planned expansions in
the United Kingdom and Japan, our revenues could fall below expectations, which
would harm our business and operating results. In this event, our stock price
could decline.
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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 and prospective customers and their employees, distributors,
suppliers and customers. 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 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.
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
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<PAGE> 18
the 181(st) day after completion of this offering, 23,377,182 of shares of our
common stock held by existing stockholders will be freely tradable. In addition,
Credit Suisse First Boston Corporation may, at its discretion and without
notice, release existing stockholders from lockup agreements. These releases
could involve the release of a specified percentage of all shares subject to
lockup agreements or the release of an individual's shares for liquidity
concerns that apply only to that individual. A private placement of 1,368,524
shares will occur immediately following the closing of this offering. These
shares will become eligible for sale in the public market one year from the date
of this prospectus or earlier upon registration under the Securities Act. Sales
of these shares in the future, whether due to early release from lockup
agreements, termination of these agreements or expiration of holding periods,
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."
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 48.7% 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;
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- 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 $8.51
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."
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.
WE ARE SUBJECT TO RISKS RELATED TO LEGAL PROCEEDINGS.
We may be from time to time involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. For example, we are
currently the subject of a lawsuit with one of our former employees which was
filed in the Superior Court of the State of California for the County of San
Francisco. The former employee is seeking commissions and pursuing other claims
against us and our executives. We intend to contest the action vigorously and do
not believe that resolution of this action will materially harm our financial
condition. However, litigation is subject to inherent uncertainties and,
therefore, we cannot assure you that this action or other actions that may be
pursued in the future will not materially harm our business, operating results
or financial condition.
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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 $58.3 million from the
sale of the 4,400,000 shares of common stock in this offering, at an assumed
initial public offering price of $11.00 per share, and from the sale of
1,368,524 shares of common stock in the private placement -- approximately $65.1
million if the underwriters exercise their over-allotment option in
full -- after deducting estimated underwriting discounts and commissions and
estimated offering expenses.
We expect to use the net proceeds from this offering for working capital
and general corporate purposes. We are not currently able to estimate the
allocation of proceeds specifically, 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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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 4,400,000
shares of our common stock in this offering at an assumed initial public
offering price of $11.00 per share, and 1,368,524 shares of common stock
in the private placement, 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, 33,143,313 shares issued and
outstanding (pro forma as adjusted)............... $ 9,601 $ 65,815 $124,127
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 82,674
-------- -------- ========
Total capitalization......................... $ 24,362 $ 24,362 82,674
======== ======== ========
</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, 2000 under our 1996 stock plan; and
- 200,000 additional shares of common stock available for issuance under
our 2000 employee stock purchase plan immediately following this
offering.
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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 $24.4
million, or approximately $0.89 per share of common stock. After giving effect
to the sale of 4,400,000 shares of common stock in this offering at an assumed
initial public offering price of $11.00 per share, and 1,368,524 shares of
common stock in the private placement, 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 $82.7 million, or $2.49
per share. This represents an immediate increase in pro forma net tangible book
value of $1.60 per share to existing stockholders and an immediate dilution in
pro forma net tangible book value of $8.51 per share to purchasers of common
stock in this offering, or 77% 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 and
the private placement................................. 1.60
------
Pro forma net tangible book value per share after this
offering and the private placement........................ 2.49
------
Dilution per share to new investors......................... $ 8.51
======
</TABLE>
The following table shows on a pro forma as adjusted basis at December 31,
1999, after giving effect to the sale of the 4,400,000 shares of common stock in
this offering at an assumed initial public offering price of $11.00 per share
and 1,368,524 shares of common stock in the private placement, before deducting
the 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 and the private placement:
<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 83% $ 45,172,000 42% $ 1.65
New investors.................. 4,400,000 13% 48,400,000 45% $11.00
Private placement investors.... 1,368,524 4% 14,000,000 13% $10.23
---------- --- ------------ ---
Total..................... 33,143,313 100% $107,572,000 100%
========== === ============ ===
</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 or the over-allotment option is exercised, there will be further
dilution to investors.
20
<PAGE> 23
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:
Cost of Delivered Learning fees......................... 29 363 855 570 1,455
Cost of Learning Solution services...................... 11 39 361 139 1,820
Content research and development........................ 251 886 1,657 968 2,775
Technology research and development..................... 299 665 1,005 715 2,365
Sales and marketing..................................... 188 1,400 2,970 2,038 7,218
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> <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:
Cost of Delivered Learning fees............................. $ 3 $ -- $ 98
Cost of Learning Solution services...................... 4 1 166
Content research and development........................ 4 0 46
Technology research and development..................... 13 1 230
Sales and marketing..................................... 25 1 607
General and administrative.............................. 9 -- 949
--- ------- --------
Total................................................. $58 $ 3 $ 2,096
=== ======= ========
</TABLE>
21
<PAGE> 24
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 content
research and development, sales and marketing activities, technology 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
courses have accounted for, and we expect will continue to account for, a
significant portion of our total revenues.
We generate revenues by delivering courses included in our course catalog
as well as delivering our customized e-learning courses to participants.
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 time period a participant has
access to 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. Currently, we have entered into revenue sharing
agreements with a limited number of customers who are reselling our courses to
their customers. These agreements have not generated material revenue to date.
We intend to recognize revenues under these agreements consistent with our
Delivered Learning fee revenue recognition policy.
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 as earned in accordance with Statement of Position (SOP)
81-1, Accounting for Performance of Construction Production-Type Contracts, as
development progresses on
22
<PAGE> 25
the percentage of completion method. We estimate the percentage of completion
based on actual development progress in relation to the course development plan,
not to exceed the ratio of actual costs incurred to total estimated costs to
complete the course development. Provisions for estimated losses on incomplete
contracts will be made on a contract by contract basis and recognized in the
period in which such losses become probable and can be reasonably estimated. To
date, there have been no such losses. Custom contracts typically call for
non-refundable payments due upon achievement of certain milestones in production
of the courses.
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 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 at least 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
23
<PAGE> 26
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, 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
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 Services
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, customers, co-developers and Internet
portals. 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
Cost of Delivered Learning Fees
Cost of Delivered Learning fees 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. Cost of Delivered
Learning fees increased from approximately $570,000 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 support from tutors, who
24
<PAGE> 27
provide timely online responses to participants. Headcount related to cost of
Delivered Learning fees increased from 4 employees at December 31, 1998 to 14
employees at December 31, 1999.
Cost of Learning Solution Services
Cost of Learning Solution services consists primarily of personnel related
costs to develop custom and tailored courses for a specific customer. Cost of
Learning Solution services increased from approximately $139,000 in the nine
months ended December 31, 1998 to $1.8 million in the nine months ended December
31, 1999, due to the need for additional headcount to develop custom courses.
Headcount related to cost of Learning Solution services increased from eight
employees at December 31, 1998 to 55 employees at December 31, 1999.
Content Research and Development
Content research and development expenses represent costs to develop
catalog courses, including personnel related costs, content acquisition costs,
royalties paid to authors and content editing. Content research and development
expenses increased from approximately $968,000 in the nine months ended December
31, 1998 to $2.8 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
catalog course development. Headcount in content research and development
increased from 20 employees at December 31, 1998 to 36 employees at December 31,
1999. All content research 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.
Technology Research and Development
Technology research and development expenses consist primarily of personnel
related costs in connection with product development efforts of underlying
technology for both Delivered Learning fees and Learning Solution services.
Technology 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 technology 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 technology research and
development is essential to our future success and expects these expenses to
increase substantially in future periods.
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 $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.
25
<PAGE> 28
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
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
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 attributable to an increase in the
number of learning solutions developed for, and released to, a larger base of
customers.
COSTS AND EXPENSES
Cost of Delivered Learning Fees
Cost of Delivered Learning fees 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
26
<PAGE> 29
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.
Cost of Learning Solution Services
Cost of Learning Solution services increased from approximately $11,000 in
fiscal 1997 to $39,000 in fiscal 1998 to $361,000 in fiscal 1999 due to the need
for additional headcount to develop custom courses. Headcount increased from
zero full time employees in fiscal 1997 to one employee in fiscal 1998 to 12
employees in fiscal 1999.
Content Research and Development
Content research and development expenses increased from approximately
$251,000 in fiscal 1997 to approximately $886,000 in fiscal 1998 to $1.7 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 10 employees at March 31, 1998 to 21 employees at
March 31, 1999.
Technology Research and Development
Technology 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.
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.
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.
27
<PAGE> 30
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:
Cost of Delivered Learning fees.......... 146 202 222 285 318 486 651
Cost of Learning Solution services....... 19 21 99 222 374 614 832
Content research and development......... 284 303 381 689 616 883 1,276
Technology research and development...... 219 271 225 290 443 922 1,000
Sales and marketing...................... 623 711 703 933 1,351 2,065 3,802
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 1,860 2,754 3,641 6,078 10,054
------- ------- ------- ------- ------- ------- -------
Interest and other income.................. 30 17 27 92 92 68 189
------- ------- ------- ------- ------- ------- -------
Net loss................................... $(1,142) $(1,272) $(1,365) $(1,972) $(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, attributable to increases in sales. 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
28
<PAGE> 31
to $1.2 million at March 31, 1999 to $3.7 million at December 31, 1999. Deferred
revenue results from customer 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 existing cash resources would not be sufficient to
finance our presently anticipated operating expenses and working capital
requirement for the next 12 months, unless we reduced anticipated expenses. To
the extent that this offering is unsuccessful, during the next 12 months we will
be required to seek alternative financing to fund our presently anticipated
operating expenses. 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 have
entered into stock purchase agreements for a private placement of 1,368,524
shares of our common stock, contingent upon completion of this public offering,
for an aggregate price of $14 million. Currently, we have no plans for any
follow-on public offering. However, we may seek to sell additional equity or
debt securities or secure a bank line of credit. Currently, we have no other
immediately available sources of liquidity. 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 completed an assessment of our information
technology systems for year 2000 problems in September 1999. We did not replace
any of our systems based on the results of our assessment. We experienced no
problems with our systems since the beginning of 2000. To date, we have incurred
expenses related to the year 2000 issue of less than $100,000, which were
included in operating expenses. We plan to continue to monitor our system
throughout the year to assess whether any problems develop. If any errors or
defects become evident, we may incur costs to resolve them, however, we do not
expect to make any material expenditures related to year 2000 compliance issues
in the future.
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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 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.
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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 customers 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
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programs. Based on interactions with our customers, we believe that these
investments have often yielded uncertain results and in many cases have failed
to address and satisfy strategic business objectives. To date, investment in
learning has consisted 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
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relationships with instructors and peers. Web-based technologies can also offer
real-time tracking of participant performance.
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 strategic resellers to develop revenue generating businesses around our
e-learning solutions. We have entered into revenue sharing agreements with some
of these customers and resellers. To date, revenues generated from these
arrangements have been insignificant, 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 identify and contract with people in the industry who are regarded as
experts in their fields. We either pay royalties to these content sources or pay
them on a per hour basis. In some cases, custom course development content is
provided to us by our customers' employees that are most knowledgeable about
their specific product or application. 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
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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 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. We maintain a
network of consultants and independent contractors who act as tutors and are
experts in the subject matter of our courses. 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, and our technology
enables us to accurately track response times and ensure that our tutors are
achieving their response time targets. 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.
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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 resource 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 e-learning
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 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 a representative sampling of how several of our customers
have implemented our e-learning solutions:
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.
We have entered into an agreement with KPMG to jointly
develop and deliver Internet learning solutions to large
corporations. For the three months ended December 31, 1999,
we recognized $2.2 million in revenues from KPMG.
</TABLE>
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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.
For the nine months ended December 31, 1999, we recognized
revenue of $451,000 from Adobe.
</TABLE>
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.
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
IDs and passwords to a New Horizons branded learning
environment and courses.
For the nine months ended December 31, 1999, we recognized
revenue of $183,000 from New Horizons.
</TABLE>
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TENET HEALTHCARE CORPORATION -- a nationwide provider of health care
services which owns or operates 113 acute care hospitals and related businesses
employing approximately 118,000 employees in 17 states.
<TABLE>
<S> <C>
Challenge: Provide ongoing professional education on nursing and
hospital administration to a geographically dispersed
workforce.
We will design, create and deliver at least 500 hours of
Solution: e-learning courses on various health care topics relating to
nursing and hospital administration, with the objective of
enabling Tenet to more effectively recruit, educate and
retain highly qualified professionals.
Our agreement with Tenet was entered into in January 2000,
and we will recognize revenues over approximately the next
two years.
</TABLE>
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. CUSTOMER ADVOCACY
New Horizons Computer Learning Charles Schwab & Co., Inc.
Centers, Inc. Intel Corporation
Ryder TRS J.P. Morgan & Co. Incorporated
Silicon Graphics, Inc. Lawson Software
Sun Microsystems, Inc. Optimark Technologies, Inc.
The Alliance for Employee Growth Texas Instruments Incorporated
and Development, Inc.
</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. Customer advocacy customers use our products and services to
provide e-learning to their external
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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.
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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 learning delivery system. The
following diagram depicts the architecture of our end-to-end e-learning
solutions.
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[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,
customers and co-developers and Internet portals. 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
firms, including KPMG and Cambridge Technology Partners work with us to jointly
sell our 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 portals, including Intraware and Fatbrain,
resell our courses as components of their e-learning 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
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<PAGE> 45
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.
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 currently the subject of a lawsuit with one of our former employees
which was filed in the Superior Court of the State of California for the County
of San Francisco. The former employee is seeking commissions and pursuing other
claims against us and our executives. After consultation with our attorneys, we
believe that this suit is without merit and we intend to vigorously defend every
claim. If this litigation is decided adversely to us, we may be required to pay
damages to the plaintiff.
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<PAGE> 46
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
Jon C. Madonna............................ 56 Director
Roderick C. McGeary....................... 49 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
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<PAGE> 47
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 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
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<PAGE> 48
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.
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.
Jon C. Madonna has been a member of our board of directors since January
2000. Since December 1998, Mr. Madonna has been the President and Chief
Executive Officer of Carlson Wagonlit Travel, a leading business travel and
expense management company. From January 1997 to October 1998, Mr. Madonna was
Vice Chairman of The Travelers Group, a financial services and insurance
company, and Vice Chairman of Travelers Property and Casualty and Chief
Executive Officer of the Personal Lines business. Previously, Mr. Madonna was
with KPMG Peat Marwick for 28 years, where he held numerous senior leadership
positions including Chairman, KPMG International from July 1995 to January 1998
and Chairman and Chief Executive Officer, KPMG Peat Marwick, USA from 1990 to
October 1996. Mr. Madonna is also a director of Neuberger Berman, Inc., an
independent investment advisor and Tidewater, Inc., a provider of services and
equipment to the offshore energy industry. Mr. Madonna holds B.S. from
University of San Francisco.
Roderick C. McGeary has been a member of our board of directors since
January 2000. Mr. McGeary is a national managing partner of KPMG Consulting, an
international consulting
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<PAGE> 49
organization, a part of KPMG Peat Marwick LLP, and a member of KPMG Consulting's
management committee. Mr. McGeary joined KPMG in 1972 as an audit professional
and was elected partner in 1981. In January 1994, Mr. McGeary was named
partner-in-charge of KPMG's West Coast Systems practice and in 1997, he was
named a member of a two-person executive team that directs all KPMG Consulting
services. Mr. McGeary received his B.S. from Lehigh University.
BOARD OF DIRECTORS
Our bylaws currently authorize seven 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 directors, Messrs. Goettner, Madonna and McGeary
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, 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
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<PAGE> 50
when they first join our board. In January 2000, we granted Messrs. Madonna and
McGeary an option to purchase 40,000 shares of our common stock at a per share
exercise price of $9.00.
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.
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
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<PAGE> 51
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 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,
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<PAGE> 52
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 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.
2000 Employee Stock Purchase Plan
Our board of directors adopted our 2000 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
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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.
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.
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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 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> 55
TRANSACTIONS WITH RELATED PARTIES
PURCHASES OF STOCK
We sold 1,544,400 shares of our common stock to Peter J. Goettner, our
President and Chief Executive Officer, 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> 56
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> 57
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 33,143,313
shares of common stock outstanding after completion of this offering and the
private placement. 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% 27.3%
H&Q Venture Associates, LLC
One Bush Street
San Francisco, CA 94104
TI Ventures, L.P.............................. 3,085,472 11.3 9.3
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 9.0
H&Q Venture Associates, LLC
One Bush Street
San Francisco, CA 94104
Adobe Ventures, L.P.(3)....................... 2,948,990 10.8 8.9
H&Q Venture Associates, LLC
One Bush Street
San Francisco, CA 94104
The Walden Group(4)........................... 2,700,000 9.9 8.2
750 Battery Street, Suite 700
San Francisco, CA 94111
Steven L. Eskenazi(5)......................... 2,700,000 9.9 8.2
The Walden Group
750 Battery Street, Suite 700
San Francisco, CA 94111
Torstar Corporation........................... 2,076,923 7.6 6.3
One Young Street, Sixth Floor
Toronto, Canada M5E1P9
Attn: David Wetherald
</TABLE>
55
<PAGE> 58
<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).......................... 1,604,087 5.9 4.8
Steven C. Zahm(7)............................. 1,411,129 5.2 4.3
Umberto Milletti(8)........................... 1,245,762 4.5 3.7
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).......................... 16,297,928 58.9% 48.7%
</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 53,124 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.
(11) Includes 312,916 stock options exercisable within 60 days of December 31,
1999.
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<PAGE> 59
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. There will be 33,143,313 shares
of our common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and assuming no exercise after December 31, 1999 of
outstanding options or warrants, after giving effect to the sale of the shares
of common stock in this offering and the private placement. 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.
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<PAGE> 60
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.
In January 2000, we entered into a stock purchase agreement with GE Capital
Equity Investments, Inc., under which, contingent upon and immediately following
the completion of this offering, GE Capital agreed to invest $10,000,000 in a
private placement of shares of our common stock at a price per share equal to
93% of the initial public offering price per share. In January 2000, we also
entered into a stock purchase agreement with Tenet Healthcare under which,
contingent upon and immediately following the completion of this offering, Tenet
Healthcare agreed to invest $4,000,000 in a private placement of shares of our
common stock at a price per share equal to 93% of the initial public offering
price per share.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
After this offering, holders of 22,814,590 shares of common stock
outstanding prior to the private placement and this offering (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.
In connection with the private placement of securities with GE Capital, we
have granted registration rights to GE Capital that entitle GE Capital to
require us to register under the Securities Act the 977,517 shares it will
purchase in the private placement on the 180(th) day following the date of this
prospectus.
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.
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<PAGE> 61
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.
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.
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<PAGE> 62
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.
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<PAGE> 63
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 and the private placement, we will have
outstanding 33,143,313 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 4,400,000 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 28,743,313 shares of common
stock held by existing stockholders and investors in the private placement are
"Restricted Shares" as Rule 144 defines that term. These 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.
Assuming the initial public offering price is $11.00 per share, a private
placement of 1,368,524 shares will occur immediately following the closing of
this offering. These shares will become eligible for sale in the public market
one year from the date of this prospectus. GE Capital Equity Investments, one of
the purchasers in the private placement, has registration rights for the shares
purchased in the private placement. For additional information regarding these
registration rights, please see "Description of Capital Stock -- Registration
Rights."
The remaining 27,374,789 shares of our common stock will be eligible for
sale in the public market approximately when indicated in the following table:
<TABLE>
<S> <C>
At the effective date....................................... 0
181 days after the effective date........................... 23,377,182
More than 181 days after the effective date................. 3,997,607
</TABLE>
All of the shares eligible for sale 181 days after the effective date are
subject to volume limitations under Rule 144, except 8,560,662 shares eligible
for future sale under Rule 144(k) and 588,924 shares eligible for sale under
Rule 701.
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
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<PAGE> 64
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
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
23,792,107 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.
62
<PAGE> 65
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, Chase
Securities Inc., 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......................
Chase Securities Inc........................................
FleetBoston Robertson Stephens Inc..........................
---------
Total............................................. 4,400,000
=========
</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 660,000 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
underwriting fee will be determined in negotiations between us and the
underwriters at the time of pricing. The amount of the fee, which will be
calculated as a percentage of the initial public offering price, is not yet
known, but we do not expect it to exceed 7% of the gross proceeds of the
offering. 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>
The principal components of the offering expenses payable by us, which are
estimated at $700,000, will include the fees and expenses of our accountants and
attorneys, the fees of our registrar
63
<PAGE> 66
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.
Chase Securities Inc., 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 persons associated with some of our customers and suppliers, who have
expressed an interest in purchasing common stock in this offering. The
underwriters may also reserve shares to sell to customers and potential
customers. The number of shares available for sale to the general public in this
offering will be reduced to the extent these persons or entities 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 Chase Securities Inc., 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.
The decision of Chase Securities Inc. to distribute the common stock was made
independent of H&Q Digital Think Investors, L.P. and Hambrecht & Quist Employee
Venture Fund, LP II, which entities had no involvement in determining whether or
when to distribute our common stock in this offering or the terms of this
offering. Chase Securities Inc. will not receive any benefit from this offering
other than its portion of the underwriting fee as paid by us.
64
<PAGE> 67
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;
- 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.
65
<PAGE> 68
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.
66
<PAGE> 69
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.
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.
67
<PAGE> 70
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> 71
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.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
June 4, 1999
(December 2, 1999 as to Note 11)
F-2
<PAGE> 72
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> 73
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:
Cost of Delivered Learning fees........ 29,030 363,271 854,490 569,412 1,454,383
Cost of Learning Solution services..... 10,986 38,870 361,280 138,137 1,819,828
Content research and development....... 250,578 886,617 1,657,084 968,475 2,775,404
Technology research and development.... 299,128 664,922 1,005,069 715,068 2,365,032
Selling and marketing.................. 187,915 1,399,897 2,970,092 2,037,680 7,218,351
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:
Cost of Delivered Learning fees...... -- -- $ 3,116 $ -- $ 98,472
Cost of Learning Solution services... -- -- 3,960 828 166,109
Content research and development..... -- -- 3,491 206 45,915
Technology research and
development........................ -- -- 12,770 1,223 230,101
Selling and marketing................ -- -- 25,240 820 606,779
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> 74
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> 75
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> 76
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. In the nine months ended December 31, 1999, one customer accounted for
34% 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 as earned
in accordance with Statement of Position (SOP) 81-1, Accounting for Performance
of Construction/ Production-Type Contracts, as development progresses on the
percentage of completion method. We
F-7
<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)
estimate the percentage of completion based on actual development progress in
relation to the course development plan, not to exceed the ratio of actual costs
incurred to total estimated costs to complete the course development. Provisions
for estimated losses on incomplete contracts will be made on a contract by
contract basis and recognized in the period in which such losses become probable
and can be reasonably estimated. To date, there have been no such losses. Custom
contracts typically call for non-refundable payments due upon achievement of
certain milestones in production of the courses. Deferred revenues represent
customer prepayments for both delivered learning fees and learning solution
services.
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.
Such expenses include web site development costs, which to date have not met the
capitalization criteria of SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use.
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 as
noncompensatory 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,
F-8
<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)
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.
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> 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)
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.
F-10
<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)
Changes in each class of preferred stock are as follows:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
---------- ---------- -----------
<S> <C> <C> <C>
Balances, April 22, 1996 (inception)............. $ -- $ -- $ --
Issuances of Series A............................ 1,592,000
Accretion of redemption value.................... 278,055
---------- ---------- -----------
Balances, March 31, 1997......................... 1,870,055 -- --
Issuances of Series B............................ 5,790,001
Accretion of redemption value.................... 467,513 1,201,624
---------- ---------- -----------
Balances, March 31, 1998......................... 2,337,568 6,991,625 --
Issuances of Series C............................ 11,736,458
Accretion of redemption value.................... 584,392 1,719,155 1,213,989
---------- ---------- -----------
Balances, March 31, 1999......................... $2,921,960 $8,710,780 $12,950,447
========== ========== ===========
</TABLE>
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 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.
- 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,
F-11
<PAGE> 81
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)
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-12
<PAGE> 82
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 22, 1996 (inception)........................ -- $ --
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-13
<PAGE> 83
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
F-14
<PAGE> 84
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)
recorded $180,000 of deferred stock compensation related to the issuance of
preferred stock at less 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
F-15
<PAGE> 85
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)
participants' annual compensation. The Company has not provided matching
contributions for any of the periods presented.
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 2000 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-16
<PAGE> 86
LOGO
<PAGE> 87
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
II-1
<PAGE> 88
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.
(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* 2000 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
</TABLE>
II-2
<PAGE> 89
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
10.7* DigitalThink Course Agreement dated March August 19, 1999
between DigitalThink and KPMG LLP
DigitalThink and KPMG LLP
10.8** Services Agreement between DigitalThink and Exodus
Communications, Inc.
10.9** Course Development Agreement between DigitalThink and Texas
Instruments, Inc.
10.10** Strategic Reseller Agreement between DigitalThink and KPMG
LLP
10.11 Stock Purchase Agreement dated January 21, 2000 between
DigitalThink and GE Capital Equity Investments
10.12 Stock Purchase Agreement dated January 21, 2000 between
DigitalThink and Tenet Healthcare Corporation
10.13 Registration Rights Agreement between DigitalThink and GE
Capital Equity Investments
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.
(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> 90
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 2nd day of
February 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 February 2, 2000
- ------------------------------------------ and Chairman of the Board of
Peter J. Goettner Directors (principal executive
officer)
/s/ MICHAEL W. POPE Vice President, Chief Financial February 2, 2000
- ------------------------------------------ Officer (principal financial and
Michael W. Pope accounting officer)
* Director February 2, 2000
- ------------------------------------------
E. Follett Carter
* Director February 2, 2000
- ------------------------------------------
Steve L. Eskenazi
* Director February 2, 2000
- ------------------------------------------
Samuel D. Kingsland
* Director February 2, 2000
- ------------------------------------------
William H. Lane, III
*By: /s/ MICHAEL W. POPE February 2, 2000
-----------------------------------
Michael W. Pope
Attorney-in-fact
</TABLE>
II-4
<PAGE> 91
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael W. Pope, his attorney-in-fact,
with the power of substitution, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to sign any registration
statement for the same offering covered by this Registration Statement that is
to be effective upon filing pursuant to Rule 462(b) promulgated under the
Securities Act of 1933, as amended, and all post-effective amendments thereto,
and to file the same, with all exhibits thereto and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that such attorneys-
in-fact and agents or any of them, or his or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JON C. MADONNA Director February 2, 2000
- ------------------------------------------
Jon C. Madonna
Director February 2, 2000
- ------------------------------------------
Roderick C. McGeary
</TABLE>
II-5
<PAGE> 92
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 April 22, 1996 (inception) through
March 31, 1997 and the years ended March 31, 1998 and 1999, and have issued our
report thereon dated June 4, 1999 (December 2, 1999 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.
/s/ DELOITTE & TOUCHE LLP
June 4, 1999
San Jose, California
S-1
<PAGE> 93
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> 94
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* 2000 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
10.8** Services Agreement between DigitalThink and Exodus
Communications, Inc.
10.9** Course Development Agreement between DigitalThink and Texas
Instruments, Inc.
10.10** Strategic Reseller Agreement between DigitalThink and KPMG
LLP
10.11 Stock Purchase Agreement dated January 21, 2000 between
DigitalThink and GE Capital Equity Investments
10.12 Stock Purchase Agreement dated January 21, 2000 between
DigitalThink and Tenet Healthcare Corporation
10.13 Registration Rights Agreement between DigitalThink and GE
Capital Equity Investments
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 10.11
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (this "Agreement"), is made as of
January 21, 2000, by and between DigitalThink, Inc., a Delaware corporation
(the "Company) and GE Capital Equity Investments, Inc. ("Purchaser").
WHEREAS, the Purchaser desires to purchase common stock, $.001 par value
per share, of the Company (the "Common Stock"); and
WHEREAS, the Company desires to issue Common Stock to the Purchaser and,
in order to induce the Purchaser to purchase the Shares, desires to grant to
Purchaser the registration rights with respect to the Shares set forth in the
Registration Rights Agreement between the Company and Purchaser dated as of even
date herewith (the "Share Registration Rights Agreement");
NOW, THEREFORE, in consideration of the promises and the representations,
warranties and agreements set forth herein, the parties hereto agree as follows:
1. Purchase of Shares. Subject to the terms and conditions of this
Agreement, the Company shall sell to Purchaser, and Purchaser shall purchase
from the Company, on the Closing Date (as defined in Section 2), the number of
shares of the Company's Common Stock obtained by dividing (a) Ten Million
Dollars ($10,000,000) by (b) 93% of the per share price paid by the public for
the Company's Common Stock in the Company's initial public offering of Common
Stock (the "IPO"). Such purchase price per share shall be the "Purchase Price,"
and each share of Common Stock purchased hereunder shall be a "Share" (and,
collectively, the "Shares"). The aggregate Purchase Price for the Shares shall
be payable on the Closing Date by wire transfer of immediately available funds.
On the Closing Date, upon receipt of such cash consideration, the Company shall
deliver to Purchaser a certificate or certificates representing the Shares,
registered in the name of Purchaser or its nominee.
2. The Closing. The closing of the transactions contemplated hereby (the
"Closing") shall take place concurrently with the closing of the IPO at the
offices of counsel to the Company, subject to the conditions precedent set forth
in Section 5 of this Agreement having been satisfied or waived, or at such other
time and/or place and/or on such date as the parties may mutually agree (the
"Closing Date").
3. Representations and Warranties of the Company. The Company hereby
represents and warrants to Purchaser as follows:
(a) Organization and Good Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its organization and has all requisite corporate power and authority to carry on
its business as now conducted. The Company is duly qualified to transact
business and is in good standing in each jurisdiction in which the failure to so
qualify could be reasonably expected to have a material adverse effect on the
condition (financial or other), business, properties, or results of operations
of the Company (a "Material Adverse Effect").
<PAGE> 2
(b) Authorization; Enforceability. The Company, its officers, directors
and stockholders have taken all action necessary to authorize, execute and
deliver this Agreement and to consummate the transactions contemplated herein.
This Agreement and the Share Registration Rights Agreement each has been duly
executed by the Company and is a valid and binding obligation of the Company,
enforceable against it in accordance with its terms, except insofar as
enforceability may be affected by bankruptcy, insolvency or similar laws
affecting creditor's rights generally and the availability of any particular
equitable remedy.
(c) Valid Issuance of Shares. The Shares (i) are duly authorized by the
Company's articles of incorporation, (ii) are duly authorized to be issued by
the Company's board of directors, (iii) when issued, sold and delivered in
accordance with the terms of this Agreement, will be duly and validly issued,
fully paid and nonassessable and will be free of any preemptive rights, taxes,
security interests, adverse claims or restrictions on transfer, other than
restrictions on transfer under applicable state and federal securities laws.
Assuming the accuracy of the representations and warranties contained in Section
4 hereof, the offer and sale of the Shares as contemplated hereby are exempt
from registration under the Securities Act of 1933, as amended (the "Securities
Act") and under applicable state securities and "blue sky" laws, as currently in
effect.
(d) Compliance with Other Documents. Neither the execution or delivery of
this Agreement or the Share Registration Rights Agreement, the consummation of
the transactions contemplated hereby and thereby, nor the fulfillment of or
compliance with the terms and conditions hereof or thereof conflict with or will
result in a breach or violation of or default under any of the terms, conditions
or provisions of (i) the Company's organizational documents or (ii) any
agreement, order, judgment, decree, arbitration award, statute, regulation or
instrument to which it is a party or by which it or its assets are bound.
(e) No Consents. Other than consents obtained as of the date hereof, no
consent or approval, authorization, order, registration or qualification of or
with any governmental entity or any other person is required for the execution
and delivery of this Agreement and the Share Registration Rights Agreement and
the consummation of the transactions contemplated hereby and thereby.
(f) Registration Statement. The Company's registration statement on Form
S-1, as amended (Registration No. 333- 92429) (the "Registration Statement") and
each amendment or supplement thereto did not or will not, at the time filed with
the Securities and Exchange Commission, and will not, at the time it becomes
effective, include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(g) Title to Property and Assets. The Company owns its property and assets
free and clear of all mortgages, liens, loans and encumbrances, except such
encumbrances and liens that arise in the ordinary course of business and do not
materially impair the Company's ownership or use of such property or assets.
With respect to the property and assets it leases, the Company is in compliance
with such leases and, to the best of its knowledge, holds a valid leasehold
interest free of any liens, claims or encumbrances.
2
<PAGE> 3
(h) Capitalization. The Company's capitalization information contained in
the Registration Statement is complete and accurate as of the dates specified
therein.
(i) Litigation. Except as disclosed in the Registration Statement, there
are no actions, proceedings or investigations pending against the Company, that,
either individually or in the aggregate, could be reasonably expected to have a
Material Adverse Effect.
(j) Intellectual Property. Except as disclosed in the Registration
Statement, the Company owns, possesses or can acquire on reasonable terms,
adequate trademarks, trade names and other rights to inventions, know-how,
patents, copyrights, confidential information and other intellectual property
(collectively "Intellectual Property Rights") necessary to conduct the business
now operated by it, or presently employed by it, and has not received any notice
of infringement of or conflict with asserted rights of others with respect to
any Intellectual Property Rights.
(k) Financial Statements. The financial statements included in the
Registration Statement present fairly the financial position of the Company as
of the dates shown and its results of operations and cash flows for the periods
shown, and, except as otherwise disclosed in the Registration Statement, such
financial statements have been prepared in conformity with the generally
accepted accounting principles in the United States, and such principles have
been applied on a consistent basis.
(l) Changes. Except as disclosed in the Registration Statement, since the
date of the latest audited financial statement included in the Registration
Statement, there has been no change, development or event that has had or could
reasonably be expected to have Material Adverse Effect.
(m) Taxes. The Company has filed on a timely basis all tax returns and
reports (including information returns and reports) as required by law. These
returns and reports are true and correct in all material respects. The Company
has paid all taxes and other assessments due, except those contested by it in
good faith and except to the extent that a reserve has been reflected on the
Company's financial statements in accordance with generally accepted accounting
principles. The provision for taxes of the Company as shown in the Company's
financial statements is adequate for taxes due or accrued as of the date
thereof.
4. Representations and Warranties by Purchaser. Purchaser hereby
represents and warrants to the Company as follows:
(a) Authorization. This Agreement constitutes the valid and legally
binding obligation of Purchaser enforceable against it in accordance with its
terms, except insofar as enforceability may be affected by bankruptcy,
insolvency or similar laws affecting creditor's rights generally and the
availability of any particular equitable remedy.
(b) Accredited Investor. Purchaser is an "accredited investor" as such
term is defined in Rule 501(a) of Regulation D promulgated under the Securities
Act.
(c) Investigation. Purchaser has carefully reviewed this Agreement and has
had the opportunity to make detailed inquiry concerning the Company, its
business and its personnel.
3
<PAGE> 4
Purchaser acknowledges that it has had the opportunity to ask questions of and
receive answers from the Company that Purchaser considers necessary for purposes
of purchasing the Shares. The foregoing, however, does not limit or modify the
representations and warranties of the Company in Section 3 of this Agreement or
the right of Purchaser to rely thereon.
(d) Restricted Securities. Purchaser understands that the Shares are
characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable regulations
such securities may be resold only if they are subsequently registered under the
Securities Act or an exemption from such registration is available. Purchaser
represents that it is familiar with SEC Rule 144, as presently in effect, and
understands the resale limitations imposed thereby and by the Act.
(e) Purchase for Own Account. Purchaser is acquiring the Shares for
Purchaser's own account for investment and not with a view to, or for sale in
connection with, any distribution thereof in violation of the Securities Act.
Purchaser has no present agreement, understanding or arrangement to subdivide,
sell, assign or otherwise dispose of all or any part of the Shares.
5. Conditions to the Closing. The obligation of each of the parties hereto
to consummate the transactions contemplated hereby is subject to (i) the
concurrent consummation of the IPO, (ii) there being in effect no law, rule,
regulation, order or injunction which prohibits or makes illegal the
consummation of the transaction contemplated hereby and (iii) (a) in the case of
Purchaser, the accuracy as of the date when made and as of the Closing Date (as
if they had been made on and as of the Closing Date) of the representations and
warranties of the Company set forth herein and (b) in the case of the Company,
the accuracy as of the date when made and as of the Closing Date (as if they had
been made on and as of the Closing Date) of the representations and warranties
of Purchaser set forth herein.
6. Restrictions on Transfer.
(a) Agreement Not to Transfer. The Shares and the rights under this
Agreement may be sold, pledged, hypothecated, assigned, conveyed, transferred or
otherwise disposed of (each, a "Transfer") only (i) pursuant to an effective
registration statement under the Securities Act or pursuant to an exemption from
registration under the Securities Act in accordance with Rule 144 or another
available exemption or (ii) to the Company.
(b) Restrictive Legend. Unless and until otherwise permitted by this
Section 6, each certificate representing the Shares and any certificate issued
at any time upon transfer of, or in exchange for or replacement of, any
certificate bearing the legend set forth below shall be stamped or otherwise
imprinted with a legend in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY
STATE. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD,
PLEDGED, HYPOTHECATED, ASSIGNED, CONVEYED, TRANSFERRED OR OTHERWISE DISPOSED OF,
EXCEPT IN
4
<PAGE> 5
COMPLIANCE WITH SUCH ACT AND LAWS. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF THE STOCK PURCHASE
AGREEMENT, DATED AS OF JANUARY 21, 2000. COPIES OF SUCH AGREEMENT MAY BE
OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF DIGITALTHINK, INC."
(c) Termination of Restrictions. The restrictions imposed by this Section
6 upon the transferability of the Shares shall cease and terminate as to any
particular certificate evidencing the Shares or shares of capital stock when (i)
such certificate or Shares shall have been effectively registered under the
Securities Act and sold by the holder thereof in accordance with such
registration or (ii) in the opinion of counsel for Purchaser (if such opinion is
reasonably satisfactory in form and substance to the Company), such restrictions
are no longer required in order to ensure compliance with the Securities Act.
Whenever the restrictions imposed by this Section 6 shall terminate as to any
certificate of Shares, as hereinabove provided, the holder thereof shall be
entitled to receive from the Company without expense, a new certificate for
Shares not bearing the restrictive legend set forth in Subsection (b) of this
Section.
7. Registration Rights.
(a) In consideration for the purchase of the Shares hereunder, and as an
inducement to the Purchaser's purchase of the Shares, the Company shall grant
the Purchaser the registration rights with respect to the Shares set forth in
the Share Registration Rights Agreement.
(b) The registration rights granted to Purchaser pursuant to the Share
Registration Rights Agreement shall be in addition to, and not in lieu of, the
registration rights granted to Purchaser and certain other investors pursuant to
the Restated Investor Rights Agreement dated as of November 10, 1999 between the
Company and the investors party thereto, including Purchaser, as amended
pursuant to that certain amendment dated as of November 17, 1999 between the
Company and the investors party thereto, including Purchaser (as so amended, the
"Existing Registration Rights Agreement").
(d) Without limiting the representation set forth in Section 3(e) hereof,
the Company hereby represents and warrants to the Purchaser that it has obtained
all required consents from the parties to the Existing Registration Rights
Agreement to the granting of the registration rights to Purchaser set forth in
the Share Registration Rights Agreement.
8. Miscellaneous.
(a) Supplements and Amendments. This Agreement may be supplemented,
amended or waived only by a subsequent writing signed by each of the parties
hereto.
(b) Use of Purchaser's Name. The Company shall not, unless prior written
consent is given by Purchaser (which consent shall not to be unreasonably
withheld), create or disseminate any publicity using the name of Purchaser or
any of its affiliates, or any trade name or mark thereof, except, and only to
the extent, as may be required by law or legal process, including, without
limitation, federal and state securities laws and filings with the Securities
and Exchange Commission.
5
<PAGE> 6
(c) Counterparts. This Agreement may be executed in any number of
counterparts and each such counterpart shall for all purposes be deemed to be an
original, and all such counterparts shall together constitute but one and the
same instrument.
(d) Successors and Assigns. Except as otherwise provided herein, this
Agreement and all of the terms and provisions hereof shall be binding upon and
inure to the benefit of the parties and their respective heirs, executors,
administrators, successors, trustees, legal representatives and assigns.
(e) Entire Agreement. This Agreement and the Registration Rights Agreement
are intended by the parties as the final expression of their agreement and
intended to be a complete and exclusive statement of the agreement and
understanding of the parties hereto in respect of the subject matter contained
herein. There are no restrictions, promises, warranties or undertakings, other
than those set forth or referred to herein or therein with respect to the
registration rights granted by the Company with respect to the securities sold
pursuant to the Purchase Agreement. The terms of this Agreement and the
Registration Rights Agreement supersede any directly inconsistent terms of any
prior agreements between the parties hereto, including without limitation the
terms of that certain letter agreement dated as of November 22, 1999 between the
Company, the Purchaser and Credit Suisse First Boston Corporation, that would
apply to the shares of Common Stock purchased hereunder.
(f) Applicable Law; Venue. This Agreement shall be deemed to be a contract
made under the laws of the State of New York and for all purposes shall be
construed in accordance with the laws of said State applicable to contracts made
and to be performed wholly within said State without regard to the conflict of
law principles thereof. Venue for any action to enforce the provisions of this
agreement shall be exclusive in the federal and state courts located in the City
of New York in the State of New York.
(g) Waiver of Trial by Jury. EACH OF THE PARTIES HERETO HEREBY (i) AGREES
NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND (ii)
WAIVES SUCH RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL
NOW OR HEREAFTER EXIST AS TO ANY ISSUE WITH RESPECT TO ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. Such waiver
of right to trial by jury is separately given, knowingly and voluntarily, by
each of the parties hereto, and this waiver is intended to encompass
individually each instance and each issue as to which the right to a jury trial
would otherwise accrue. Each of the parties hereto is hereby authorized and
requested to submit this Agreement to any court having jurisdiction, so as to
serve as conclusive evidence of the other party's waiver of the right to trial
by jury. Further, each of the parties hereto hereby certifies that no
representative or agent of such party has represented, expressly or otherwise,
to each of the parties hereto that the parties will not seek to enforce this
waiver of right to trial by jury.
(h) Severability. Every provision of this Agreement is intended to be
severable. If any term or provision hereof is illegal or invalid for any reason
whatsoever, such illegality or invalidity shall not affect the validity of the
remainder of the Agreement.
6
<PAGE> 7
(i) Non-Waiver. No provision of this Agreement shall be deemed to have
been waived, unless such waiver is contained in a written notice given to the
party claiming such waiver has occurred, and no such waiver shall be deemed to
be a waiver of any other or further obligation or liability of the party or
parties in whose favor the waiver was given.
(j) Expenses. Each party shall pay its own expenses and costs incurred or
to be incurred in negotiating, closing and carrying out the transactions
contemplated hereby, irrespective of whether such transactions are actually
consummated.
(k) Termination Prior to the Closing.This Agreement shall terminate prior
to the Closing if the Closing does not occur within 40 calendar days from the
date hereof.
[SIGNATURES COMMENCE ON THE FOLLOWING PAGE]
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have duly executed this Stock
Purchase Agreement as of the date first above written.
THE COMPANY:
DIGITALTHINK, INC.
By:
-----------------------------------
Name:
Title:
PURCHASER:
GE CAPITAL EQUITY INVESTMENTS, INC.
By:
-----------------------------------
Name:
Title:
ACKNOWLEDGED:
(with respect to Section 8(e))
CREDIT SUISSE FIRST BOSTON CORPORATION
By:
-----------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.12
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (this "Agreement"), is made as of
January 21, 2000, by and between DigitalThink, Inc., a Delaware corporation
(the "Company) and Tenet Healthcare Corporation, Inc. ("Purchaser").
WHEREAS, the Purchaser desires to purchase common stock, $.001 par value
per share, of the Company (the "Common Stock"); and
WHEREAS, the Company desires to issue Common Stock to the Purchaser and,
in order to induce the Purchaser to purchase the Shares, desires to grant to
Purchaser the registration rights with respect to the Shares set forth in the
Registration Rights Agreement between the Company and Purchaser dated as of even
date herewith (the "Share Registration Rights Agreement");
NOW, THEREFORE, in consideration of the promises and the representations,
warranties and agreements set forth herein, the parties hereto agree as follows:
1. Purchase of Shares. Subject to the terms and conditions of this
Agreement, the Company shall sell to Purchaser, and Purchaser shall purchase
from the Company, on the Closing Date (as defined in Section 2), the number of
shares of the Company's Common Stock obtained by dividing (a) Four Million
Dollars ($4,000,000) by (b) 93% of the per share price paid by the public for
the Company's Common Stock in the Company's initial public offering of Common
Stock (the "IPO"). Such purchase price per share shall be the "Purchase Price,"
and each share of Common Stock purchased hereunder shall be a "Share" (and,
collectively, the "Shares"). The aggregate Purchase Price for the Shares shall
be payable on the Closing Date by wire transfer of immediately available funds.
On the Closing Date, upon receipt of such cash consideration, the Company shall
deliver to Purchaser a certificate or certificates representing the Shares,
registered in the name of Purchaser or its nominee.
2. The Closing. The closing of the transactions contemplated hereby (the
"Closing") shall take place concurrently with the closing of the IPO at the
offices of counsel to the Company, subject to the conditions precedent set forth
in Section 5 of this Agreement having been satisfied or waived, or at such other
time and/or place and/or on such date as the parties may mutually agree (the
"Closing Date").
3. Representations and Warranties of the Company. The Company hereby
represents and warrants to Purchaser as follows:
(a) Organization and Good Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its organization and has all requisite corporate power and authority to carry on
its business as now conducted. The Company is duly qualified to transact
business and is in good standing in each jurisdiction in which the failure to so
qualify could be reasonably expected to have a material adverse effect on the
condition (financial or other), business, properties, or results of operations
of the Company (a "Material Adverse Effect").
<PAGE> 2
(b) Authorization; Enforceability. The Company, its officers, directors
and stockholders have taken all action necessary to authorize, execute and
deliver this Agreement and to consummate the transactions contemplated herein.
This Agreement and the Share Registration Rights Agreement each has been duly
executed by the Company and is a valid and binding obligation of the Company,
enforceable against it in accordance with its terms, except insofar as
enforceability may be affected by bankruptcy, insolvency or similar laws
affecting creditor's rights generally and the availability of any particular
equitable remedy.
(c) Valid Issuance of Shares. The Shares (i) are duly authorized by the
Company's articles of incorporation, (ii) are duly authorized to be issued by
the Company's board of directors, (iii) when issued, sold and delivered in
accordance with the terms of this Agreement, will be duly and validly issued,
fully paid and nonassessable and will be free of any preemptive rights, taxes,
security interests, adverse claims or restrictions on transfer, other than
restrictions on transfer under applicable state and federal securities laws.
Assuming the accuracy of the representations and warranties contained in Section
4 hereof, the offer and sale of the Shares as contemplated hereby are exempt
from registration under the Securities Act of 1933, as amended (the "Securities
Act") and under applicable state securities and "blue sky" laws, as currently in
effect.
(d) Compliance with Other Documents. Neither the execution or delivery of
this Agreement or the Share Registration Rights Agreement, the consummation of
the transactions contemplated hereby and thereby, nor the fulfillment of or
compliance with the terms and conditions hereof or thereof conflict with or will
result in a breach or violation of or default under any of the terms, conditions
or provisions of (i) the Company's organizational documents or (ii) any
agreement, order, judgment, decree, arbitration award, statute, regulation or
instrument to which it is a party or by which it or its assets are bound.
(e) No Consents. Other than consents obtained as of the date hereof, no
consent or approval, authorization, order, registration or qualification of or
with any governmental entity or any other person is required for the execution
and delivery of this Agreement and the Share Registration Rights Agreement and
the consummation of the transactions contemplated hereby and thereby.
(f) Registration Statement. The Company's registration statement on Form
S-1, as amended (Registration No. 333- 92429) (the "Registration Statement") and
each amendment or supplement thereto did not or will not, at the time filed with
the Securities and Exchange Commission, and will not, at the time it becomes
effective, include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(g) Title to Property and Assets. The Company owns its property and assets
free and clear of all mortgages, liens, loans and encumbrances, except such
encumbrances and liens that arise in the ordinary course of business and do not
materially impair the Company's ownership or use of such property or assets.
With respect to the property and assets it leases, the Company is in compliance
with such leases and, to the best of its knowledge, holds a valid leasehold
interest free of any liens, claims or encumbrances.
2
<PAGE> 3
(h) Capitalization. The Company's capitalization information
contained in the Registration Statement is complete and accurate as of the
dates specified therein.
(i) Litigation. Except as disclosed in the Registration Statement, there
are no actions, proceedings or investigations pending against the Company, that,
either individually or in the aggregate, could be reasonably expected to have a
Material Adverse Effect.
(j) Intellectual Property. Except as disclosed in the Registration
Statement, the Company owns, possesses or can acquire on reasonable terms,
adequate trademarks, trade names and other rights to inventions, know-how,
patents, copyrights, confidential information and other intellectual property
(collectively "Intellectual Property Rights") necessary to conduct the business
now operated by it, or presently employed by it, and has not received any notice
of infringement of or conflict with asserted rights of others with respect to
any Intellectual Property Rights.
(k) Financial Statements. The financial statements included in the
Registration Statement present fairly the financial position of the Company as
of the dates shown and its results of operations and cash flows for the periods
shown, and, except as otherwise disclosed in the Registration Statement, such
financial statements have been prepared in conformity with the generally
accepted accounting principles in the United States, and such principles have
been applied on a consistent basis.
(l) Changes. Except as disclosed in the Registration Statement, since the
date of the latest audited financial statement included in the Registration
Statement, there has been no change, development or event that has had or could
reasonably be expected to have Material Adverse Effect.
(m) Taxes. The Company has filed on a timely basis all tax returns and
reports (including information returns and reports) as required by law. These
returns and reports are true and correct in all material respects. The Company
has paid all taxes and other assessments due, except those contested by it in
good faith and except to the extent that a reserve has been reflected on the
Company's financial statements in accordance with generally accepted accounting
principles. The provision for taxes of the Company as shown in the Company's
financial statements is adequate for taxes due or accrued as of the date
thereof.
4. Representations and Warranties by Purchaser. Purchaser hereby
represents and warrants to the Company as follows:
(a) Authorization. This Agreement constitutes the valid and legally
binding obligation of Purchaser enforceable against it in accordance with its
terms, except insofar as enforceability may be affected by bankruptcy,
insolvency or similar laws affecting creditor's rights generally and the
availability of any particular equitable remedy.
(b) Accredited Investor. Purchaser is an "accredited investor" as such
term is defined in Rule 501(a) of Regulation D promulgated under the Securities
Act.
(c) Investigation. Purchaser has carefully reviewed this Agreement and has
had the opportunity to make detailed inquiry concerning the Company, its
business and its personnel.
3
<PAGE> 4
Purchaser acknowledges that it has had the opportunity to ask questions of and
receive answers from the Company that Purchaser considers necessary for purposes
of purchasing the Shares. The foregoing, however, does not limit or modify the
representations and warranties of the Company in Section 3 of this Agreement or
the right of Purchaser to rely thereon.
(d) Restricted Securities. Purchaser understands that the Shares are
characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable regulations
such securities may be resold only if they are subsequently registered under the
Securities Act or an exemption from such registration is available. Purchaser
represents that it is familiar with SEC Rule 144, as presently in effect, and
understands the resale limitations imposed thereby and by the Act.
(e) Purchase for Own Account. Purchaser is acquiring the Shares for
Purchaser's own account for investment and not with a view to, or for sale in
connection with, any distribution thereof in violation of the Securities Act.
Purchaser has no present agreement, understanding or arrangement to subdivide,
sell, assign or otherwise dispose of all or any part of the Shares.
5. Conditions to the Closing. The obligation of each of the parties hereto
to consummate the transactions contemplated hereby is subject to (i) the
concurrent consummation of the IPO, (ii) there being in effect no law, rule,
regulation, order or injunction which prohibits or makes illegal the
consummation of the transaction contemplated hereby and (iii) (a) in the case of
Purchaser, the accuracy as of the date when made and as of the Closing Date (as
if they had been made on and as of the Closing Date) of the representations and
warranties of the Company set forth herein and (b) in the case of the Company,
the accuracy as of the date when made and as of the Closing Date (as if they had
been made on and as of the Closing Date) of the representations and warranties
of Purchaser set forth herein.
6. Restrictions on Transfer.
(a) Agreement Not to Transfer. The Shares and the rights under this
Agreement may be sold, pledged, hypothecated, assigned, conveyed, transferred or
otherwise disposed of (each, a "Transfer") only (i) pursuant to an effective
registration statement under the Securities Act or pursuant to an exemption from
registration under the Securities Act in accordance with Rule 144 or another
available exemption or (ii) to the Company.
(b) Restrictive Legend. Unless and until otherwise permitted by this
Section 6, each certificate representing the Shares and any certificate issued
at any time upon transfer of, or in exchange for or replacement of, any
certificate bearing the legend set forth below shall be stamped or otherwise
imprinted with a legend in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY
STATE. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD,
PLEDGED, HYPOTHECATED, ASSIGNED, CONVEYED, TRANSFERRED OR OTHERWISE DISPOSED OF,
EXCEPT IN
4
<PAGE> 5
COMPLIANCE WITH SUCH ACT AND LAWS. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF THE STOCK PURCHASE
AGREEMENT, DATED AS OF JANUARY 21, 2000. COPIES OF SUCH AGREEMENT MAY BE
OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF DIGITALTHINK, INC."
(c) Termination of Restrictions. The restrictions imposed by this Section
6 upon the transferability of the Shares shall cease and terminate as to any
particular certificate evidencing the Shares or shares of capital stock when (i)
such certificate or Shares shall have been effectively registered under the
Securities Act and sold by the holder thereof in accordance with such
registration or (ii) in the opinion of counsel for Purchaser (if such opinion is
reasonably satisfactory in form and substance to the Company), such restrictions
are no longer required in order to ensure compliance with the Securities Act.
Whenever the restrictions imposed by this Section 6 shall terminate as to any
certificate of Shares, as hereinabove provided, the holder thereof shall be
entitled to receive from the Company without expense, a new certificate for
Shares not bearing the restrictive legend set forth in Subsection (b) of this
Section.
7. Miscellaneous.
(a) Supplements and Amendments. This Agreement may be supplemented,
amended or waived only by a subsequent writing signed by each of the parties
hereto.
(b) Use of Purchaser's Name. The Company shall not, unless prior written
consent is given by Purchaser (which consent shall not to be unreasonably
withheld), create or disseminate any publicity using the name of Purchaser or
any of its affiliates, or any trade name or mark thereof, except, and only to
the extent, as may be required by law or legal process, including, without
limitation, federal and state securities laws and filings with the Securities
and Exchange Commission.
(c) Counterparts. This Agreement may be executed in any number of
counterparts and each such counterpart shall for all purposes be deemed to be an
original, and all such counterparts shall together constitute but one and the
same instrument.
(d) Successors and Assigns. Except as otherwise provided herein, this
Agreement and all of the terms and provisions hereof shall be binding upon and
inure to the benefit of the parties and their respective heirs, executors,
administrators, successors, trustees, legal representatives and assigns.
(e) Entire Agreement. This Agreement is intended by the parties as the
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein or
therein with respect to the registration rights granted by the Company with
respect to the securities sold pursuant to the Purchase Agreement.
(f) Applicable Law; Venue. This Agreement shall be deemed to be a contract
made under the laws of the State of New York and for all purposes shall be
construed in accordance with the laws of said State applicable to contracts made
and to be performed wholly within said
5
<PAGE> 6
State without regard to the conflict of law principles thereof. Venue for any
action to enforce the provisions of this agreement shall be exclusive in the
federal and state courts located in the City of New York in the State of New
York.
(g) Waiver of Trial by Jury. EACH OF THE PARTIES HERETO HEREBY (i) AGREES
NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND (ii)
WAIVES SUCH RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL
NOW OR HEREAFTER EXIST AS TO ANY ISSUE WITH RESPECT TO ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. Such waiver
of right to trial by jury is separately given, knowingly and voluntarily, by
each of the parties hereto, and this waiver is intended to encompass
individually each instance and each issue as to which the right to a jury trial
would otherwise accrue. Each of the parties hereto is hereby authorized and
requested to submit this Agreement to any court having jurisdiction, so as to
serve as conclusive evidence of the other party's waiver of the right to trial
by jury. Further, each of the parties hereto hereby certifies that no
representative or agent of such party has represented, expressly or otherwise,
to each of the parties hereto that the parties will not seek to enforce this
waiver of right to trial by jury.
(h) Severability. Every provision of this Agreement is intended to be
severable. If any term or provision hereof is illegal or invalid for any reason
whatsoever, such illegality or invalidity shall not affect the validity of the
remainder of the Agreement.
(i) Non-Waiver. No provision of this Agreement shall be deemed to have
been waived, unless such waiver is contained in a written notice given to the
party claiming such waiver has occurred, and no such waiver shall be deemed to
be a waiver of any other or further obligation or liability of the party or
parties in whose favor the waiver was given.
(j) Expenses. Each party shall pay its own expenses and costs incurred or
to be incurred in negotiating, closing and carrying out the transactions
contemplated hereby, irrespective of whether such transactions are actually
consummated.
(k) Termination Prior to the Closing.This Agreement shall terminate prior
to the Closing if the Closing does not occur within 40 calendar days from the
date hereof.
[SIGNATURES COMMENCE ON THE FOLLOWING PAGE]
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have duly executed this Stock
Purchase Agreement as of the date first above written.
THE COMPANY:
DIGITALTHINK, INC.
By:
-----------------------------------
Name:
Title:
PURCHASER:
TENET HEALTHCARE CORPORATION
By:
-----------------------------------
Name:
Title:
7
<PAGE> 1
EXHIBIT 10.13
================================================================================
REGISTRATION RIGHTS AGREEMENT
BETWEEN
DIGITALTHINK, INC.
AND
GE CAPITAL EQUITY INVESTMENTS, INC.
DATED AS OF JANUARY 21, 2000
================================================================================
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and
entered into as of January 21, 2000, between DigitalThink, Inc. (the
"Company"), and GE Capital Equity Investments, Inc. (together with any
successor or assigns under this Agreement, "Purchaser").
WHEREAS, pursuant to that certain Stock Purchase Agreement dated as of
even date herewith (the "Purchase Agreement"), the Company has agreed to sell to
Purchaser certain shares (the "Shares") of its common stock, $.001 par value per
share (the "Common Stock"), and, as an inducement for the Purchaser to purchaser
such Shares, the Company has agreed to provide the registration rights set forth
in this Agreement to Purchaser with respect to the Shares.
NOW THEREFORE, the parties hereby agree as follows:
Section 1. DEFINITIONS
Capitalized terms not otherwise defined herein shall have the respective
meanings given them in the Purchase Agreement. As used in this Agreement, the
following capitalized terms shall have the following meanings:
"Common Stock" shall mean the common stock, par value $.001 per share, of
the Company.
"Effective Date" shall have the meaning set forth in Section 2 hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as from
time to time amended.
"Existing Registration Rights Agreements" shall mean those agreements in
existence as of the date hereof pursuant to which the Company is obligated to
register its securities, as set forth on Exhibit A hereto.
"IPO" has the meaning set forth in the Purchase Agreement.
"Misstatement" shall mean an untrue statement of a material fact or an
omission to state a material fact required to be stated in a Registration
Statement or Prospectus or necessary to make the statements in a Registration
Statement, Prospectus or preliminary prospectus not misleading.
"Person" shall mean a natural person, partnership, corporation, business
trust, association, joint venture or other entity or a government or agency or
political subdivision thereof.
"Prospectus" shall mean the prospectus included in any Registration
Statement, as supplemented by any and all prospectus supplements and as amended
by any and all post-effective amendments and including all material incorporated
by reference in such prospectus.
<PAGE> 3
"Purchase Agreement" shall mean that certain Stock Purchase Agreement
dated as of the date hereof between the Company and Purchaser.
"Registrable Securities" shall mean (a) the shares of Common Stock issued
or issuable pursuant to the Purchase Agreement, (b) any securities issued or
issuable with respect to such Common Stock by way of a stock dividend or stock
split or in connection with a combination of shares, recapitalization, merger,
consolidation or reorganization and (c) any shares of Common Stock or securities
issued or issuable with respect to such Common Stock as provided in (b) above,
acquired by Purchaser from the Company subsequent to the date hereof, whether or
not owned by Purchaser at the time of a Registration.
"Registration" shall mean a registration pursuant to Section 2 hereof.
"Registration Expenses" shall mean the out-of-pocket expenses of a
Registration, including:
(1) all registration, qualification and filing fees (including
fees with respect to filings required to be made with the
National Association of Securities Dealers);
(2) fees and expenses of compliance with securities or blue sky
laws (including fees and disbursements of counsel for the
underwriters or selling holders in connection with blue sky
qualifications of the Registrable Securities and
determinations of their eligibility for investment under the
laws of such jurisdictions as the managing underwriters or
holders of a majority of the Registrable Securities being sold
may designate);
(3) printing, messenger, telephone and delivery expenses;
(4) fees and disbursements of counsel for the Company and not
more than one firm of attorneys for the sellers of the
Registrable Securities;
(5) expenses of the underwriters and fees and disbursements of
counsel for the underwriters, in each case, to the extent
required to be paid pursuant to an underwriting agreement
relating to a Registration;
(6) fees and disbursements of all independent certified public
accountants of the Company incurred in connection with such
Registration (including the expenses of any special audit and
"cold comfort" letters incident to such registration);
(7) premiums and other costs of securities acts liability
insurance if the Company so desires or if the underwriters so
require or Purchaser reasonably so requires; and
(8) fees and expenses of any other Persons retained by the Company
in connection with a Registration.
3
<PAGE> 4
"Registration Statement" shall mean any registration statement under the
Securities Act on an appropriate form (which form shall be available for the
sale of the Registrable Securities in accordance with the intended method or
methods of distribution thereof and shall include all financial statements
required by the SEC to be filed therewith) which covers Registrable Securities
pursuant to the provisions of this Agreement, including the Prospectus included
in such registration statement, amendments (including post-effective amendments)
and supplements to such registration statement, and all exhibits to and all
material incorporated by reference in such registration statement.
"Securities Act" shall mean the Securities Act of 1933, as from time to
time amended.
"SEC" shall mean the Securities and Exchange Commission.
"Violation" has the meaning set forth in Section 4(a).
Section 2. REGISTRATIONS
(a) At any time commencing 120 days after the effectiveness of the
registration statement under the Securities Act relating to the Company's IPO
(such date of effectiveness, the "IPO Date") and ending on the first anniversary
of the IPO Date, Purchaser may request registration under the Securities Act of
all or part of its Registrable Securities on Form S-1 or any similar or
successor form. Upon a request of the Purchaser pursuant to the immediately
preceding sentence, the Company shall take such actions as shall be necessary to
file a Registration Statement with respect to the Shares before the 181st day
following the IPO (the "Effective Date") and shall take such commercially
reasonable actions as may be necessary to cause such Registration Statement with
respect to the Shares to become effective on or before the Effective Date.
Notwithstanding the foregoing, the Company shall not be required to file and
have declared effective under the Securities Act more than one registration
pursuant to this Agreement.
(b) The Company will pay all Registration Expenses with respect to any
Registration Statement filed pursuant to Section 2.
(c) The Company will not include in any Registration any securities which
are not Registrable Securities without the written consent of Purchaser, if the
offering relating to the Registration is not an underwritten offering. If the
offering relating to the Registration is an underwritten offering, then the
Company may include in any Registration other securities which are not
Registrable Securities; provided, that in the event any such other securities
are so included, and the managing underwriter determines that market conditions
require a limitation on the number of securities which may be offered and sold,
(i) the Purchaser shall have the first right to include all of its Registrable
Securities in the offering before any securities held by other selling
shareholders or the Company may be included in the offering, (ii) securities
held by stockholders of the Company other than Purchaser shall first be excluded
from the offering and (iii) securities being offered for the account of the
Company shall next be excluded from the offering.
4
<PAGE> 5
(d) The Purchaser will have the right to determine whether the offering
pursuant to any Registration Statement shall be an underwritten offering. If the
Purchaser determines that such offering will be an underwritten offering, the
Company will have the right to select the investment banker(s) and manager(s),
if any, to administer such offering, subject to the approval of the Purchaser,
which approval will not unreasonably be withheld.
(e) Except as provided in this Agreement and the Existing Registration
Rights Agreements, the Company will not grant to any Persons the right to
request the Company to register any equity securities of the Company, or any
securities convertible or exchangeable into or exercisable for such securities,
without the written consent of Purchaser. The Company shall obtain the consent
of the holders of securities under all Existing Registration Rights Agreement to
the grant of the registration rights provided for herein and the waiver of such
holders of any rights to priority upon a Registration that are inconsistent with
the priorities set forth in Section (c) above.
(f) The Company may, upon written notice to the Purchaser, require the
Purchaser to cease use of the Registration Statement and Prospectus contained
therein for a period not to exceed 30 days, if in the reasonable judgment of the
Company, disclosure of an item of material nonpublic information would be
materially detrimental to the Company. The Company may not impose more than one
"blackout" period under this Section 2(f) in any one year period and any
blackout period shall increase the number of days for which the Company must
keep the Registration statement effective by a number of days equal to the
length of the blackout.
3. REGISTRATION PROCEDURES
If and whenever the Company is required to register Registrable Securities
in a Registration, the Company will effect such registration to permit the sale
of such Registrable Securities on the Effective Date. With respect to any
Registration, the Company will as expeditiously as practicable:
(a) prepare and file with the SEC as soon as practicable a Registration
Statement with respect to such Registrable Securities and use all commercially
reasonable measures to cause such Registration Statement to become effective on
the Effective Date and remain continuously effective until the date that is the
earlier to occur of (i) the date 105 days from the date such Registration
Statement was declared effective, and (ii) the date the last of the Registrable
Securities covered by such Registration Statement have been sold, provided that
before filing a Registration Statement or Prospectus or any amendments or
supplements thereto, the Company shall furnish to Purchaser and the
underwriters, if any, draft copies of all such documents proposed to be filed,
which documents will be subject to the review of Purchaser and such
underwriters, and the Company shall not file any Registration Statement or
amendment thereto or any Prospectus or any supplement thereto to which Purchaser
or the underwriters, if any, shall reasonably object;
(b) prepare and file with the SEC such amendments and post-effective
amendments to the Registration Statement, and such supplements to the
Prospectus, as may be requested by any underwriter of Registrable Securities or
as may be required by the rules, regulations or
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<PAGE> 6
instructions applicable to the registration form used by the Company or by the
Securities Act or rules and regulations thereunder to keep the Registration
Statement effective until the first to occur of the events set forth in clauses
(i) and (ii) of paragraph 3(a) above;
(c) promptly notify Purchaser and the managing underwriter, if any,
and (if requested by any such Person) confirm such advice in writing,
(1) when the Prospectus or any supplement or post-effective
amendment has been filed, and, with respect to the Registration Statement
or any post-effective amendment, when the same has become effective,
(2) of any request by the SEC for amendments or
supplements to the Registration Statement or the Prospectus or for
additional information,
(3) of the issuance by the SEC of any stop order
suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose,
(4) if at any time the representations and warranties of the
Company contemplated by clause (1) of paragraph (o) below cease to be
accurate in all material respects,
(5) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Registrable
Securities for sale in any jurisdiction or the initiation or threatening
of any proceeding for such purpose, and
(6) of the existence of any fact which results in the
Registration Statement, the Prospectus or any document incorporated
therein by reference containing a Misstatement;
(d) obtain the withdrawal of any order suspending the effectiveness
of the Registration Statement at the earliest practicable time;
(e) unless the Company objects in writing on reasonable grounds, if
requested by the managing underwriter or Purchaser, as promptly as practicable
incorporate in a supplement or post-effective amendment such information as the
managing underwriter and Purchaser agree should be included therein relating to
the sale of the Registrable Securities, including, without limitation,
information with respect to the number of shares of Registrable Securities being
sold to underwriters, the purchase price being paid therefor by such
underwriters and with respect to any other terms of the underwritten offering of
the Registrable Securities to be sold in such offering; and make all required
filings of such supplement or post-effective amendment as soon as notified of
the matters to be incorporated in such supplement or post-effective amendment;
(f) promptly prior to the filing of any document which is to be
incorporated by reference into the Registration Statement or the Prospectus
(after initial filing of the Registration Statement) provide copies of such
document to counsel to Purchaser and to the managing underwriter, if any, and
make the Company's representatives available for discussion of such
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<PAGE> 7
document and make such changes in such document prior to the filing thereof as
counsel for Purchaser or underwriters may reasonably request;
(g) furnish to Purchaser and the managing underwriter, without charge, at
least one signed copy of the Registration Statement and any post-effective
amendments thereto, including financial statements and schedules, all documents
incorporated therein by reference and all exhibits (including those incorporated
by reference);
(h) deliver to Purchaser and the underwriters, if any, without charge, as
many copies of each Prospectus (and each preliminary prospectus) as such Persons
may reasonably request (the Company hereby consenting to the use of each such
Prospectus (or preliminary prospectus) by each of Purchaser and the
underwriters, if any, in connection with the offering and sale of the
Registrable Securities covered by such Prospectus (or preliminary prospectus));
(i) register and qualify for offer and sale under the securities or blue
sky laws of such jurisdictions as Purchaser or the underwriters, if any, may
designate in writing and do anything else necessary or advisable to enable from
a legal perspective the disposition in such jurisdictions of the Registrable
Securities covered by the Registration Statement; provided that the Company
shall not be required to qualify generally to do business in any jurisdiction
where it is not then so qualified or to take any action which would subject it
to general service of process in any such jurisdiction where it is not then so
subject;
(j) cooperate with Purchaser and the managing underwriter, if any, to
facilitate the timely preparation and delivery of certificates not bearing any
restrictive legends representing the Registrable Securities to be sold and cause
such Registrable Securities to be in such denominations and registered in such
names as the managing underwriter may request at least three business days prior
to any sale of Registrable Securities to the underwriters;
(k) cause the Registrable Securities covered by the Registration Statement
to be registered with or approved by such other governmental agencies or
authorities as may be necessary to enable the seller or sellers thereof or the
underwriters, if any, to consummate the disposition of such Registrable
Securities;
(1) if the Registration Statement or the Prospectus contains a
Misstatement, prepare a supplement or post-effective amendment to the
Registration Statement or the related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of the Registrable Securities, the Prospectus will
not contain a Misstatement;
(m) cause all Registrable Securities covered by the Registration Statement
to be listed on any national securities exchange on which the Company's
securities are listed or authorized for quotation on Nasdaq, if requested by
Purchaser or the managing underwriter, if any;
(n) provide a CUSIP number for all Registrable Securities not later
than the effective date of the Registration Statement;
(o) enter into such agreements (including an underwriting agreement) and
do anything else reasonably necessary or advisable in order to expedite or
facilitate the disposition
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<PAGE> 8
of such Registrable Securities, and in such connection, whether or not the
registration is an underwritten registration:
(1) make such representations and warranties and the
underwriters, if any, in form, substance and scope as are customarily made
by issuers to holders and underwriters, respectively, in similar
underwritten offerings;
(2) obtain opinions of counsel to the Company and updates
thereof (which counsel and opinions, in form, scope and substance, shall
be reasonably satisfactory to the managing underwriter, if any) addressed
to the underwriters, if any, covering the matters customarily covered in
opinions delivered to holders and underwriters, respectively, in similar
underwritten offerings and such other matters as may be reasonably
requested such underwriters;
(3) obtain "cold comfort" letters and updates thereof from the
Company's independent certified public accountants addressed to the
underwriters, if any, such letters to be in customary form and covering
matters of the type customarily covered in "cold comfort" letters to
holders and underwriters, respectively, in connection with similar
underwritten offerings;
(4) if an underwriting agreement is entered into, cause the
same to include customary indemnification and contribution provisions and
procedures with respect to such underwriters; and
(5) deliver such documents and certificates as may be
reasonably requested the managing underwriter, if any, to evidence
compliance with clause (1) above and with any customary conditions
contained in the underwriting agreement or other agreement entered into by
the Company.
The above shall be done at each closing under such underwriting or similar
agreement;
(p) make available for inspection by representatives of Purchaser, any
underwriter participating in any disposition pursuant to such Registration
Statement, and any attorney or accountant retained by the sellers or any such
underwriter, all financial and other records and pertinent corporate documents
and properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such seller or
underwriter in connection with the Registration; provided that any records,
information or documents that are designated by the Company in writing as
confidential shall be kept confidential by such Persons unless disclosure of
such records, information or documents is required by court or administrative
order; and
(q) otherwise comply with all applicable rules and regulations of the SEC
relating to such Registration, and make generally available to its security
holders earnings statements satisfying the provisions of Section 11(a) of the
Securities Act, no later than forty-five (45) days after the end of any 12-month
period (or ninety (90) days, if such period is a fiscal year) commencing at the
end of any fiscal quarter in which Registrable Securities are sold to
underwriters in an underwritten offering, or, if not sold to underwriters in
such an offering,
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<PAGE> 9
beginning with the first month of the Company's first fiscal quarter commencing
after the effective date of the Registration Statement, which statements shall
cover said 12-month period.
3. REGISTRATION EXPENSES.
Except as otherwise provided herein, all expenses incident to the
Company's performance of or compliance with this Agreement, including without
limitation all Registration Expenses, will be borne by the Company.
4. INDEMNIFICATION.
(a) To the extent permitted by law, the Company will indemnify and hold
harmless the Purchaser, the officers, directors and affiliates of the Purchaser,
any underwriter (as defined in the Securities Act) for such Purchaser and each
person, if any, who controls such Purchaser or underwriter within the meaning of
the Securities Act or the Securities Exchange Act of 1934, as amended (the "1934
Act"), against any losses, claims, damages, or liabilities (joint or several) to
which they may become subject under the Securities Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations (collectively a "Violation"): (i)
any untrue statement or alleged untrue statement of a material fact contained in
any Registration Statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not misleading, or
(iii) any violation or alleged violation by the Company of the Securities Act,
the 1934 Act, any state securities law or any rule or regulation promulgated
under the Securities Act, the 1934 Act or any state securities law; and the
Company will pay to each such Purchaser, underwriter or controlling person, as
incurred, any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage, liability, or
action; provided, however, that the indemnity agreement contained in this
Section 4(a) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability, or action if such settlement is effected without the
consent of the Company (which consent shall not be unreasonably withheld), nor
shall the Company be liable in any such case for any such loss, claim, damage,
liability, or action to the extent that it arises out of or is based upon a
Violation which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
any such Purchaser, underwriter or controlling person.
(b) To the extent permitted by law, the Purchaser will indemnify and hold
harmless the Company, each of its directors, each of its officers who has signed
the registration statement, each person, if any, who controls the Company within
the meaning of the Securities Act, any underwriter, each of its officers,
directors and partners and any controlling person of any such underwriter,
against any losses, claims, damages, or liabilities (joint or several) to which
any of the foregoing persons may become subject, under the Securities Act, the
1934 Act or other federal or state law, insofar as such losses, claims, damages,
or liabilities (or actions in respect thereto) arise out of or are based upon
any Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by the Purchaser expressly for use in connection with such
Registration; and the
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<PAGE> 10
Purchaser will pay, as incurred, any legal or other expenses reasonably incurred
by any person intended to be indemnified pursuant to this Section 4(b), in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this Section 4(b) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Purchaser, which consent shall not be unreasonably withheld;
and in no event shall any indemnity under this Section 4(b) exceed the net
proceeds from the offering received by the Purchaser.
(c) Promptly after receipt by an indemnified party under this Section 4 of
notice of the commencement of any action (including any governmental action),
such indemnified party will, if a claim in respect thereof is to be made against
any indemnifying party under this Section 4, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
the defense thereof with counsel mutually satisfactory to the indemnified and
indemnifying parties; provided, however, that an indemnified party shall have
the right to retain its own counsel, with the fees and expenses to be paid by
the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 4, but the omission to so deliver written
notice to the indemnifying party will not relieve it of any liability that it
may have to any indemnified party otherwise than under this Section 4.
(d) If the indemnification provided for in this Section 4 is held by a
court of competent jurisdiction to be unavailable to an indemnified party with
respect to any losses, claims, damages or liabilities referred to herein, the
indemnifying party, in lieu of indemnifying such indemnified party thereunder,
shall to the extent permitted by applicable law contribute to the amount paid or
payable by such indemnified party as a result of such loss, claim, damage or
liability in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and of the indemnified party on the other
in connection with the Violation(s) that resulted in such loss, claim, damage or
liability, as well as any other relevant equitable considerations. The relative
fault of the indemnifying party and of the indemnified party shall be determined
by a court of law by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission to state a material
fact relates to information supplied by the indemnifying party or by the
indemnified party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission;
provided, that in no event shall any contribution by the Purchaser hereunder
exceed the net proceeds from the offering received by such Purchaser.
(e) The obligations of the Company and the Purchaser under this Section 4
shall survive the completion of any offering of Registrable Securities.
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5. TRANSFER OF REGISTRATION RIGHTS
The rights of Purchaser hereunder may be transferred as permitted in the
Purchase Agreement. The Company shall be given written notice by Purchaser at
the time of any such transfer permitted by the Purchase Agreement stating the
name and address of the transferee, including a writing by such transferee to
the effect that such transferee agrees to be bound by the terms hereof and
identifying the securities with respect to which the rights hereunder are being
transferred.
6. MISCELLANEOUS
(a) Remedies.
Purchaser, in addition to being entitled to exercise all rights provided
herein, in the Purchase Agreement and granted by law, including recovery of
damages, shall be entitled to specific performance of its rights under this
Agreement. The Company agrees that monetary damages would not be adequate
compensation for any loss incurred by reason of a breach by it of the provisions
of this Agreement and hereby agrees to waive the defense in any action for
specific performance that a remedy at law would be adequate.
(b) No Inconsistent Agreements.
The Company shall not, on or after the date of this Agreement, enter into
any agreement with respect to its securities that is inconsistent with the
rights granted to Purchaser in this Agreement or otherwise conflicts with the
provisions hereof. Other than as disclosed on Exhibit A attached hereto, the
Company has not previously entered into any agreement with respect to its
securities granting any right to registration of securities to any Person. The
rights granted to Purchaser hereunder do not in any way conflict with and are
not inconsistent with the rights granted to the holders of the Company's
securities under any such agreements.
(c) Amendments and Waivers.
The provisions of this Agreement, including the provisions of this
sentence, may not be amended, modified or supplemented, and waivers or consents
to departures from the provisions hereof may not be given unless the Company has
obtained the written consent of Purchaser.
(d) Notices.
All notices and other communications provided for or permitted hereunder
shall be made in writing by hand-delivery, registered first-class mail, telex,
facsimile, or air courier guaranteeing overnight delivery:
if to Purchaser:
GE Capital Equity Investments, Inc.
120 Long Ridge Road
Stamford, CT 06927
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Attention: General Counsel
Facsimile: (203) 357-3047
with a copy to:
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, CA 90071-3197,
Attention: Linda L. Curtis
Facsimile: (213) 229-6582
if to the Company:
DigitalThink, Inc.
1000 Brannan Street, Suite 501
San Francisco, CA 94103
Facsimile: (415) 437-3877
with a copy to:
Wilson Sonsini Goodrich &Rosati
650 Page Mill Road
Palo Alto, CA 94304
Facsimile: (650) 493-6811
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt acknowledged, if telecopied; and on the
next business day, if timely delivered to an air courier guaranteeing overnight
delivery.
(e) Successors and Assigns.
This Agreement shall inure to the benefit of and be binding upon the
successors and assigns of each of the parties.
(f) Counterparts.
This Agreement may be executed in any number of counterparts and by the
parties hereto in separate counterparts, each of which when so executed shall be
deemed to be an original and all of which taken together shall constitute one
and the same agreement.
(g) Headings.
The headings in this Agreement are for convenience of reference only and
shall not limit or otherwise affect the meaning hereof.
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(h) Governing Law.
This Agreement shall be construed, interpreted and the rights of the
parties determined in accordance with the internal laws of the State of New
York, without regard to the conflict of law principles thereof; except with
respect to matters of law concerning the internal corporate affairs of any
corporate entity which is a party to or the subject of this Agreement, and as to
those matters the law of the jurisdiction under which the respective entity
derives its powers shall govern.
(i) Severability.
In the event that any one or more of the provisions contained herein, or
the application thereof in any circumstance, is held invalid, illegal or
unenforceable, the validity, legality and enforceability of any such provision
in every other respect and of the remaining provisions contained herein shall
not be affected or impaired thereby.
(j) Forms.
All references in this Agreement to particular forms of Registration
Statements are intended to include all successor forms which are intended to
replace, or to apply to similar transactions as, the forms herein referenced.
(k) Entire Agreement; Prior Agreements.
This Agreement and the Purchase Agreement are intended by the parties as
the final expression of their agreement and intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein or therein with respect to the registration rights granted by the Company
with respect to the securities sold pursuant to the Purchase Agreement. The
registration rights granted to Purchaser pursuant to hereto shall be in addition
to, and not in lieu of, the registration rights granted to Purchaser and certain
other investors pursuant to the Restated Investor Rights Agreement dated as of
November 10, 1999 between the Company and the investors party thereto, including
Purchaser, as amended pursuant to that certain amendment dated as of November
17, 1999 between the Company and the investors party thereto, including
Purchaser (as so amended, the "Existing Registration Rights Agreement"). The
terms of this Agreement and the Purchase Agreement supersede any directly
inconsistent terms of any prior agreements between the parties hereto, including
without limitation the terms of that certain letter agreement dated as of
November 22, 1999 between the Company, the Purchaser and Credit Suisse First
Boston Corporation, that would apply to the shares of Common Stock purchased
pursuant to the Purchase Agreement.
(l) Waiver of Trial by Jury. EACH OF THE PARTIES HERETO HEREBY (i) AGREES
NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND (ii)
WAIVES SUCH RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL
NOW OR HEREAFTER EXIST AS TO ANY ISSUE WITH RESPECT TO ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING
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OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
Such waiver of right to trial by jury is separately given, knowingly and
voluntarily, by each of the parties hereto, and this waiver is intended to
encompass individually each instance and each issue as to which the right to a
jury trial would otherwise accrue. Each of the parties hereto is hereby
authorized and requested to submit this Agreement to any court having
jurisdiction, so as to serve as conclusive evidence of the other party's waiver
of the right to trial by jury. Further, each of the parties hereto hereby
certifies that no representative or agent of such party has represented,
expressly or otherwise, to each of the parties hereto that the parties will not
seek to enforce this waiver of right to trial by jury.
[signature page follows]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
DIGITALTHINK, INC.
By:
---------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
GE CAPITAL EQUITY INVESTMENTS, INC.
By:
---------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
ACKNOWLEDGED:
(with respect to Section 6(k))
CREDIT SUISSE FIRST BOSTON CORPORATION
By:
-----------------------------------
Name:
Title:
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-92429 of DigitalThink, Inc. on Form S-1 of our report dated June 4, 1999
(December 2, 1999 as to Note 11), appearing in the prospectus, which is part of
this registration statement, and of our report dated June 4, 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
- ------------------------------------------
San Jose, California
February 1, 2000
