10-K 1 d10k.htm FORM 10-K Form 10-K

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 

  x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934  

 

For the Fiscal Year Ended December 31, 2002

 

OR

 

  ¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  

 

For the transition period from ____________ to ____________

 

Commission File Number 0-31537

 


 

DOCENT, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

77-0460705

(State or other jurisdiction

 

(I.R.S. Employer

of incorporation or organization)

 

Identification No.)

2444 Charleston Road,

 

94043

Mountain View, California

 

(Zip Code)

(Address of principal executive offices)

   

 

(650) 934-9500

(Registrant’s telephone number including area code)

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class


  

Name of Each Exchange

on Which Registered


None

  

None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, $0.001 par value per share


(Title of class)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark if disclosures of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the Registrant’s knowledge, in definitive proxy or information definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendments to this Form 10-K. x

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act  Rule 12b-2). Yes ¨ No x

 

The aggregate market value of the 13,818,000 shares of voting Common Stock held by non-affiliates of the Registrant computed by reference to the closing price of $3.45 per share of the Common Stock as reported on the Nasdaq National Market System as of June 30, 2002, the last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $47,672,000. The Registrant has no non-voting common equity. For the purpose of the foregoing computation, only the directors and executive officers of the Registrant were deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

As of February 28, 2003, Registrant had outstanding approximately 14,338,000 shares of Common Stock, $0.001 par value per share, plus associated rights.

 

A copy of the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available for free on the Company’s website, www.docent.com, within 24 hours after such material is electronically filed with the Securities and Exchange Commission.

 

Portions of the Registrant’s Proxy Statement for the annual meeting of stockholders to be held on June 6, 2003 are incorporated by reference in Part III of this Annual Report on Form 10-K

 



This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “forecasts,” “predicts,” “intends” 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 eLearning market, (2) our plans to develop new products and services, and (3) our business strategies and plans. Actual results may differ materially from those described in any such forward-looking statement. Risks inherent in Docent’s business and factors that could cause or contribute to such differences include without limitation the risks set forth in the “Risk Factors” section and the considerations set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Docent expressly disclaims any obligation to update any forward-looking statements. All information regarding common stock and earnings per share amounts have been restated within this Form 10-K to reflect the October 2002 one-for-three reverse split.

 

PART I

 

ITEM 1.    BUSINESS

 

Docent

 

We are a leading provider of integrated software applications, services, and content proven to drive business performance through learning. Our solutions are helping hundreds of corporations and government agencies around the world achieve measurable improvement in business results in vital areas such as sales readiness and new product launch, customer education and sales channel effectiveness, certification and regulatory compliance, Enterprise Resource Planning (“ERP”) and Customer Relationship Management (“CRM”) system rollout training, and organizational development and corporate university education. Our core offering, Docent Enterprise, is an integrated suite of software applications that provide the ability to manage performance by aligning individual objectives with the broader goals of the organization, identify essential skills and competencies, and prescribe and deliver recommended learning activities. Our software provides capabilities that allow organizations to create, manage, and deliver online learning content in addition to leveraging content created by third party providers. Individuals can collaboratively share content over the Web, and communicate in real-time in virtual classrooms or online meetings. Most importantly, organizations can report, measure and analyze the impact of training on desired business results in order to effectively target learning activities.

 

We were incorporated in Delaware in June 1997.

 

Industry Background

 

We participate in an established market category defined as “eLearning” by leading industry research firms such as Gartner, META Group, International Data Corporation, and many others. The roots of eLearning can be traced to the early days of the Web with the introduction of internet-based training (“IBT”) tools. These tools provide the ability to convert classroom-based training materials to the Web, facilitating learner convenience and cost savings associated with elimination of travel to training locations, employee time off work, and reproduction of training materials. The IBT phase was followed with the addition of learning management systems (“LMS”) that provide further cost savings and efficiencies through online registration, and centralized management and tracking of disparate learning resources, activities (both online and classroom-based), and student populations. The addition of performance management applications and blended delivery channels that span instructor-led training, self-paced Web training, and virtual classrooms have extended the effectiveness of learning. Each stage of market evolution has delivered progressive levels of customer value. We deliver solutions that span each of these areas, and are leading the industry into a new phase of business performance management with industry-specific solutions and analytic applications. Analytic applications will enable organizations to integrate data captured in learning systems with data captured in ERP, CRM, and other systems in order to correlate the impact of training with business goals.

 

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Products and Services

 

Products

 

Docent Enterprise is our award winning integrated suite of applications that link learning to business results. The Docent Enterprise suite includes the following modules:

 

Docent Learning Management Server

 

The Docent Learning Management Server (“Docent LMS”) is a globally scalable application that integrates with ERP, CRM, Human Resource Management Systems (“HRMS”), and other enterprise and legacy systems to deliver robust capabilities in the areas of compliance and certification, competency management, global training commerce, student registration and tracking, records management, and reporting. The Docent LMS supports a blend of learning channels: self-paced Web, live interactive Web, traditional instructor-led courses and documentation. To help organizations regulated by the U.S. Food and Drug Administration (“FDA”), Occupational Safety and Health Administration (“OSHA”), the U.S. Securities and Exchange Commission (“SEC”), U.S. Department of Transportation, and other regulatory entities in countries around the world, maintain compliance with mandated policies and procedures, the Docent LMS provides specialized capabilities that meet the most demanding standards for electronic signature management and control, secure log-in and authentication, and audit trail tracking and reporting. The Docent LMS is compliant with the FDA’s 21 Code of Federal Regulations Part 11 standards, making it the preferred solution for life science companies. The compliance and certification features in the Docent LMS are of value to companies in any industry, including financial services, manufacturing, energy, and high tech.

 

Docent Learning Content Management System

 

The Docent Learning Content Management System (“LCMS”) provides a complete environment for creating, managing, assembling, and delivering learning content. Organizations can accelerate the process of creating and delivering highly effective and targeted learning content to the Web. Learners access and retain the personalized information they need, when they need it, in the context of their critical business objectives.

 

Docent Live!

 

Docent Live! provides a Web-based environment for real-time communication and collaboration among geographically dispersed individuals and groups. Multiple modes of interaction are supported, including one-to-one mentoring, small group meetings, virtual classrooms, online seminars, and live or on-demand broadcasts to thousands of participants.

 

Docent Exchange

 

Docent Exchange lets subject matter experts create, manage and deliver compelling learning content to the Web. There is no time delay and expense associated with relying on instructional course designers. Using workflow tailored to an organization’s unique needs, content is published to a self-service Web environment to provide context-driven, personalized delivery. The delivery environment closes the learning loop by enabling learner feedback, assessments and contributions.

 

Docent Peak Performance

 

Docent Peak Performance is used to manage individual performance and automate the performance appraisal process. The application cascades organizational goals to the individual level, and ensures that individual objectives are aligned with corporate goals. Docent Peak Performance identifies competencies required to fulfill objectives, and prescribes learning activities cataloged in the Docent LMS.

 

Docent Analytics

 

Docent Analytics is a family of packaged solutions that measure the effect of learning activities on business performance, enabling companies to analyze and report on the value of their training investment. The product

 

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line is comprised of separately-priced application modules that each include pre-built key performance indicators and metrics to support specific business objectives such as sales performance, sales channel effectiveness, compliance, and certification. Docent Analytics is currently in limited release.

 

Content

 

We also offer a range of third party content from our content partners that address industry-specific and solution area needs.

 

Services

 

Professional services

 

Our comprehensive range of professional services include needs assessment, project management, on-site technical implementation services, employee competency and profile development, curriculum planning and content development, system integration, and system upgrades. A variety of solution packages are offered for accelerated deployment and system rollouts.

 

Technical support (maintenance)

 

We provide global customer support before, during, and after installation of our software products. Assistance in the use of our software is available from technical support engineers via e-mail, telephone, or by submitting a form via the Docent Website. Support is provided on an annual contract basis, which includes all software updates (upon request), bug fixes, additional documentation, or patches released during the contract period. Docent Technical Support provides domestic and international phone and email support to our registered users during normal business hours and on an extended coverage basis.

 

Hosting

 

Our hosting solutions manage both the underlying hardware and the integrated application enabling clients to concentrate on their learning environment and its effectiveness for their users.

 

Docent University

 

We offer a range of customer and partner training programs that are available online as well as in an instructor-led format at Docent facilities and at our customer sites.

 

Revenue from Customers

 

In 2002, 2001 and 2000, no one customer accounted for 10% or more of our total revenue.

 

Alliances

 

Content Partners

 

Our content partners provide specialized off-the-shelf content specific to industries and subject areas and that is certified to be compatible with the Docent platform. Our content certification program provides development licenses and a third party testing environment to ensure interoperability.

 

System Integrators and Business Outsource Providers

 

Our system integration partners resell software and/or services as part of their value-added solution. We have alliances with large worldwide system integrators, and regional systems integrators in North America, Europe, and Asia Pacific. We also have formed alliances with several business outsource providers that include our learning solution as part of a complete HR outsourced solution.

 

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Technology Partners

 

Our technology partners provide complementary technology, such as enterprise application integration, content management, and synchronous Web collaboration technologies that extend the value of the Docent solution.

 

Technology, Research and Development

 

Our solutions are designed on a standards-based, open and scalable architecture, are Web-based and are accessible by users through standard Web browsers. As a result, our infrastructure supports large numbers of individual users and organizations across a global geographic distribution. The architecture has been designed to allow for content and results from multiple organizations to be aggregated easily and delivered to anyone using a variety of Internet appliances. This allows information to reach a diverse set of internal and external participants with minimal deployment and maintenance costs. Furthermore, the user profiles, assessment results, detailed course statistics and other types of user activity data are tracked in a central database in order to analyze usage and participant behavior patterns.

 

Our research and development expenses are funded by the proceeds of our debt and equity financings, as well as by our revenue. All of our research and development expenditures are expensed as incurred. These expenses were approximately $11.1 million for the year ended December 31, 2002; $11.6 million for the year ended December 31, 2001; and approximately $6.6 million for the year ended December 31, 2000. Our efforts and expenditures in research and development are devoted to enhancing the functionality of our existing products, the Docent Enterprise suite, which is currently being shipped.

 

Our solutions are designed to support leading relational database management systems, including Oracle, Microsoft SQL Server and IBM DB2. We support multiple operating systems and hardware configurations to meet the different needs of our customers. Our software incorporates third party software in addition to code which we have developed ourselves. Server applications are based on standard Web server technology and are implemented in Java or C++ with both native and standards-based connectivity to both the Web server and the database. Key features of our technology include:

 

Single unified data model.    Our solutions are built around a single, unified data model. The complete learning experience of a user, from initial skill gap analysis and learning plan development, through registration and content delivery, to post-assessment, certification and measurement of results, is tracked in relational databases that share information in an integrated, comprehensive and data-centric learning environment.

 

Scalable platform.    Our solutions are designed as a series of separable application servers, allowing individual hardware platforms to be sized to the specific needs of a customer. We are able to add multiple application servers in one or more geographic locations to provide the capacity to handle large numbers of participants, organizations, courses and types of content or to improve the overall response time of the system.

 

Multiple Simultaneous Cultures.    Our solutions have been designed to allow support for multiple simultaneous cultures from a single instance of the Docent application. This includes such features as the support for multiple simultaneous languages (both single- and double-byte) from a single application server as well as the support of multiple languages in a single system.

 

Ease of implementation.    Our solutions have been designed to be easily tailored to an organization’s business environment. This has been accomplished through the use of our “application file” architecture which references HTML tags, SQL database queries and standard scripting language statements in ordinary text files in order to modify the functionality of the system. A standard system can be quickly and easily deployed using automated installation scripts.

 

Standards-based open architecture.    Our application servers run in both the Windows NT and UNIX environments, using standard Web servers from Microsoft, Sun iPlanet (Netscape), Apache and

 

5


others, and relational databases from Microsoft, Oracle, or IBM. We provide direct and standards-based connections to industry standard databases and Web servers. Our solution infrastructure is based on standard Internet architectures and protocols. We support standard activities in the learning management arena, and our system is one of the few certified as compliant with the Aviation Industry CBT Committee (AICC) AGR-010 Internet-based course management interface standard. We are also in conformance with the United States Department of Defense (DOD) Advanced Distance Learning (ADL) initiative’s Sharable Courseware Object Reference Model (SCORM) version 1.2 specifications, and the IMS metadata tagging version 1.0 specification.

 

Remote and wireless operations. Our solutions provide a number of capabilities to allow for remote and wireless operations. These include hybrid Web/CD-ROM deliverables that enable organizations to make more effective use of limited network bandwidth. Our Docent Mobile component allows users to download content for use while disconnected from the Internet, or an intranet, and to synchronize results upon reconnection. Our technology platform also allows us to deliver solutions through non-traditional devices such as wireless modem-equipped Palm or other wireless Personal Data Assistant devices and browser-equipped cellular telephones.

 

Sales and Marketing

 

We have direct sales operations in North America, Europe, and Japan. Our direct sales channels are augmented with systems integrator reseller partners in these regions as well as parts of the world where we do not have a direct sales presence. In North America, our direct sales force is aligned by vertical industry in order to provide a higher level of service and understanding of our customers’ industry-specific business requirements. We license software to our end user customers on a perpetual use or term basis, with maintenance, training, and services priced separately.

 

During the year ended December 31, 2002, we realized $6.3 million, or approximately 23%, of our revenue from our European sales. In fiscal year 2001, we realized $6.9 million, or approximately 24%, of our revenue from our European sales. In fiscal year 2000, we realized $1.1 million, or approximately 10%, of our revenue from our European sales. During the year ended December 31, 2002, we realized $437,000, or approximately 2%, of our revenue from Asia/Pacific. Prior to 2002, revenue from Asia/Pacific was negligible. These amounts are attributable to our revenue on the basis of direct billing to the customer at the customer’s location.

 

Competition

 

The market for our products and services is highly competitive and subject to rapid change. Leading market research firms such as Gartner, META Group and International Data Corporation each track dozens of vendors, and are all predicting vendor consolidation over the next several years. We encounter competition from a variety of sources that can be classified as follows:

 

    “Best of breed” learning management system vendors who focus exclusively on learning management platforms.

 

    eLearning suite vendors who provide learning management systems and other eLearning offerings such as synchronous web collaboration products, learning content management systems, and performance management applications.

 

    Enterprise application software vendors who are extending their ERP, CRM, and HRMS offerings with learning management and content development products.

 

    Customer in-house development programs.

 

    eLearning application service providers who provide subscription-based internet learning applications and content.

 

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We believe that competitive differentiation is influenced by the following factors:

 

    Size and success of installed base customers

 

    Customer satisfaction

 

    Breadth of product line capabilities

 

    Vendor financial viability

 

    Interoperability with diverse range of third party content and technologies

 

    System scalability, measured in terms of number of concurrent users, response times, courses, domains, and other variables

 

    Total cost of ownership

 

    Ability to integrate with other enterprise applications commonly deployed in global 2000 and government customers

 

    Support for prevailing technology standards and Web architectures

 

    Pricing

 

    Geographic coverage and channels

 

Intellectual Property Rights

 

Our success and ability to compete effectively is dependent on our ability to develop and maintain the proprietary aspects of our technology, patent and operate without infringing on the intellectual property rights of others. We rely on a combination of trademark, trade secret and copyright law and contractual restrictions to protect the proprietary aspects of our technology. These legal protections afford only limited protection for our technology. We seek to protect the source code for our software, documentation and other written materials under trade secret and copyright laws. We license our software pursuant to signed license or “shrink wrap” agreements, which impose restrictions on the licensee’s ability to use the software. Finally, we seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to proprietary information to execute confidentiality agreements with us and by restricting access to our source code. Due to rapid technological change, we believe factors such as the technological and creative skills of our personnel and new product developments and enhancements to existing products are more important to establishing and maintaining a technology leadership position than the various legal protections of our technology.

 

Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult and, while we are unable to determine the extent to which software piracy exists, if at all, it can be expected to be a persistent problem. The laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the intellectual property rights of others or to defend against claims of infringement or invalidity. Any such litigation could result in substantial costs and diversion of resources. Our means of protecting our intellectual property rights may not be adequate to protect us from the infringement or misappropriation of our intellectual property rights by others.

 

Currently, third parties have registered Docent or a variant as a trademark in the United States and in some other jurisdictions outside the United States for use with goods or services, which could be construed to overlap those offered by Docent. Although these third parties have not initiated formal infringement proceedings or any other formal challenges to Docent’s use of the Docent trademark, any claims, with or without merit, could cause costly litigation that could consume significant management time. Although Docent is a registered trademark for Class 35 business services in the United States, we may not be able to register Docent as a trademark in some

 

7


countries, including the United States, for use with other goods or services due to existing registrations of third parties. As a result, we may choose not to use Docent as a trademark in one or more of these countries in connection with some of our products or services.

 

Two patent infringement cases have been brought by third parties alleging that Docent has infringed their patents. If these third party claims for infringement and their patents are valid, we may be required to license the patents on terms that may or may not be favorable or be forced to alter our website or our software product which is the subject of the patents, either of which results may adversely affect our revenue.

 

We obtain the content for many of the courses delivered with our solutions from third party content providers and also receive the right to resell this content to other customers. It is possible that the use of this content may subject us to the intellectual property claims of third parties. Although we seek indemnification from our content providers to protect us from these types of claims, we may not be fully protected from extensive damage claims or claims for injunctive relief. In addition, our content providers may assert that some of the courses we develop under contract with other customers may improperly use their proprietary content. Our involvement in any litigation to resolve intellectual property ownership matters could require us to incur substantial costs and divert management’s attention and resources. If we became liable to third parties for infringing their intellectual property rights, we could be required to pay substantial damages. In order to continue marketing our products, we may be required to develop non-infringing intellectual property, obtain a license, or cease selling the products that contain the infringing intellectual property, each of which may cause us to incur significant costs and expenses. Furthermore, we may be unable to develop non-infringing intellectual property, or to obtain a license on commercially reasonable terms, if at all. In this event, if the intellectual property was a trademark, we could be required to cease using a trademark, which could involve a loss of goodwill, as well as the possibility of a damage award and a temporary disruption during a transition to other trademarks.

 

Employees

 

As of February 28, 2003, we had 166 employees. Of these employees, 54 were engaged in sales and marketing, 49 in research and development, 41 in professional services, and 22 in general and administration. Our future success depends on our ability to attract and retain highly qualified technical, sales and senior management personnel.

 

None of our employees are represented by a labor union or collective bargaining agreement. We have not experienced any work stoppages and consider our relations with our employees to be good.

 

ITEM 2.    PROPERTIES

 

We currently lease and use approximately 27,000 square feet of office space for our headquarters located in Mountain View, California. In addition to the Mountain View premises, we also lease sales offices in Lisle, Illinois; France; the United Kingdom; Germany; and Japan.

 

As part of the 2002 restructuring programs, facilities currently under lease in Mountain View, California and The Netherlands were closed. We are currently trying to sublease these facilities. The Mountain View, California lease expires in May 2005 and The Netherlands lease expires in January 2005.

 

ITEM 3.    LEGAL PROCEEDINGS

 

On May 31, 2002, IP Learn, LLC filed a patent infringement case against Docent in the United States District Court for the Northern District of California. In December 2002, IP Innovation, LLC filed a patent infringement case against Docent in the United States District Court for the Southern District of Texas. Docent believes that the patent infringement cases are without merit and intends to defend against them vigorously. However, if these third party claims for infringement and their patents are valid, we may be required to license

 

8


the patents on terms that may or may not be favorable or be forced to alter our website or our software product which is the subject of the patents, either of which results may adversely affect our revenue.

 

Also, from time to time, we may become involved in litigation relating to claims arising from our ordinary course of business. We believe that there are no claims or actions pending or threatened against us, the ultimate disposition of which would have a material adverse effect on us.

 

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

Not applicable

 

9


PART II

 

ITEM 5.    MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.

 

Our common stock is traded in the Nasdaq National Market System under the symbol “DCNT.” There were 188 holders of record of our common stock on February 28, 2003. The table below provides the quarterly high and low closing prices, as reported by Nasdaq, for the last two fiscal years, adjusted to reflect the effect of the October 2002 one-for-three reverse stock split.

 

    

Fiscal 2002


    

Fiscal 2001


    

Per Share


    

Per Share


    

High


    

Low


    

High


    

Low


First Quarter

  

$

11.82

    

$

5.19

    

$

35.82

    

$

8.64

Second Quarter

  

$

6.78

    

$

3.45

    

$

30.00

    

$

9.51

Third Quarter

  

$

3.54

    

$

1.77

    

$

24.66

    

$

6.21

Fourth Quarter

  

$

3.00

    

$

1.90

    

$

9.51

    

$

4.83

 

We did not pay any dividends in fiscal 2002 or fiscal 2001 and we do not anticipate paying dividends to our stockholders in the foreseeable future.

 

Use of Proceeds

 

On September 29, 2000, we completed the initial public offering of our common stock. After deducting the underwriting discounts and commissions and the offering expenses, the net proceeds to us from the offering were approximately $92.2 million. As of December 31, 2002, the remaining proceeds of $41.0 million were held in cash and money market accounts, or invested in commercial paper, auction rate securities and municipal bonds. Uses of the proceeds as of December 31, 2002 were as follows: $44.7 million was used to fund operations, $3.4 million was used in the acquisition of gForce Systems Inc., and $3.1 million was used to repurchase stock.

 

 

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ITEM 6.    SELECTED FINANCIAL DATA

 

   

Years Ended December 31,


 
   

2002


    

2001


    

2000


    

1999


    

1998


 
   

(in thousands, except per share data)

 

Consolidated Statement of Operations Data:

                                           

Revenue:

                                           

License

 

$

13,286

 

  

$

15,331

 

  

$

5,062

 

  

$

141

 

  

$

297

 

Services and maintenance

 

 

14,506

 

  

 

13,680

 

  

 

5,889

 

  

 

651

 

  

 

244

 

   


  


  


  


  


Total revenue

 

 

27,792

 

  

 

29,011

 

  

 

10,951

 

  

 

792

 

  

 

541

 

   


  


  


  


  


Cost of revenue:

                                           

Cost of license

 

 

1,706

 

  

 

480

 

  

 

40

 

  

 

29

 

  

 

23

 

Cost of services and maintenance

 

 

8,763

 

  

 

13,873

 

  

 

9,160

 

  

 

1,279

 

  

 

750

 

   


  


  


  


  


Total cost of revenue

 

 

10,469

 

  

 

14,353

 

  

 

9,200

 

  

 

1,308

 

  

 

773

 

   


  


  


  


  


Gross profit (loss):

                                           

License gross profit

 

 

11,580

 

  

 

14,851

 

  

 

5,022

 

  

 

112

 

  

 

274

 

Service gross profit (loss)

 

 

5,743

 

  

 

(193

)

  

 

(3,271

)

  

 

(628

)

  

 

(506

)

   


  


  


  


  


Total gross profit (loss)

 

 

17,323

 

  

 

14,658

 

  

 

1,751

 

  

 

(516

)

  

 

(232

)

   


  


  


  


  


Operating expenses:

                                           

Research and development

 

 

11,126

 

  

 

11,648

 

  

 

6,561

 

  

 

2,999

 

  

 

2,245

 

Sales and marketing

 

 

21,489

 

  

 

47,242

 

  

 

50,963

 

  

 

11,920

 

  

 

2,513

 

General and administrative

 

 

5,936

 

  

 

12,991

 

  

 

11,117

 

  

 

3,230

 

  

 

1,473

 

Restructuring charge

 

 

3,193

 

  

 

6,129

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

In-process research and development

 

 

—  

 

  

 

707

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

   


  


  


  


  


Total operating expenses

 

 

41,744

 

  

 

78,717

 

  

 

68,641

 

  

 

18,149

 

  

 

6,231

 

   


  


  


  


  


Loss from operations

 

 

(24,421

)

  

 

(64,059

)

  

 

(66,890

)

  

 

(18,665

)

  

 

(6,463

)

Interest and other expense, net

 

 

(210

)

  

 

(724

)

  

 

(564

)

  

 

(327

)

  

 

(22

)

Interest income

 

 

990

 

  

 

3,926

 

  

 

2,827

 

  

 

279

 

  

 

51

 

   


  


  


  


  


Loss before provision for income taxes

 

 

(23,641

)

  

 

(60,857

)

  

 

(64,627

)

  

 

(18,713

)

  

 

(6,434

)

Provision for income taxes

 

 

152

 

  

 

72

 

  

 

63

 

  

 

 

  

 

 

   


  


  


  


  


Net loss

 

 

(23,793

)

  

 

(60,929

)

  

 

(64,690

)

  

 

(18,713

)

  

 

(6,434

)

   


  


  


  


  


Dividend accretion and deemed dividend on convertible preferred stock

 

 

—  

 

  

 

—  

 

  

 

(19,069

)

  

 

(1,354

)

  

 

—  

 

   


  


  


  


  


Net loss attributable to common stockholders

 

$

(23,793

)

  

$

(60,929

)

  

$

(83,759

)

  

$

(20,067

)

  

$

(6,434

)

   


  


  


  


  


Net loss per share attributable to common stockholders—basic and diluted (1)

 

$

(1.72

)

  

$

(4.47

)

  

$

(19.04

)

  

$

(15.57

)

  

$

(6.73

)

   


  


  


  


  


Weighted average common shares outstanding (1)

 

 

13,852

 

  

 

13,620

 

  

 

4,398

 

  

 

1,289

 

  

 

956

 

   


  


  


  


  


   

As of December 31,


 
   

2002


    

2001


    

2000


    

1999


    

1998


 
   

(in thousands)

 

Consolidated Balance Sheet Data:

                                           

Cash and cash equivalents

 

$

36,968

 

  

$

28,460

 

  

$

92,818

 

  

$

12,773

 

  

$

2,968

 

Short term investments

 

 

3,974

 

  

 

33,840

 

  

 

4,029

 

  

 

—  

 

  

 

—  

 

Working capital

 

 

34,277

 

  

 

56,730

 

  

 

90,522

 

  

 

9,938

 

  

 

1,862

 

Long term investments

 

 

—  

 

  

 

—  

 

  

 

18,450

 

  

 

—  

 

  

 

—  

 

Total assets

 

 

54,242

 

  

 

84,547

 

  

 

127,816

 

  

 

15,302

 

  

 

4,183

 

Notes payable and capital lease obligations, noncurrent

 

 

45

 

  

 

143

 

  

 

516

 

  

 

1,117

 

  

 

162

 

Convertible preferred stock

 

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

33,288

 

  

 

10,615

 

Total stockholders’ equity (deficit)

 

 

39,008

 

  

 

64,651

 

  

 

112,596

 

  

 

(23,330

)

  

 

(8,024

)


(1)   Share and per share amounts for all periods presented have been adjusted to reflect the October 2002 one-for-three reverse stock split.

 

11


 

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with Item 1: Business; Item 6: Selected Financial Data; and Item 8: Financial Statements and Supplementary Data.

 

This discussion contains forward-looking statements that involve risks and uncertainties. These statements relate to our future plans, objectives, expectations and intentions, and the assumptions underlying or relating to any of these statements. These statements may be identified by the use of words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “will” and similar expressions. Our actual results could differ materially from those discussed in these statements. Factors that could contribute to such differences include those discussed in this document such as our statement that we believe our cash will last through at least the next 12 months, that we expect to incur operating losses through fiscal year 2003 and that the restructuring programs are expected to save Docent approximately $20.9 million per year of cash. Except as required by law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Overview

 

General

 

We were incorporated in June 1997 to develop, market and sell eLearning products. We provide infrastructure software and related services that allow our customers to create, deploy and manage learning and knowledge exchange over the Internet.

 

Critical Accounting Policies and Estimates

 

General

 

Discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, we evaluate estimates based on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. We believe the following critical accounting policies involve our more significant judgments and estimates used in the preparation of our consolidated financial statements:

 

    Revenue Recognition

 

    Allowance for Doubtful Accounts

 

    Goodwill and Intangible Assets

 

    Restructuring

 

    Allowance for Deferred Tax Assets

 

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result. Our senior management has reviewed these critical accounting policies and related disclosures with our Disclosure Committee and the Audit Committee of our Board of Directors. See the Notes to Consolidated Financial Statements, which contain additional information regarding our accounting policies and other disclosures required by GAAP.

 

12


 

Revenue Recognition

 

Our revenue recognition policy is significant because our revenue is a key component of our results of operations. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter. We follow detailed revenue recognition guidelines, which are discussed below. We recognize revenue in accordance with GAAP rules that have been prescribed for the software industry. The accounting rules related to revenue recognition are complex and are affected by interpretations of the rules and an understanding of industry practices, both of which are subject to change. Consequently, the revenue recognition accounting rules require management to make significant judgments.

 

We do not record revenue on sales to customers whose ability to pay is in doubt at the time of sale. Rather, revenue is recognized from these customers as cash is collected. The determination of a customer’s ability to pay requires significant judgment. In this regard, Docent management will consider the international region of the customer and the financial viability of the customer in assessing a customer’s ability to pay.

 

Revenue arrangements with extended payment terms are generally considered not to be fixed or determinable and, accordingly, we do not generally recognize revenue on the majority of these arrangements until the customer payment becomes due. The determination of whether extended payment terms are fixed or determinable requires significant judgment by management, including assessing such factors as the past payment history with the individual customer and evaluating the risk of concessions over an extended payment period. The determinations that we make can materially impact the timing of recognition of revenues. Our normal payment terms currently range from “net 30 days” to “net 60 days,” which are not considered extended payment terms.

 

Many of our software arrangements include consulting implementation services. Consulting revenues from these arrangements are generally accounted for separately from the license revenues because the arrangements qualify as “service transactions” as defined in Statement of Position No. 97-2, Software Revenue Recognition, issued by the American Institute of Certified Public Accountants (SOP 97-2). The more significant factors considered in determining whether the revenue should be accounted for separately include the nature of services (i.e., consideration of whether the services are essential to the functionality of the licensed product), degree of risk, availability of services from other vendors, timing of payments and impact of milestones or acceptance criteria on the realizability of the software license fee. Revenues for consulting services are generally recognized as the services are performed. If there is a significant uncertainty about the project completion or receipt of payment for the consulting services, revenue is deferred until the uncertainty is sufficiently resolved. We estimate the percentage of completion on contracts with fixed or “not to exceed” fees on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project. If we do not have a sufficient basis to measure progress towards completion, revenue is recognized when we receive final acceptance from the customer. When total cost estimates exceed revenues, we accrue for the estimated losses immediately based upon an average fully burdened daily rate applicable to the consulting organization delivering the services. The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent with the application of the percentage of completion method of accounting affect the amounts of revenue and related expenses reported in our. A number of internal and external factors can affect our estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes.

 

Allowance for Doubtful Accounts

 

We record allowances for estimated losses resulting from the inability of our customers to make required payments. We assess the credit worthiness of our customers based on multiple sources of information and analyze such factors as our historical bad debt experiences, industry and geographic concentrations of credit risk, economic trends and changes in customer payment terms. This assessment requires significant judgment. If the

 

13


financial condition of our customers were to worsen, additional allowances may be required, resulting in future operating losses that are not included in the allowance for doubtful accounts at December 31, 2002.

 

Goodwill and Intangible Assets

 

We make judgments about the recoverability of goodwill and intangible assets whenever events or changes in circumstances indicate that an other-than-temporary impairment in the remaining value of the assets recorded on our balance sheet may exist. We test the impairment of goodwill annually or more frequently if indicators of impairment arise. In order to estimate the fair value of intangible assets, we make various assumptions about the future prospects for the business that the asset relates to and typically estimate future cash flows to be generated by these businesses. Based on these assumptions and estimates, we determine whether we need to take an impairment charge to reduce the value of the asset stated on our balance sheet to reflect its estimated fair value. Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results. More conservative assumptions of the anticipated future benefits from these businesses would result in greater impairment charges, which would increase the net loss and result in lower asset values on our balance sheet. Conversely, less conservative assumptions would result in smaller impairment charges, lower net loss and higher asset values. We performed an annual review of our goodwill and intangible assets as of October 1, 2002 and no impairment charge was deemed necessary as of that date.

 

Restructuring

 

During fiscal years 2002 and 2001, we recorded significant accruals in connection with our restructuring programs. These accruals include estimates pertaining to the ability to sub-lease a facility in Mountain View, California. The actual costs may differ from these estimates. These estimates will be reviewed and potentially revised on a quarterly basis and, to the extent that future vacancy rates and sublease rates vary adversely from those estimates, we may incur additional losses that are not included in the accrued facilities consolidation charge at December 31, 2002. Conversely, unanticipated improvements in vacancy rates or sublease rates, or termination settlements for less than our accrued amounts, may result in a reversal of a portion of the accrued balance and a benefit on our statement of operations in a future period. Such reversals would be reflected as a credit to restructuring charges.

 

Allowance for Deferred Tax Assets

 

A valuation allowance is recorded to reduce all of the deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase income or reduce loss and increase stockholders’ equity in the period such determination was made.

 

Sources of Revenue and Revenue Recognition

 

We generate revenue from the sale of our products and services to enterprises, system integrators, reseller partners, and content providers. To date, we have generated our license and services revenue primarily from direct sales, and referral sales from our system integrators, to enterprise customers.

 

Enterprise customers have the option of purchasing perpetual licenses or renting time-based licenses for the Docent Enterprise Suite, that includes the Docent Learning Management Server, Docent Learning Content Management System, Docent Exchange, Docent Live!, Docent Peak Performance and Docent Analytics software. Docent Live! and Docent Peak Performance are third party products that we resell. Our perpetual

 

14


licensees pay an initial fee based on the number of users and may enter into annual maintenance contracts that include the right to receive periodic unspecified upgrades, error corrections, and telephone and Web-based support. Our time-based licenses require license holders to pay a monthly fee, which is based on the number of users and includes maintenance and support. Customers with perpetual or time-based licenses may also outsource to Docent the hosting of their system on a third party’s server for a monthly fee and an initial set-up fee.

 

In conjunction with the licensing of our software, we offer implementation and training services. To date, most of our enterprise customer revenue has been generated by perpetual software licenses, and maintenance and consulting services.

 

We typically sign multi-year royalty agreements with our content providers to deliver their content over the Web. Under these agreements, we receive a minimum annual payment and a percentage of the revenue these content providers receive in excess of the minimum payment for content which they or third parties, such as resellers or system integrators described below, provide to customers. For that minimum payment, we provide our software and application hosting. In the first year of the agreement, as part of the minimum payment, we also provide professional services such as implementation and training. During subsequent years, these services are available for an additional fee. To date, almost all of our revenue from content providers has been insignificant and consisted of minimum annual payments.

 

We generate revenue from our reseller partners who purchase our products and maintenance services, together with content from our content providers, and resell them to their customers. To date, resellers have typically sold perpetual licenses of our software and annual maintenance agreements. They usually provide additional professional services themselves, but may also resell some of our professional services. Generally, they receive a discount from our list license prices. When they resell content from our content providers, our content providers would receive revenue that is included in the calculation of the royalties we are entitled to receive from our content providers as described above.

 

Revenue from sales to resellers is recognized upon the receipt of a purchase order or a sales contract from the reseller and when the end customer has been identified, provided all the conditions for revenue recognition set forth above have been met. No right of return exists for these sales.

 

In accordance with SOP 97-2, as amended, we recognize revenue from licensing our software if all of the following conditions are met:

 

    There is persuasive evidence of an arrangement;

 

    We have delivered the product to the customer;

 

    Collection of the fees is probable; and

 

    The amount of the fees to be paid by the customer is fixed or determinable.

 

For arrangements requiring customer acceptance, revenue recognition is deferred until the earlier of the end of the acceptance period or until written notice of acceptance is received from the customer. We consider all arrangements with payment terms longer than normal not to be fixed or determinable. Our normal payment terms currently range from “net 30 days” to “net 60 days.” For arrangements involving extended payment terms, revenue recognition generally occurs when payments are due.

 

For arrangements involving time-based licenses, customers pay a fee based on the number of users, and such fees include maintenance and support. Objective evidence of fair value does not exist for the related maintenance and support, as maintenance and support are not offered separately for such time-based arrangements. In these cases, we recognize the entire arrangement fee ratably over the contractual maintenance and support period, which is generally one year. We have allocated the time-based license and maintenance revenue based on their relative costs.

 

15


 

For arrangements involving a significant amount of services related to installation, modification or customization of our software products, we recognize revenue using the percentage-of-completion method. However, where there are customer acceptance clauses that we do not have an established history of meeting or which are not considered to be routine, we recognize revenue when the arrangement has been completed and accepted by the customer.

 

For arrangements that include multiple elements, such as a product license, maintenance and support, hosting and professional services, we allocate revenue to all undelivered elements, usually maintenance and support, hosting and professional services, based on objective evidence of the fair value of those elements. Fair value is specific to us and represents the price for which we sell each element separately. Any amount remaining is allocated using the residual method to the delivered elements, generally only the product license, and recognized as revenue when the conditions discussed above are satisfied.

 

We recognize revenue from fees for ongoing maintenance and support ratably over the period of the maintenance and support agreement, which is generally one year. We recognize revenue allocated to, or fees generated from, the separate selling of professional services as the related services are performed. Fees associated with hosting and application service provider (“ASP”) services are recognized ratably over the period of the hosting agreement, which is generally one year.

 

For arrangements with our content providers, the minimum fee is allocated among the separate elements, including professional services and hosting, based on the fair value of each of these elements. Any minimum royalty amount is recognized as revenue ratably over the period in which it is earned, which is generally one year. Any royalty over and above the minimum is recognized upon receipt of a revenue report from the content provider.

 

Customer billings that have not been recognized as revenue in accordance with the above policies are shown on the balance sheet as deferred revenue.

 

Costs and expenses

 

Our cost of license revenue includes the cost of amortized developed and core technology from the gForce acquisition, the cost of third party software we resell, and the cost of manuals, production media and shipping costs. Our cost of service and maintenance revenue includes salaries and related expenses of our professional services organization and charges related to hosting activities and other third party services.

 

Research and development, sales and marketing, and general and administrative expense categories include direct costs, such as salaries, employee benefits, travel and entertainment, and allocated communication, information technology, rent and depreciation expenses. Sales and marketing expenses also include sales commissions and expenditures related to public relations, advertising, trade shows and marketing campaigns. General and administrative expenses also include legal and financial services fees.

 

Stock-based compensation consists of two components. The first component is amortization of unearned stock-based compensation recorded in connection with stock option grants to our employees. This amount represents the difference between the deemed fair value of our common stock for accounting purposes on the date these stock options were granted and the exercise price of those options. This amount is included as a component of stockholders’ equity and is being amortized on an accelerated basis by charges to operations over the vesting period of the options, consistent with the method described in Financial Accounting Standards Board Interpretation No. 28. The second component is the fair value of common stock and other equity instruments issued to non-employees in exchange for services. We use the Black-Scholes pricing model to estimate the fair value of other equity instruments granted to non-employees in accordance with Emerging Issue Task Force 96-18.

 

16


 

History of Losses

 

We have incurred significant costs to develop our technology and products and to build our engineering, sales, marketing, professional services and administration departments. As a result, we have incurred significant losses since inception and, as of December 31, 2002, had an accumulated deficit of $188.2 million. We believe our success will depend on increasing our customer and partner base and continually enhancing our products. We expect to continue to incur operating losses at least through fiscal year 2003.

 

Results of Operations

 

Years Ended December 31, 2002, 2001, and 2000

 

Revenue

 

Total revenue decreased $1.2 million, from $29.0 million in 2001 to $27.8 million in 2002. Total revenue in 2001 increased $18.0 million, from $11.0 million in 2000.

 

License revenue decreased $2.0 million, from $15.3 million in 2001 to $13.3 million in 2002. Total license revenue in 2001 increased $10.2 million, from $5.1 million for 2000. The decrease in license revenue from 2001 to 2002 was primarily due to a decrease in sales to new customers, a decrease in the average size, and a decrease in business referred from our reseller partners. The increase in license revenue, from 2000 to 2001 was primarily attributable to increased number of customers and repeat business with existing customers, and an increase in business referred from our reseller partners.

 

Service and maintenance revenue increased $826,000, from $13.7 million in 2001 to $14.5 million in 2002. Total service and maintenance revenue increased $7.8 million, from $5.9 million in 2000. The increase in service revenue from 2001 to 2002 was primarily attributable to the cumulative effect of renewals of annual maintenance agreements, partially offset by a decrease in consulting revenue. The increase in service revenue from 2000 to 2001 was primarily attributable to an increased number of customers, repeat business with existing customers, and the cumulative effect of renewals of annual maintenance agreements.

 

In 2002, 2001 and 2000, no one customer accounted for 10% or more of our total revenue.

 

Costs of Revenue

 

Cost of license revenue increased $1.2 million, from $480,000 in 2001 to $1.7 million in 2002. Cost of license revenue in 2001 increased $440,000, from $40,000 in 2000. The increases in cost of license revenue were primarily attributable to the cost of amortized developed and core technology from the gForce acquisition. The gForce acquisition occurred in the fourth quarter of 2001. Twelve months of the cost of amortized developed and core technology, or $1.4 million, were recorded in 2002, compared to three months, or $300,000, in 2001. No cost of amortized developed and core technology was recorded in 2000.

 

Cost of service and maintenance revenue decreased $5.1 million, from $13.9 million in 2001 to $8.8 million in 2002. Cost of service and maintenance revenue in 2001 increased by $4.7 million, from $9.2 million in 2000. The decrease in 2002 was due to decreased use of third party implementation service partners and hosting services, decreased personnel in our professional services organization, and a decrease in stock-based compensation. Expenses relating to third party implementation service partners and hosting services decreased $2.2 million, from $4.9 million in 2001 to $2.7 million in 2002. Expenses relating to service and maintenance personnel decreased $2.1 million, from $7.9 million in 2001 to $5.8 million in 2002. Stock-based compensation decreased $781,000, from $1.0 million in 2001 to $266,000 in 2002.

 

The increases from 2000 to 2001 were primarily due to increased use of and expenses related to third party service partners, and to a lesser extent, to the growth in personnel in our professional services organization.

 

17


Expenses relating to and the use of third party service partners increased $2.1 million from $2.8 million in 2000. Expenses relating to service and maintenance personnel increased $1.5 million from $6.4 million in 2000.

 

Service and maintenance gross profit (loss) percentage increased 41% from (1%) for 2001 to 40% for 2002. Service and maintenance gross loss percentage increased 55% in 2001, from a (56%) gross loss for 2000. The increases in both periods are primarily attributable to the improved billable utilization of employee consultants that perform implementation and other consulting services for customers and less reliance on third party implementation service partners. The increase in 2002 gross profit is also attributable to a greater percentage of lower cost maintenance revenue, and a decrease in higher cost services revenue.

 

Operating Expenses

 

Research and development.    Research and development expenses decreased $522,000, from $11.6 million in 2001 to $11.1 million in 2002. Research and development expenses in 2001 increased $5.0 million, from $6.6 million in 2000. The decrease in 2002 was attributable to a decrease in stock-based compensation, partially offset by increases in the number of external development consultants and research and development personnel. Stock-based compensation decreased $1.6 million, from $1.3 million of expense in 2001 to a credit of $335,000 in 2002. Expenses relating to external development consultants increased $850,000, from $1.1 million in 2001 to $2.0 million in 2002. Expenses relating to research and development personnel increased $457,000, from $9.1 million in 2001 to $9.5 million in 2002.

 

The increase from 2000 to 2001 was primarily attributable to increases in the number of research and development personnel. Expenses relating to research and development personnel in 2001 increased $4.6 million, from $4.5 million in 2000.

 

To date, all software development costs have been expensed in the period incurred.

 

Sales and marketing.    Sales and marketing expenses decreased $25.7 million, from $47.2 million in 2001 to $21.5 million in 2002. Sales and marketing expenses in 2001 decreased $3.8 million, from $51.0 million in 2000. The decrease in sales and marketing expenses in 2002 was due to a decrease in the number of employees and sales offices, and a decrease in stock-based compensation. Expenses related to sales and marketing personnel decreased $18.3 million, from $36.3 million in 2001 to $18.0 million in 2002. Stock-based compensation decreased $4.4 million, from $4.6 million in 2001 to $202,000 in 2002.

 

The decrease in sales and marketing expense from 2000 to 2001 was attributable to a decrease in stock-base compensation partially offset by an increase in the number of employees and sales offices. Stock-based compensation in 2001 decreased $15.0 million, from $19.6 million in 2000. Expenses related to sales and marketing personnel in 2001 increased $11.1 million from $25.2 million in 2000.

 

General and administrative.    General and administrative expenses decreased $7.1 million, from $13.0 million in 2001 to $5.9 million in 2002. General and administrative expenses in 2001 increased $1.9 million, from $11.1 million in 2000. The decrease in 2002 was primarily attributable to decreases in stock-based compensation and expenses relating to general and administrative personnel compensation. Stock-based compensation decreased $4.7 million, from $4.4 million of expense in 2001 to a credit of $298,000 in 2002. Expenses relating to general and administrative personnel decreased $1.9 million, from $5.5 million in 2001 to $3.6 million in 2002.

 

The increase from 2000 to 2001 was primarily attributable to an increase in outside professional service fees, such as attorneys and accountants, associated with our expansion into international markets and the regulatory requirements of being a public company. Outside professional service fees increased $1.7 million, from $970,000 in 2000 to $2.7 million in 2001.

 

18


 

Restructuring charges.    In 2002 and 2001, we implemented restructuring programs to better align operating expenses with anticipated revenues.

 

During the third quarter of fiscal 2001, Docent recorded a $4.2 million restructuring charge, which consisted of $3.0 million in facility exit costs, $704,000 in employee severance costs, $224,000 in equipment impairment and $211,000 in other exit costs. The restructuring program resulted in a reduction in force across all company functions of approximately 11%, or 35 employees.

 

During the fourth quarter of fiscal 2001, Docent recorded a $1.9 million restructuring charge, which consisted of $779,000 in facility exit costs, $833,000 in employee severance costs, $144,000 in equipment impairment and $188,000 in other exit costs. The restructuring program resulted in a reduction in force across all company functions of approximately 16%, or 45 employees. These facility exit costs include an adjustment of $112,000 related to the restructuring recorded during the third quarter of fiscal 2001. The adjustment reflects the reduction of the estimated sublease income of a particular vacated facility.

 

During the first quarter of fiscal 2002, Docent recorded a $925,000 restructuring charge, which consisted of $886,000 in employee severance costs and $39,000 in other exit costs. The restructuring program resulted in a reduction in force across all company functions of approximately 17%, or 42 employees.

 

During the second quarter of fiscal 2002, Docent recorded a $3.1 million restructuring charge, which consisted of $2.1 million in facility exit costs, $822,000 in employee severance costs, $163,000 in equipment impairment, and $27,000 in other exit costs. The restructuring program resulted in a reduction in force across all company functions of approximately 17%, or 36 employees. If Docent fails to sublease an exited facility, or the assumptions used for estimated time to sublease and sublease price are incorrect, an additional charge not exceeding $94,000 will occur.

 

During the second quarter of fiscal 2002, Docent increased its estimate of the total costs associated with the above restructuring activities and recorded an adjustment of $298,000. The adjustment reflects the reduction of the estimated sublease income of one vacated facility of $372,000, partially offset by the settlement cost of another lease obligation of $74,000.

 

During the third quarter of fiscal 2002, Docent continued the announced second quarter restructuring actions. Docent recorded a $381,000 restructuring charge, which consisted of $271,000 in employee severance costs, and $110,000 in equipment impairment. The continued restructuring program resulted in a reduction in force across all company functions of approximately 5%, or nine employees.

 

Also during the third quarter of fiscal 2002, Docent settled a facility lease obligation of a vacated facility, associated with the above restructuring activities, and recorded an adjustment of $1.6 million. The adjustment reflects a reduction of the future monthly lease payments that were originally estimated to be $3.0 million, but were settled for $1.4 million.

 

Management expects these restructuring programs will save Docent approximately $20.9 million per year of cash.

 

Stock-based compensation.    In connection with the issuance of common stock and the granting of stock options and warrants to our employees and non-employees, we recorded deferred stock-based compensation totaling approximately $54.2 million. Stock-based compensation credit, net, relating to the common stock, options and warrants was $193,000 for 2002 and an expense of $11.2 million for 2001, and $27.0 million for 2000. As of December 31, 2002, we had an aggregate of $926,000 of deferred stock-based compensation remaining to be amortized. The credit in stock-based compensation resulted from using a graded amortization method over the vesting period of generally four years. The graded amortization method records more expense early in the life of the options. The 2002 termination of certain Docent officers with unvested options, which had already been expensed under the graded method resulted the credit balance.

 

19


 

In 2002, in connection with the termination of an officer, we accelerated the vesting of certain stock options held by the individual and recorded a compensation charge of $14,000 related to the re-measurement of these options at the date of termination. Also in 2002, Docent granted 18,000 common stock options in exchange for services from consultants. The options vest in equal monthly installments over 12 months and Docent recorded a compensation charge of $14,000 associated with these options.

 

In 2001, in connection with the termination of certain employees, we accelerated the vesting of certain stock options held by them and recorded a compensation charge of $198,000 related to the re-measurement of these options at the date of termination. Also in 2001, Docent granted 2,500 common stock options in exchange for services from a consultant. Docent recorded a compensation charge of $44,000 associated with these options.

 

Amortization of the remaining deferred stock-based compensation is expected to result in additional charges to operations as follows: $720,000 in 2003; $157,000 in 2004; and $49,000 in 2005.

 

Acquisition

 

On October 16, 2001, we acquired gForce Systems, Inc. (“gForce”), a leading provider of rapid eLearning content management and delivery solutions. We acquired gForce to extend our existing product line. We accounted for the acquisition under the purchase method of accounting. Goodwill was subsequently reduced by $140,000 in the three months ended June 30, 2002 to $760,000, due to the settlement of a liability for an amount less than the amount recorded at the time of the acquisition. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

 

    

At October 16, 2001


 

Current assets

         

$

172

 

Property, plant, and equipment

         

 

211

 

Research and development assets

         

 

707

 

Intangible assets subject to amortization (thirty-two month weighted-average useful life):

               

Core technology (three year useful life)

  

$

2,493

        

Developed technology (fourteen month useful life)

  

 

568

        

Patents (three year useful life)

  

 

148

        

Trade name (fourteen month useful life)

  

 

83

        
    

        
           

 

3,292

 

Goodwill

         

 

900

 

           


Total assets acquired

         

 

5,282

 

           


Current liabilities

         

 

(3,804

)

Long-term liabilities

         

 

(939

)

           


Total liabilities assumed

         

 

(4,743

)

           


Net assets acquired

         

$

539

 

           


 

We acquired gForce by assuming liabilities of $4,743,000 and providing an advance payment of $119,000. We also incurred approximately $420,000 of acquisition costs, for a total purchase price of $5,282,000. To settle certain gForce liabilities, we issued 167,000 shares of our common stock valued at an aggregate amount of $1,019,000. To cover any undisclosed pre-acquisition claims against gForce, of the 167,000 total shares issued, we placed 42,000 shares of Docent’s common stock in escrow for 18 months.

 

To determine the value of the developed technology, the expected future cash flow attributed to all existing technology was discounted, taking into account risks related to the characteristics and applications of the technology, existing and future markets, and assessments of the life cycle stage of technology. The $707,000

 

20


assigned to research and development assets represented acquired in-process research and development (“IPR&D”) that had not yet reached technological feasibility and had no alternative future use. We wrote off these assets at the date of acquisition in accordance with Financial Accounting Standards Board Interpretation No. 4, Applicability of Financial Accounting Standards Board Statement No. 2 to Business Combination Accounted for by the Purchase Method. To estimate the value of the IPR&D, the expected cash flows attributed to the completed portion of the IPR&D were calculated. These cash flows considered the contribution of the core technology, the risks related to the development of the IPR&D and the percent of research completed as of the valuation date, as well as the expected life cycle of the technology. Finally, the cash flows attributed to the completed portion of the IPR&D, net of the core technology contribution, were discounted to the present value to estimate the value of the IPR&D. Goodwill is determined based on the residual difference between the amount paid and the values assigned to identified tangible and intangible assets. Goodwill is not being amortized. The Company began amortizing on a straight-line basis developed technology, core technology, trademarks and patents over useful life of fourteen to thirty-six months and consist of (in thousands):

 

    

December 31, 2002


  

December 31, 2001


    

Gross Carrying Amount


  

Accumulated Amortization


    

Net


  

Gross Carrying Amount


    

Accumulated Amortization


    

Net


Developed technology

  

$

568

  

$

(568

)

  

$

—  

  

$

568

    

$

(101

)

  

$

467

Core technology

  

 

2,493

  

 

(1,005

)

  

 

1,488

  

 

2,493

    

 

(174

)

  

 

2,319

Trade name

  

 

83

  

 

(83

)

  

 

—  

  

 

83

    

 

(15

)

  

 

68

Patents

  

 

148

  

 

(59

)

  

 

89

  

 

148

    

 

(10

)

  

 

138

    

  


  

  

    


  

    

$

3,292

  

$

(1,715

)

  

$

1,577

  

$

3,292

    

$

(300

)

  

$

2,992

    

  


  

  

    


  

 

The amortization expense associated with these intangible assets was $1,415,000 for the years ended December 31, 2002 and $300,000 for the years ended December 31, 2001.

 

Docent performed an impairment test of intangible assets as of October 1, 2002. As of October 1, 2002, based on the discounted cashflows expected during their remaining useful life, to their carrying value, there was no impairment of intangible assets recorded. Docent will perform an interim impairment analysis if circumstances warrant.

 

Interest expense, other expense, net, and interest income

 

Interest expense.    Interest expense decreased $148,000, from $294,000 in 2001 to $146,000 in 2002. In 2001, interest expense decreased $80,000, from $374,000 in 2000. The decreases in 2002 and 2001 were attributable to lower capital lease and equipment loan balances.

 

Other expense, net.    Other expense, net, decreased $366,000, from $430,000 in 2001 to $64,000 in 2002. The decrease in 2002 was due to net foreign exchange gains. In 2001, other expense, net, increased $240,000, from $190,000 in 2000. The increase in 2001 was attributable to increased state and local franchise tax.

 

Interest income.    Interest income decreased $2.9 million, from $3.9 million in 2001 to $990,000 in 2002. The decrease in 2002 was due to lower average cash and investments balances maintained by us, reflecting the use of cash to fund operations and lower interest rates. In 2001, interest income increased $1.1 million, from $2.8 million in 2000. The increase in 2001 was the result of higher average cash and investments balances, due to proceeds from our initial public offering in September 2000.

 

Provision for income taxes

 

We incurred U.S. operating losses for all periods from inception through December 31, 2002 and therefore have not recorded a provision for U.S. federal income taxes. We recorded a provision for foreign income taxes of

 

21


$96,000 and state taxes of $56,000 for 2002, a provision for foreign income taxes of $72,000 for 2001, and a provision for foreign income taxes of $63,000 for 2000.

 

Realization of the deferred tax assets is dependent on future earnings, the timing and amount of which are uncertain. Accordingly, a valuation allowance, in an amount equal to the net deferred tax assets as of December 31, 2002, has been established to reflect these uncertainties.

 

As of December 31, 2002, we had net operating loss carry-forwards for federal tax purposes of approximately $125.0 million and for state tax purposes of approximately $51.0 million. These federal and state tax loss carry-forwards are available to reduce future taxable income and expire at various dates beginning in 2004, if not utilized. Utilization of the net operating losses may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.

 

Liquidity and Capital Resources

 

Since inception, we have funded our operations primarily by the sale of equity securities, through which we have raised net proceeds of $172.1 million through December 31, 2002. As of December 31, 2002, we had approximately $37.0 million of cash and cash equivalents and $4.0 million of short-term investments.

 

Cash used in operating activities was $18.8 million in 2002, $46.8 million in 2001, and $33.1 million in 2000. The cash used during these periods was primarily attributable to net losses of $23.8 million in 2002, $60.9 million during 2001, and $64.7 million during 2000. In 2002, cash used to fund net losses was partially offset by a decrease in accounts receivable of $4.0 million. The decrease in accounts receivable is due to improved cash collections and lower revenue levels. In 2001 and 2000, the net losses included non-cash compensation charges related to various types of grants of our stock to employees and non-employees. Total expenses in relation to these grants were $11.4 million in 2001 and $27.0 million in 2000.

 

Investment in property and equipment, excluding equipment acquired under capital leases, was $642,000 in 2002, $2.6 million in 2001, and $3.5 million in 2000. In 2002, we sold $72.8 million of short-term investments, partially offset by purchases of $42.9 million of short-term investments. In 2001, we purchased $73.0 million of short-term investments partially offset by sales of $43.2 million of short-term investments and sales of $18.5 million of long-term investments. In 2000, we purchased $4.0 million of short-term investments and $18.5 million of long-term investments.

 

Cash used by financing activities was $2.2 million in 2002, primarily as a result of the purchase of $2.4 million of treasury stock. Cash used by financing activities was $2.6 million in 2001, as a result of payments on capital lease obligations and notes payable of $3.2 million. Cash provided by financing activities was $139.1 million in 2000, resulting primarily from $92.2 million in net proceeds from Docent’s initial public offering and from $45.7 million in net proceeds from the issuance of convertible preferred stock.

 

In September 2002, Docent entered into an agreement with a third party software company to resell that company’s product through April 2005. Under the agreement, Docent committed to purchase $1.0 million of the third party software and pay the third party software company $1.0 million over the first year of the agreement for the distributed software. If Docent fails to resell $1.0 million during the first year, Docent will pay the third party software company the remaining unsold balance due. The payment for the remaining unsold balance will be credited to future purchases over the life of the agreement.

 

22


 

At December 31, 2002, our contractual obligations and commercial commitments were as follows (in thousands):

 

    

Payment Due by Period


    

Total


  

Less than 1 Year


  

1-3 Years


  

4-5 Years


Capital lease obligation

  

$

144

  

$

99

  

$

45

  

$

Operating leases

  

 

1,960

  

 

777

  

 

1,165

  

 

18

Restructuring facility payments

  

 

1,752

  

 

656

  

 

1,096

  

 

Accenture consulting obligation

  

 

640

  

 

640

  

 

  

 

Software resale and distribution commitment

  

 

1,000

  

 

1,000

  

 

  

 

    

  

  

  

Total contractual cash obligations

  

$

5,496

  

$

3,172

  

$

2,306

  

$

18

    

  

  

  

 

Further information on capital lease obligation, restructuring facility payments and Accenture consulting obligation can be found in Notes to Consolidated Financial Statements, Note 7. Capital Leases and Notes Payable, Note 6. Restructuring Charge, and Note 14. Related Parties, respectively. Further information on operating leases and software resale and distribution commitment can be found in Notes to Consolidated Financial Statements, Note 8. Commitments and Contingencies.

 

We currently anticipate that our available cash resources will be sufficient to meet our presently anticipated working capital, capital expenditure and business expansion requirements for at least 12 months after the date of this filing. However, we may need to raise additional funds prior to this date to support a more rapid expansion than we currently anticipate, develop new or enhanced applications and services, respond to competitive pressures, acquire complementary businesses or technologies, or take advantage of unanticipated opportunities. We are planning to continue our decreases in cash used in operations, and eventually generate cash from operations.

 

Related Parties

 

In March 2000, we entered into an alliance agreement with Accenture, which was a stockholder of ours and one of whose retired partners is a member of our Board of Directors. The alliance agreement provides for the resale of our software products and services by Accenture, the submission of joint proposals to potential clients where either we would be subcontracting our services to Accenture or Accenture would be subcontracting its services to us; the alliance agreement also provides for revenue sharing. The alliance agreement is for an initial term of three years, terminating on March 31, 2003, with either party having the right to terminate the agreement without cause on 60 days’ notice. The alliance agreement automatically renews for an additional two-year term, terminating on March 31, 2005, unless either party notifies the other at least ninety days prior to the expiration of the term of its intent not to renew. As of February 28, 2003, neither Accenture nor Docent had given notification of any intent not to renew.

 

At September 30, 2002, we believe Accenture held approximately 72,000 shares of our common stock and had warrants, expiring on March 31, 2003, to purchase an additional 799,000 shares at $22.56 per share. Accenture’s holdings in our common stock on a fully diluted basis on September 30, 2002 represented approximately 6.0% of the outstanding shares of our common stock. In December 2002, Accenture sold all of their Docent common stock and warrants.

 

As part of the alliance agreement, Accenture resells our software products to third party customers. In 2002, we recognized $324,000 of revenue from Accenture as part of this resale arrangement. In 2001, we recognized $864,000 of revenue from Accenture as part of this resale arrangement. Pricing for Accenture resale agreements represents the fair value of comparable resale agreements with our other reseller partners. In 2000, we sold to Accenture a Docent Enterprise software license for Accenture’s internal use and recognized $663,000 of

 

23


associated revenue. Pricing for this internal use license represents the fair value of comparable agreements with unaffiliated third parties at the time of the sale.

 

A component of the alliance agreement with Accenture is revenue sharing. When Accenture introduces Docent to prospective third party customers, Accenture is entitled to a portion of the contracted license fee if we sell a license directly to such prospective third party customers. The negotiated revenue sharing amounts range from 10% to 30%, based on the amount of time and effort it takes to complete each sale. Our license revenue related to such sales is decreased by the revenue sharing amount due to Accenture. During 2002, we decreased our license revenue by $321,000, due to the revenue sharing agreement with Accenture. During 2001, we decreased our license revenue by $858,000, due to the revenue sharing agreement with Accenture. At December 31, 2002, we owed Accenture $325,000 related to license agreements that are subject to revenue sharing.

 

Docent subcontracted to Accenture $68,000 in 2001 and $11,000 in 2000 of consulting work for our third party customers. During 2002, Docent did not subcontract with Accenture any consulting work for our third party customers. Accenture charges us its standard hourly rates for consulting. Accenture subcontracted to us consulting work for Accenture’s third party customers in the amount of $6,000 during 2002, $337,000 during 2001 and $60,000 during 2000. Docent charges Accenture its standard hourly rates for consulting, and records such amounts as service revenue.

 

Concurrent with the alliance agreement, we entered into a consulting services agreement with Accenture pursuant to which we are currently committed to purchase $640,000 of consulting services from Accenture prior to April 1, 2003.

 

In August 2002, Docent signed a consulting agreement with Robert Lauer, one of its Board members. The agreement is for one year and will compensate Mr. Lauer $1,500 per day worked. Mr. Lauer worked 18 days in 2002. The agreement also grants Mr. Lauer 13,000 stock options that vest over one year with an exercise price of $2.80 per share. Mr. Lauer has been and will be consulting Docent management regarding strategic planning and business development.

 

Docent recorded Stock-based compensation expense of $14,000 related to these stock options in 2002. At each reporting date, the Company re-values the vested portion of these options using the Black-Scholes option pricing model. As a result, the stock-based compensation expense may fluctuate as the fair market value of the our common stock fluctuates.

 

The Company also entered into employment agreements with certain executive officers of the Company, as described in Item 13.

 

Employee Stock Options

 

Our stock option program is a key component of the compensation package we provide to attract and retain talented employees and align their interests with the interests of existing stockholders. Our cumulative potential dilution for the years ended December 31, 2002, 2001, and 2000 was 3.3%, 6.7% and 19.3%, respectively. The potential dilution percentage is calculated as the new option grants for the year, net of options forfeited by employees leaving the company, divided by the total outstanding shares at the beginning of the year. Many of these options, which have 10-year exercise periods, have exercise prices substantially higher than the current market price. At December 31, 2002, 66.0% of our outstanding stock options had exercise prices in excess of the then current market price. The Compensation Committee of the Board of Directors reviews and approves all stock option grants to executive officers. The Chief Executive Officer approves all individual stock option grants to non-executive officers.

 

24


 

Options granted from fiscal year 2000 through fiscal 2002 are summarized as follows:

 

    

(shares

in thousands)


 

Options outstanding at December 31, 1999

  

873

 

Options granted

  

5,484

 

Options exercised

  

(872

)

Cancellations

  

(2,565

)

    

Options outstanding at December 31, 2002

  

2,920

 

    

Average annual options granted net of cancellations

  

973

 

Weighted average shares outstanding for the three years ended December 31, 2002

  

13,852

 

Shares outstanding at December 31, 2002

  

14,337

 

Options outstanding as a percent of shares outstanding at December 31, 2002

  

20.4

%

Average annual options granted net of cancellations as a percentage of average shares outstanding on December 31, 2002, 2001, and 2000

  

20.6

%

 

Generally, we grant stock options to our existing employees on an annual basis. During the year ended December 31, 2002, we made grants of options to purchase approximately 2.2 million shares of our stock, which resulted in a net grant of options for 468,000 shares after deducting 1.7 million shares for cancelled options. The net options granted in 2002 after forfeitures represented 3.3% of our total outstanding shares of approximately 14.3 million as of December 31, 2002.

 

Factors That May Impact Future Operating Results and Stock Price

 

Our limited operating history subjects us to risks encountered by early stage companies and some of these risks are increased because we operate in a new and rapidly evolving market.

 

Because of our limited operating history, you must consider the risks, uncertainties and difficulties frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets, including without limitation, the following:

 

    risks that our revenue forecasts may be incorrect because of our limited sales to date and our long sales process, and

 

    risks that our new products, such as Docent Live!, Docent Peak Performance and Docent Analytics, will fail to achieve market acceptance.

 

We have not been in business long enough to use our operating history as a reliable aid in predicting trends specific to our company, which impairs our ability to make accurate business plans. Since the market for eLearning products is rapidly evolving, our operating history will be less relevant to future performance than the operating history of a company in an industry which is not subject to rapid change. In addition, since the market for eLearning products is new, we are limited in our ability to refer to industry trends as reliable predictors and to react to these trends. These limitations make it more difficult for us to anticipate the need for new products as the market for eLearning products changes, thus increasing our vulnerability to competition. As a result, we may either fail to increase, or suffer a decrease in, our market share, resulting in a decrease in our revenue.

 

We have a history of losses, expect future losses and may never achieve profitability.

 

We have experienced losses in each quarter since our inception and expect losses through fiscal year 2003. We incurred net losses of $23.8 million in fiscal 2002, $60.9 million in fiscal 2001, and $64.7 million in fiscal 2000. Our accumulated deficit as of December 31, 2002 was $188.2 million. We expect to derive substantially all

 

25


of our revenue for the foreseeable future from the licensing of our Docent Learning Management Server and Docent Learning Content Management System, and providing related services. Over the longer term, we expect to derive revenue from new products such as Docent Live! and Docent Peak Performance, Docent Analytics, Content, and services related to these offerings. In the future, we expect to continue to incur additional non-cash expenses relating to the amortization of deferred compensation and purchased intangible assets that will contribute to our net losses. As of December 31, 2002, we had an aggregate of $926,000 of deferred stock compensation and $1.6 million of purchased intangible assets to be amortized. As a result of all of the foregoing, we expect to incur losses for the foreseeable future and will need to generate significantly higher revenue in order to achieve profitability. If we achieve profitability, we may not be able to sustain it.

 

Fluctuations in our quarterly revenue and other operating results may cause our stock price to decline.

 

We believe that quarter-to-quarter comparisons of our revenue and other operating results are not meaningful and should not be relied on as indicators of our future performance. As a consequence of quarterly revenue fluctuations our financial results may fall short of the expectations of investors. If this occurs, the price of our common stock would likely drop. Our quarterly revenues are especially subject to fluctuations because they depend on the sale of a small number of relatively large orders. Furthermore, our quarterly revenues may be affected significantly by changes in revenue recognition policies and procedures based on changes to or new applicable accounting standards and how these standards are interpreted. As a result, our revenue and results from operations will likely vary significantly from quarter to quarter. These variances may cause our stock price to fluctuate.

 

Generally unfavorable economic conditions may cause our customers to reduce spending for new products and services, which would adversely affect our revenue.

 

The downturn in the economy has resulted in decreases in information technology spending in general. Our product and services require that our customers make a sizable initial investment in order to generate benefits from our product over time. Thus, in such an unfavorable economic environment, our enterprise customers have reduced and may further reduce the resources devoted to eLearning products and services, and in particular new products and services such as ours, before they cut back on other products and services, harming our revenue to a greater degree than the revenue of companies with different products and services.

 

Our direct sales cycle is lengthy and requires considerable investment with no assurance of when we will generate revenue from our efforts, if at all.

 

The period between our initial contact with a potential customer and that customer’s purchase of our products and services typically extends from six to nine months. The delay or failure to complete sales in a particular quarter could reduce our revenue in that quarter, as well as subsequent quarters over which revenue for the sale would likely be recognized. If our sales cycle unexpectedly lengthens in general or for one or more large orders, it would negatively affect the timing of our revenue and our revenue growth would be harmed. To sell our products and services successfully, we generally must educate our potential customers regarding the use and benefits of our products and services, which can require significant time, capital and other resources.

 

Although we must expend and allocate these resources prior to completing a sales transaction, we may never generate any revenue from these activities. In addition, many of our potential customers are large enterprises that generally take longer than smaller organizations to make significant business decisions. Any failure to meet investor expectations for a given quarter would likely cause the price of our common stock to decline.

 

We must generate significantly more revenue from our resellers to be successful and achieve profitability.

 

In order to be successful, we must increase and train our reseller sales force and enter into relationships with more resellers. The resellers will require time to learn about our products and services so that they may

 

26


effectively resell and implement them. A significant portion of our future revenue is dependent on our success in attracting new resellers and the motivation and ability of our existing and future resellers to sell and implement our products and services.

 

Our lack of product diversification means that any decline in price or demand for our products and services would seriously harm our business.

 

Our Docent Learning Management Server and Docent Learning Content Management System products and related services have accounted for substantially all of our revenue and this situation is expected to continue for the foreseeable future. Consequently, a decline in the price of, or demand for, the Docent Learning Management Server and Docent Learning Content Management System products or services, or their failure to achieve broad market acceptance, would seriously harm our business.

 

If we lose key personnel, or are unable to attract and retain additional management personnel, we may not be able to successfully grow and manage our business.

 

We believe that our future success will depend upon our ability to attract and retain our key technical and management personnel. These employees are not subject to employment contracts. We may not be successful in retaining our key employees in the future or in attracting and assimilating replacement or additional key personnel. Any failure in retaining and attracting management personnel may impair our ability to rapidly grow and manage our business.

 

Difficulties we may encounter in managing our size could adversely affect our results of operations.

 

We have experienced a period of rapid and substantial growth of our business, followed by a period of rapid and substantial downsizing of our workforce. These periods have placed a serious strain on our managerial, administrative and financial personnel and our internal infrastructure. To manage the changes these periods of expansion and contraction of our business and personnel have brought to our operations and personnel, we will be required to improve existing and implement new operational, financial and management controls, reporting systems and procedures. We may not be able to install adequate management information and control systems in an efficient and timely manner and our current or planned personnel systems, procedures and controls may not be adequate to support our future operations. If we are unable to manage further growth effectively, we will not be able to capitalize on attractive business opportunities.

 

Intense competition in our market segment could impair our ability to grow and to achieve profitability.

 

The market for our products and services is intensely competitive, dynamic and subject to rapid technological change. We expect the intensity of the competition and the pace of change to increase in the future. The relatively low barriers to entry in the eLearning market will encourage competition from a variety of established and emerging companies. Competitors vary in size and in the scope and breadth of the products and services offered. Many of our competitors have longer operating histories, substantially greater financial, technical, marketing or other resources, or greater name recognition than we have. As a result, our competitors may be able to respond more quickly than we can to new or emerging technologies and changes in customer requirements. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any one of which would seriously harm our business. Our current and potential competitors may develop and market new technologies that render our existing or future products and services obsolete, unmarketable or less competitive. Our current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with other learning solution providers, thereby increasing the availability of their services to address the needs of our current and prospective customers. We may not be able to compete successfully against our current and future competitors and competitive pressures that we encounter may seriously harm our business.

 

27


 

If we are unable to manage the complexity of conducting business globally, our international revenues may suffer.

 

International revenues accounted for approximately 24% of our revenue in fiscal 2002. We intend to expand our international presence in the future. Conducting business outside of the United States is subject to certain risks, including:

 

    changes in regulatory requirements and tariffs;

 

    language barriers;

 

    difficulties in staffing and managing foreign operations;

 

    longer payment cycles and greater difficulty in collecting accounts receivable;

 

    reduced protection of intellectual property rights;

 

    potentially harmful tax consequences;

 

    fluctuating exchange rates;

 

    price controls and other restrictions on foreign currency;

 

    difficulties in obtaining import and export licenses;

 

    the burden of complying with a variety of foreign laws; and

 

    political or economic constraints on international trade.

 

We might not successfully market, sell or distribute our products and services in foreign markets, and we cannot be certain that one or more of such factors will not materially adversely affect our future international operations, and consequently, our business and future growth.

 

Our market is subject to rapid technological change and if we fail to continually enhance our products and services, our revenue and business would be harmed.

 

We must continue to enhance and improve the performance, functionality and reliability of our products and services. The software and electronic commerce industries are characterized by rapid technological change, changes in user requirements and preferences, frequent new product and services introductions embodying new technologies, and the emergence of new industry standards and practices that could render our products and services obsolete. In the past, we have discovered that some of our customers desire additional performance and functionality not currently offered by our products. Our success will depend, in part, on our ability to internally develop and license leading technologies to enhance our existing products and services, to develop new products and services that address the increasingly sophisticated and varied needs of our customers, and to respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. If we are unable to adapt our products and services to changing market conditions, customer requirements or emerging industry standards, we may not be able to increase our revenue and expand our business.

 

If any of our major system integrators and business outsource providers changes the focus of their business or fails to comply with the terms of its agreements with us, our revenue will be harmed.

 

Our business model is dependent on developing additional revenue through our system integrators and businesses outsource providers. If one or more of these companies no longer wishes to develop business in the knowledge exchange market, we will not materially benefit from our strategic alliance with that company. In addition, if one or more of these companies breaches its strategic alliance agreement with us, we may lose the

 

28


potential for additional revenue. In addition, we will need to devote a substantial number of our personnel, as well as our financial resources, to developing and maintaining our relationships with these partners. Focusing our resources on these partnerships will impair our ability to develop revenues from direct sales and other sources, making us more dependent on our relationships with these partners. Therefore, if one or more of these relationships terminates, we could suffer a significant decrease in our revenue.

 

Our success depends upon the acceptance and successful integration by customers of our products. We often rely on third-party systems integrators to assist with implementation of our products. If large systems integrators fail to continue to support our solution or commit resources to us, if any of our customers is not able to successfully integrate our solution or if we are unable to adequately train our existing systems integration partners, our business, operating results and financial condition could suffer. In addition, we cannot control the level and quality of service provided by our current and future third-party system integrators.

 

We outsource the management and maintenance of our hosted and ASP solutions to third parties and will depend upon them to provide adequate management and maintenance services.

 

We rely on third parties to provide key components of our networks and systems. For instance, we rely on third-party Internet service providers to host the Docent Enterprise Suite for customers who desire to have these solutions hosted. We also rely on third-party communications service providers for the high-speed connections that link our and our Internet service providers’ Web servers and office systems to the Internet. Any Internet or communications systems failure or interruption could result in disruption of our service or loss or compromise of customer orders and data. These failures, especially if they are prolonged or repeated, would make our services less attractive to customers and tarnish our reputation.

 

Our products sometimes contain errors, and by releasing products containing defects our business and reputation may be harmed.

 

Our revenue may also decrease if previously undetected errors or performance problems in our existing or future products are discovered in the future or known errors considered minor by us are considered serious by our customers. Complex software products such as ours often contain unknown and undetected errors or performance problems. These errors or performance problems could result in lost revenue or delays in customer acceptance and may harm our business and reputation.

 

If third parties claim that we infringe on their patents, trademarks, or other intellectual property rights, it may result in costly litigation or require us to make royalty payments.

 

Currently, third parties have registered Docent or a variant as a trademark in the United States and in some other jurisdictions outside the United States for use with goods or services, which could be construed to overlap those offered by Docent. Although Docent is a registered trademark for Class 35 business services in the United States, we may not be able to register Docent as a trademark in some countries, including the United States, for use with other goods or services due to existing registrations of third parties. Although third parties have not initiated formal infringement proceedings or any other formal challenges to Docent’s use of the Docent trademark, any claims, with or without merit, could cause costly litigation that could consume significant management time. Docent only has one issued patent. Third parties alleging that Docent has infringed their patents have brought two patent infringement cases. These claims, which we believe to be without merit, and which we plan to vigorously defend, could be expensive and divert management attention from operating our company. If we become liable to third parties for infringement claims, we may be required to license the patents on terms that may or may not be favorable or we may be forced to alter our website or our software product which is the subject of the infringement claim, either of which may adversely affect our revenue.

 

29


 

We may not be able to adequately protect our intellectual property, and our competitors may be able to offer similar products and services that would harm our competitive position.

 

Our success and ability to effectively compete is dependent on our ability to develop and maintain the proprietary aspects of our technology and operate without infringing on the intellectual property rights of others. We rely on a combination of trademark, trade secret and copyright law and contractual restrictions to protect the proprietary aspects of our technology. These legal protections afford only limited protection for our technology. Docent only has one issued patent. We seek to protect the source code for our software, documentation and other written materials under trade secret and copyright laws. We license our software pursuant to signed license or “shrink wrap” agreements, which impose restrictions on the licensee’s ability to use the software. Finally, we seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to proprietary information to execute confidentiality agreements with us and by restricting access to our source code. Despite these precautions, third parties could copy or otherwise obtain and use our technology without authorization, or develop similar technology independently. Furthermore, effective protection of intellectual property rights is unavailable or limited in some foreign countries. Our protection of our intellectual property rights may not provide us with any legal remedy should our competitors independently develop similar technology, duplicate our products and services, or design around any intellectual property rights we hold.

 

We rely on third party software products incorporated in our product, and that we resell separately. Errors in these software products or our inability to continue to license these software products in the future would decrease our revenue and increase our costs.

 

Our product incorporates third party software, and we expect to incorporate additional software as we broaden our product and services. The operation of our product would be impaired if errors occur in the third party software that we incorporate, and we may incur additional costs to repair or replace the defective software. It may be difficult for us to correct any errors in third party software because the software is not within our control. Accordingly, our revenue would decrease and our costs would increase in the event of any errors in this software. Furthermore, it may be difficult for us to replace any third party software if a vendor seeks to terminate our license to the software. Intellectual property claims against these software products could adversely affect our revenue and increase our costs.

 

Our revenue could decrease and our costs could increase if we fail to adequately integrate acquired businesses.

 

As part of our overall business strategy, we continually evaluate and may pursue acquisitions of complementary businesses or technologies that would provide additional product or service offerings, additional industry expertise or an expanded geographic presence. We may not be able to locate attractive opportunities or acquire any we locate on favorable terms. If we do acquire technologies, products, or businesses, or we form alliances with companies requiring technology investments or revenue commitments we will face a number of risks to our business. The risks we may encounter include the potential for unknown liabilities of the acquired or combined business, potentially dilutive issuances of equity securities and the incurrence of debt. In addition, we may face difficulty in assimilating the acquired operations and employees, managing product co-development activities with our alliance partners, retaining the key employees of the acquired operation, successfully integrating the acquired technology and operations into our business and maintaining uniform standards, controls, policies, and procedures. We may also lack the experience to enter into the new product or technology markets made available by new acquisitions or alliances. Failure to manage these alliance activities effectively and to integrate entities or assets that we acquire could affect our operating results or financial condition.

 

In addition to the above-stated risks, under Statement of Financial Accounting Standards No. 142 (SFAS 142) “Goodwill and Other Intangible Assets,” our goodwill is not amortized but is instead reviewed at least annually for impairment. We test goodwill for impairment using the two-step process prescribed in SFAS 142. The first step is a screen for potential impairment, while the second step measures the amount of

 

30


impairment, if any. If general macroeconomic conditions deteriorate, affecting our business and operating results over the long-term, we could be required to record impairment charges related to goodwill, which could adversely affect our financial results.

 

If we need additional financing, we may not obtain the required financing on favorable terms and conditions.

 

We require substantial working capital to fund our business operations. We have had significant operating losses and negative cash flow from operations since inception and expect this to continue for the foreseeable future. We currently anticipate that our available cash resources will be sufficient to meet our anticipated working capital and capital expenditure requirements without needing to raise additional capital for at least 12 months after the date of this filing. However, if we are unable to meet our working capital and capital expenditure requirements with the remaining proceeds from our initial public offering and from our revenue, we will need to raise additional funds earlier. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. Additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our products and services or otherwise respond to competitive pressures would be significantly limited.

 

We do not have a comprehensive disaster recovery plan or back-up system, and a disaster could severely damage our operations.

 

We currently do not have a comprehensive disaster recovery plan in effect and do not have fully redundant systems for our services at an alternate site. A disaster could severely harm our business because our services could be interrupted for an indeterminate length of time. Our operations depend upon our ability to maintain and protect the computer systems needed for our day-to-day operations. A number of these computer systems are located on or near known earthquake fault zones. Although these systems are designed to be fault tolerant, they are vulnerable to damage from fire, floods, earthquakes, power loss, telecommunications failures and other events. Any damage to our facility could lead to interruptions in the services we provide to our customers and loss of customer information, and could substantially if not totally impair our ability to operate our business. The insurance we maintain may not be adequate to cover our losses resulting from disasters or other business interruptions.

 

Terrorism and the declaration of war by the United States against terrorism and other possible United States military actions may adversely affect our business.

 

The terrorist attacks that took place in the United States on September 11, 2001, the potential for future terrorist attacks in the United States, and the declaration of war by the United States against terrorism and other possible United States military actions have created significant instability and uncertainty in the world which may continue to have a material adverse effect on world financial markets, including financial markets in the United States. In addition, such adverse political events may have an adverse impact on economic conditions in the United States. Unfavorable economic conditions in the United States may have an adverse effect on our financial operations including, but not limited to, our ability to expand the market for our products, obtain financing as needed, enter into strategic relationships and effectively compete in the eLearning market.

 

A breach of Internet commerce security measures could reduce demand for our products and services which would in turn result in a reduction in our revenue.

 

A requirement of the continued growth of Web-based, business-to-business electronic commerce is the secure transmission of confidential information over public networks. Failure to prevent security breaches into our products or our customers’ networks, or well-publicized security breaches affecting the Internet in general, could significantly harm our growth and revenue. Advances in computer capabilities, new discoveries in the field of cryptography, or other developments may result in a compromise or breach of the algorithms we use to protect

 

31


content and transactions or our products or within our customers’ networks or proprietary information in our databases. Anyone who is able to circumvent our security measures could misappropriate proprietary and confidential information or could cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against such security breaches or to address problems caused by security breaches. Concerns over the security of the Internet and other online transactions and the privacy of users may also deter people from using the Internet to conduct transactions that involve transmitting confidential information.

 

We may become subject to government regulation and legal uncertainties that could reduce demand for our products and services or increase the cost of doing business, thereby adversely affecting our financial results.

 

We are not currently subject to direct regulation by any domestic or foreign governmental agency, other than regulations applicable to businesses generally, export control laws and laws or regulations directly applicable to Internet commerce. However, due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations may become applicable to us or may be adopted in the future with respect to the Internet covering issues such as:

 

    taxation;

 

    user privacy;

 

    content;

 

    right to access personal data;

 

    copyrights;

 

    distribution; and

 

    characteristics and quality of services.

 

The applicability of existing laws governing issues such as taxation, property ownership, copyrights, and other intellectual property issues, encryption, libel, export or import matters and personal privacy to the Internet is uncertain. The vast majority of these laws were adopted prior to the broad commercial use of the Internet and related technologies. As a result, they do not contemplate or address the unique issues of the Internet and related technologies. Changes to these laws, including some recently proposed changes, could create uncertainty in the Internet marketplace. Such uncertainty could reduce demand for our services or increase the cost of doing business due to increased costs of litigation or increased service delivery costs.

 

In addition, we could be liable for the misuse of personal information. The Federal Trade Commission, the European Union and certain state and local authorities have been investigating certain Internet companies regarding their use of personal information. We could incur additional expenses if new regulations regarding the use of personal information are introduced or if these authorities choose to investigate our privacy practices.

 

Our rights plan and the anti-takeover provisions in our charter documents could adversely affect the rights of the holders of our common stock.

 

Our Certificate of Incorporation and Bylaws contain provisions that could make it harder for a third-party to acquire us without the consent of our Board of Directors. For example, if a potential acquiror were to make a hostile bid for us, any acquiror holding less than fifty percent of the Company’s voting stock would not be able to call a special meeting of stockholders to remove our Board of Directors. A potential acquiror would also not be able to act by written consent without a meeting. In addition, our Board of Directors has staggered terms that make it difficult to remove all directors at once. The acquiror would also be required to provide advance notice of its proposal to remove directors at an annual meeting. The acquiror will not be able to cumulate votes at a meeting, which will require the acquiror to hold more shares to gain representation on the Board of Directors than if cumulative voting were permitted.

 

32


 

We have a stockholder rights plan. Under the plan, each holder of shares of our common stock has received a right to buy one one-hundredth of a share of our Series A preferred stock at an exercise price of $15.00, subject to adjustment, if a person or group were to acquire, or to announce the intention to acquire, 20% or more of our outstanding shares of common stock. Under this plan, our Board of Directors has the ability to issue preferred stock that would significantly dilute the ownership of a hostile acquiror. Our Board of Directors has designated 2,000,000 shares of preferred stock as Series A preferred stock in connection with our preferred stockholder rights plan.

 

In addition, Section 203 of the Delaware General Corporation Law limits business combination transactions with 15% stockholders that have not been approved by the board of directors. These provisions and other similar provisions make it more difficult or impossible for a third party to acquire us without negotiation. These provisions may apply even if the offer may be considered beneficial by some stockholders.

 

Our Board of Directors could choose not to negotiate with an acquiror that it did not feel was in our strategic interests. If the acquiror was discouraged from offering to acquire us or prevented from successfully completing a hostile acquisition by the anti-takeover measures, the stockholders could lose the opportunity to sell shares at a favorable price.

 

Recent Accounting Pronouncements

 

In July 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 146, Accounting for Costs Associated with Exit and Disposal Activities. This statement revises the accounting for exit and disposal activities under Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. Commitment to a plan to exit an activity or dispose of long-lived assets will no longer be sufficient to record a one-time charge for most anticipated costs. Instead, SFAS 146 requires exit or disposal costs be recorded when they are “incurred” and can be measured at fair value. SFAS 146 further requires that the recorded liability be adjusted for changes in estimated cash flows. The provisions of SFAS 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002. Previously issued financial statements cannot be restated for the effect of the provisions of SFAS 146 and liabilities previously recorded under EITF Issue No. 94-3 are grandfathered. We do not believe SFAS 146 will have a material impact on our consolidated financial statements.

 

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation— Transition and Disclosure. SFAS 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that changes to the fair value method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure provisions of SFAS 123 to require expanded and more prominent disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation. This disclosure will be required in the summary of significant accounting policies footnote or its equivalent in annual and interim financial statements. SFAS 148 does not amend SFAS 123 to require companies to account for their stock-based employee awards using the fair value method. We do not believe SFAS 148 will have a material impact on our consolidated financial statements.

 

In December 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”).” FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. We have adopted the disclosure requirements of FIN 45 as of December 31, 2002. In addition, we are required to adopt the initial recognition and measurement of the fair value of the obligation undertaken in issuing the guarantee on a prospective basis to guarantees issued or modified after December 31, 2002. We do not believe FIN 45 will have a material effect on our operations, financial position or cash flows.

 

33


 

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

Market and Currency Risk

 

We provide our services to customers primarily in the United States and, to a lesser extent, in Europe and elsewhere throughout the world. As a result, our financial results could be affected by risks typical of an international business. These risks include, but are not limited to, changes in foreign currency exchange rates, local regulations and restrictions and political climates, weak economic conditions in foreign markets, differing tax structures and foreign currency rate volatility. Sales are primarily made in U.S. Dollars; however, as we continue to expand our operations, more of our contracts may be denominated in Euros, British Pounds, Japanese Yen and Canadian Dollars. A strengthening of the U.S. Dollar could make our products less competitive in foreign markets. A sensitivity analysis was performed to measure the effect of a hypothetical 10% change in foreign currency rates to the U.S. Dollar. Based on this analysis, a 10% decrease in foreign exchange rates would result in an approximate $100,000 of foreign exchange loss associated with our international holdings.

 

Our exposure to foreign exchange rate fluctuations also arises in part from the translation of the financial results of our foreign subsidiaries into U.S. Dollars in consolidation. As exchange rates vary, these results, when translated, may vary from expectations and adversely impact overall expected profitability. To date, we have not engaged in any foreign exchange hedging activities.

 

Our investments are made in accordance with an investment policy approved by our Board of Directors. At December 31, 2002, the average maturity of our investment securities was approximately two to three months. All investment securities had maturities of less than one year. Our interest income is sensitive to changes in the general level of U.S. interest rates. Due to the short term nature of our cash equivalents and investments, which are primarily money market funds, commercial paper and U.S. Government agency notes, we believe that there is no material market risk exposure.

 

All investments are carried at market value, which approximates cost. At December 31, 2002, all of our investments were considered available for sale securities. The weighted average interest rate of our portfolio was 1.2% at December 31, 2002.

 

34


 

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Supplementary Data

 

The following tables set forth unaudited quarterly supplementary data for each of the years in the two-year period ended December 31, 2002.

 

    

Fiscal 2002, Quarter Ended


 
    

Mar 31


    

Jun 30


    

Sep 30


    

Dec 31


 
    

(in thousands, except per share data)

 

Revenue

  

$

8,006

 

  

$

6,645

 

  

$

6,056

 

  

$

7,085

 

Gross profit (1)

  

 

5,124

 

  

 

3,784

 

  

 

3,588

 

  

 

4,827

 

Loss from operations

  

 

(9,873

)

  

 

(7,191

)

  

 

(3,905

)

  

 

(3,452

)

Net loss

  

 

(9,795

)

  

 

(6,841

)

  

 

(3,940

)

  

 

(3,217

)

Net loss per share (2)

  

 

(0.71

)

  

 

(0.49

)

  

 

(0.28

)

  

 

(0.24

)

                                     
    

Fiscal 2001, Quarter Ended


 
    

Mar 31


    

Jun 30


    

Sep 30


    

Dec 31


 
    

(in thousands, except per share data)

 

Revenue

  

$

7,094

 

  

$

8,918

 

  

$

5,995

 

  

$

7,004

 

Gross profit (1)

  

 

3,875

 

  

 

4,479

 

  

 

2,572

 

  

 

3,732

 

Loss from operations

  

 

(15,167

)

  

 

(14,938

)

  

 

(18,910

)

  

 

(15,044

)

Net loss

  

 

(13,837

)

  

 

(14,072

)

  

 

(18,308

)

  

 

(14,712

)

Net loss per share (2)

  

 

(1.02

)

  

 

(1.05

)

  

 

(1.35

)

  

 

(1.05

)


(1)   Gross profit for the quarters ended December 31, 2001 to September 30, 2002 reflects the reclassification of gForce intangible asset amortization to cost of license. Amortization for gForce intangible assets was $360,000 for the three months ended September 30, 2002, $359,000 for the three months ended June 30, 2002, $360,000 for the three months ended March 31, 2002, and $300,000 for the three months ended December 31, 2001.

 

(2)   Per share amounts for all period presented have been adjusted to reflect the October 2002 one-for-three reverse stock split.

 

35


 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

    

Page


Consolidated Financial Statements of Docent, Inc.:

    

Report of Ernst & Young LLP, Independent Auditors

  

37

Report of PricewaterhouseCoopers LLP, Independent Accountants

  

38

Consolidated Balance Sheets

  

39

Consolidated Statements of Operations

  

40

Consolidated Statements of Stockholders’ Equity

  

41 to 42

Consolidated Statements of Cash Flows

  

43

Notes to Consolidated Financial Statements

  

44 to 67

 

36


 

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

 

The Board of Directors and Stockholders, Docent, Inc.

 

We have audited the accompanying consolidated balance sheets of Docent, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Docent, Inc. at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.

 

/s/    ERNST & YOUNG LLP

 

San Jose, California

January 23, 2003,

except for Note 17, as to which the date is

January 28, 2003.

 

37


REPORT OF INDEPENDENT ACCOUNTANTS

 

To the Board of Directors and Stockholders of

    Docent, Inc.:

 

In our opinion, the accompanying consolidated statements of operations, of convertible preferred stock and stockholders’ equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Docent, Inc. and its subsidiaries at December 31, 2000, and the results of their operations and their cash flows for year ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.

 

/s/    PRICEWATERHOUSECOOPERS LLP

 

San Jose, California

January 31, 2001

 

38


 

DOCENT, INC.

 

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

 

    

December 31,


 
    

2002


    

2001


 

ASSETS

                 

Current assets:

                 

Cash and cash equivalents

  

$

36,968

 

  

$

28,460

 

Short term investments

  

 

3,974

 

  

 

33,840

 

Restricted cash

  

 

46

 

  

 

456

 

Accounts receivable, net of allowances for doubtful accounts of $611 at December 31, 2002 and $541 at December 31, 2001

  

 

5,958

 

  

 

9,992

 

Prepaid expenses and other current assets

  

 

1,424

 

  

 

2,762

 

    


  


Total current assets

  

 

48,370

 

  

 

75,510

 

Property and equipment, net

  

 

3,118

 

  

 

4,702

 

Goodwill

  

 

760

 

  

 

900

 

Other intangible assets, net

  

 

1,577

 

  

 

2,992

 

Other assets

  

 

417

 

  

 

443

 

    


  


Total assets

  

$

54,242

 

  

$

84,547

 

    


  


LIABILITIES AND STOCKHOLDERS’ EQUITY

                 

Current liabilities:

                 

Accounts payable

  

$

1,032

 

  

$

1,650

 

Accrued payroll and related liabilities

  

 

2,478

 

  

 

3,297

 

Accrued liabilities

  

 

2,970

 

  

 

4,132

 

Current portion of restructuring accrual

  

 

888

 

  

 

2,996

 

Deferred revenue

  

 

6,626

 

  

 

6,177

 

Current portion of capital lease obligations

  

 

99

 

  

 

177

 

Notes payable

  

 

 

  

 

351

 

    


  


Total current liabilities

  

 

14,093

 

  

 

18,780

 

Restructuring accrual

  

 

1,096

 

  

 

973

 

Capital lease obligations

  

 

45

 

  

 

143

 

Commitments and contingencies

                 

Stockholders’ equity:

                 

Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued

  

 

 

  

 

 

Common stock, $0.001 par value; 83,333 shares authorized; 14,337 and 14,251 shares issued and outstanding in 2002 and 2001, respectively

  

 

14

 

  

 

14

 

Additional paid-in capital

  

 

231,331

 

  

 

238,880

 

Receivables from stockholders

  

 

(197

)

  

 

(980

)

Unearned stock-based compensation

  

 

(926

)

  

 

(8,292

)

Treasury stock, at cost: 1,231 shares in 2002 and 98 shares in 2001

  

 

(3,058

)

  

 

(667

)

Accumulated deficit

  

 

(188,228

)

  

 

(164,435

)

Accumulated other comprehensive income

  

 

72

 

  

 

131

 

    


  


Total stockholders’ equity

  

 

39,008

 

  

 

64,651

 

    


  


Total liabilities and stockholders’ equity

  

$

54,242

 

  

$

84,547

 

    


  


 

The accompanying notes are an integral part of these financial statements.

 

 

39


DOCENT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

    

Years Ended December 31,


 
    

2002


    

2001


    

2000


 

Revenue:

                          

License

  

$

13,286

 

  

$

15,331

 

  

$

5,062

 

Services and maintenance

  

 

14,506

 

  

 

13,680

 

  

 

5,889

 

    


  


  


Total revenue

  

 

27,792

 

  

 

29,011

 

  

 

10,951

 

    


  


  


Cost of revenue:

                          

Cost of license

  

 

1,706

 

  

 

480

 

  

 

40

 

Cost of services and maintenance (1)

  

 

8,763

 

  

 

13,873

 

  

 

9,160

 

    


  


  


Total cost of revenue

  

 

10,469

 

  

 

14,353

 

  

 

9,200

 

    


  


  


Gross profit (loss):

                          

License gross profit

  

 

11,580

 

  

 

14,851

 

  

 

5,022

 

Services and maintenance gross profit (loss)

  

 

5,743

 

  

 

(193

)

  

 

(3,271

)

    


  


  


Total gross profit

  

 

17,323

 

  

 

14,658

 

  

 

1,751

 

    


  


  


Operating expenses:

                          

Research and development (1)

  

 

11,126

 

  

 

11,648

 

  

 

6,561

 

Sales and marketing (1)

  

 

21,489

 

  

 

47,242

 

  

 

50,963

 

General and administrative (1)

  

 

5,936

 

  

 

12,991

 

  

 

11,117

 

Restructuring charge

  

 

3,193

 

  

 

6,129

 

  

 

 

In-process research and development

  

 

 

  

 

707

 

  

 

 

    


  


  


Total operating expenses

  

 

41,744

 

  

 

78,717

 

  

 

68,641

 

    


  


  


Loss from operations

  

 

(24,421

)

  

 

(64,059

)

  

 

(66,890

)

Interest expense

  

 

(146

)

  

 

(294

)

  

 

(374

)

Other income and (expense), net

  

 

(64

)

  

 

(430

)

  

 

(190

)

Interest income

  

 

990

 

  

 

3,926

 

  

 

2,827

 

    


  


  


Loss before provision for income taxes

  

 

(23,641

)

  

 

(60,857

)

  

 

(64,627

)

Provision for income taxes

  

 

152

 

  

 

72

 

  

 

63

 

    


  


  


Net loss

  

 

(23,793

)

  

 

(60,929

)

  

 

(64,690

)

    


  


  


Dividend accretion and deemed dividend on convertible preferred stock

  

 

 

  

 

 

  

 

(19,069

)

    


  


  


Net loss attributable to common stockholders

  

$

(23,793

)

  

$

(60,929

)

  

$

(83,759

)

    


  


  


Net loss per share attributable to common stockholders—basic and diluted

  

$

(1.72

)

  

$

(4.47

)

  

$

(19.04

)

    


  


  


Weighted average common shares outstanding

  

 

13,852

 

  

 

13,620

 

  

 

4,398

 

    


  


  



(1)   Non-cash amounts for amortization of unearned stock-based compensation, acceleration of stock option

vesting and issuance of options in exchange for services include the following:

 

    

Years Ended December 31,


    

2002


    

2001


  

2000


Cost of services and maintenance

  

$

266

 

  

$

1,047

  

$

802

    


  

  

Operating expenses:

                      

Research and development

  

 

(335

)

  

 

1,318

  

 

1,836

Sales and marketing

  

 

202

 

  

 

4,636

  

 

19,576

General and administrative

  

 

(298

)

  

 

4,428

  

 

4,801

    


  

  

Total included in operating expenses

  

$

(431

)

  

$

10,382

  

$

26,213

    


  

  

 

The accompanying notes are an integral part of these financial statements

 

40


DOCENT, INC.

CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands, except per share amounts)

 

   

Convertible Preferred Stock


   

Common Stock


 

Additional Paid-In Capital


    

Receivables from Stockholders


   

Treasury Stock


  

Unearned Stock-based Compensation


    

Accumulated Deficit


      

Accumulated Other Comprehensive Income


 

Total


 
   

Shares


   

Amount


   

Shares


    

Amount


      

Shares


 

Amount


            

Balances, December 31, 1999

 

6,130

 

 

$

33,288

 

 

1,770

 

  

$

2

 

$

11,221

 

  

$

(487

)

 

    —  

 

$

—  

  

$

(7,200

)

  

$

(26,866

)

    

$

—  

 

$

(23,330

)

Issuance of Series E convertible preferred stock for cash at $22.56 per share, net of issuance costs of $1,777

 

1,239

 

 

 

26,613

 

 

—  

 

  

 

—  

 

 

—  

 

  

 

—  

 

 

  —  

 

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

 

—  

 

Issuance of common stock warrants in connection with Series E convertible preferred stock financing

 

—  

 

 

 

—  

 

 

—  

 

  

 

—  

 

 

179

 

  

 

—  

 

 

—  

 

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

 

179

 

Issuance of Series F convertible preferred stock for cash at $22.56 per share, net of issuance costs of $675

 

867

 

 

 

18,761

 

 

—  

 

  

 

—  

 

 

—  

 

  

 

—  

 

 

—  

 

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

 

—  

 

Issuance of common stock warrants in connection with Series F convertible preferred stock financing

 

—  

 

 

 

—  

 

 

—  

 

  

 

—  

 

 

107

 

  

 

—  

 

 

—  

 

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

 

107

 

Issuance of Series D preferred stock upon exercise of warrant

 

62

 

 

 

—  

 

 

—  

 

  

 

—  

 

 

—  

 

  

 

—  

 

 

—  

 

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

 

—  

 

Unearned stock-based compensation

 

—  

 

 

 

—  

 

 

—  

 

  

 

—  

 

 

27,016

 

  

 

—  

 

 

—  

 

 

—  

  

 

(27,355

)

  

 

—  

 

    

 

—  

 

 

(339

)

Amortization of unearned stock-based compensation

 

—  

 

 

 

—  

 

 

—  

 

  

 

—  

 

 

—  

 

  

 

—  

 

 

—  

 

 

—  

  

 

12,310

 

  

 

—  

 

    

 

—  

 

 

12,310

 

Gross compensation expense—options to non-employees

 

—  

 

 

 

—  

 

 

—  

 

  

 

—  

 

 

709

 

  

 

—  

 

 

—  

 

 

—  

  

 

(709

)

  

 

—  

 

    

 

—  

 

 

—  

 

Stock-based compensation on acceleration of options upon termination

 

—  

 

 

 

—  

 

 

—  

 

  

 

—  

 

 

363

 

  

 

—  

 

 

—  

 

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

 

363

 

Amortization of non-employee stock-based compensation

 

—  

 

 

 

—  

 

 

—  

 

  

 

—  

 

 

—  

 

  

 

—  

 

 

—  

 

 

—  

  

 

655

 

  

 

—  

 

    

 

—  

 

 

655

 

Issuance of common stock in exchange for services

 

—  

 

 

 

—  

 

 

56

 

  

 

—  

 

 

1,402

 

  

 

—  

 

 

—  

 

 

—  

  

 

(256

)

  

 

—  

 

    

 

—  

 

 

1,146

 

Issuance of common stock for cash on exercise of options

 

—  

 

 

 

—  

 

 

541

 

  

 

1

 

 

2,119

 

  

 

—  

 

 

—  

 

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

 

2,120

 

Issuance of common stock for notes receivable on exercise of options

 

—  

 

 

 

—  

 

 

315

 

  

 

—  

 

 

1,835

 

  

 

(1,834

)

 

—  

 

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

 

1

 

Issuance of common stock upon exercise of warrants

 

—  

 

 

 

—  

 

 

75

 

  

 

—  

 

 

36

 

  

 

—  

 

 

—  

 

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

 

36

 

Repurchase of unvested shares of restricted common stock

 

—  

 

 

 

—  

 

 

(13

)

  

 

—  

 

 

(67

)

  

 

—  

 

 

—  

 

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

 

(67

)

Repayment of receivables from stockholders

 

—  

 

 

 

—  

 

 

—  

 

  

 

—  

 

 

—  

 

  

 

286

 

 

—  

 

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

 

286

 

Issuance of preferred stock warrants in exchange for services

 

—  

 

 

 

—  

 

 

—  

 

  

 

—  

 

 

12,556

 

  

 

—  

 

 

—  

 

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

 

12,556

 

Issuance of common stock warrants in exchange for services

 

—  

 

 

 

—  

 

 

—  

 

  

 

—  

 

 

324

 

  

 

—  

 

 

—  

 

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

 

324

 

Dividend accretion on convertible preferred stock

 

—  

 

 

 

7,119

 

 

—  

 

  

 

—  

 

 

(7,119

)

  

 

—  

 

 

—  

 

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

 

(7,119

)

Deemed dividend on convertible preferred stock

 

—  

 

 

 

—  

 

 

—  

 

  

 

—  

 

 

11,950

 

  

 

—  

 

 

—  

 

 

—  

  

 

—  

 

  

 

(11,950

)

    

 

—  

 

 

—  

 

Issuance of common stock in initial public offering, net of issuance costs of $9,040

 

—  

 

 

 

—  

 

 

3,067

 

  

 

3

 

 

92,156

 

  

 

—  

 

 

—  

 

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

 

92,159

 

Conversion of preferred stock to common stock upon initial public offering

 

(8,298

)

 

 

(85,781

)

 

8,298

 

  

 

8

 

 

85,773

 

  

 

—  

 

 

—  

 

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

 

85,781

 

Issuance of common stock for employee stock purchase plan

 

—  

 

 

 

—  

 

 

20

 

  

 

—  

 

 

—  

 

  

 

—  

 

 

—  

 

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

 

—  

 

Rescission of stock options exercised

 

—  

 

 

 

—  

 

 

(149

)

  

 

—  

 

 

(948

)

  

 

948

 

 

—  

 

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

 

—  

 

Net loss

 

—  

 

 

 

—  

 

 

—  

 

  

 

—  

 

 

—  

 

  

 

—  

 

 

—  

 

 

—  

  

 

—  

 

  

 

(64,690

)

    

 

—  

 

 

(64,690

)

Foreign currency translation adjustments

 

—  

 

 

 

—  

 

 

—  

 

  

 

—  

 

 

—  

 

  

 

—  

 

 

—  

 

 

—  

  

 

—  

 

  

 

—  

 

    

 

118

 

 

118

 

   

 


 

  

 


  


 
 

  


  


    

 


Comprehensive loss

 

—  

 

 

 

—  

 

 

—  

 

  

 

—  

 

 

—  

 

  

 

—  

 

 

—  

 

 

—  

  

 

—  

 

  

 

—  

 

    

 

—  

 

 

(64,572

)

   

 


 

  

 


  


 
 

  


  


    

 


Balances, December 31, 2000

 

—  

 

 

$

—  

 

 

13,980

 

  

$

14

 

$

239,612

 

  

$

(1,087

)

 

—  

 

$

  —  

  

$

(22,555

)

  

$

(103,506

)

    

$

118

 

$

112,596

 

   

 


 

  

 


  


 
 

  


  


    

 


 

The accompanying notes are an integral part of these financial statements.

 

41


 

DOCENT, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except per share amounts)

 

   

Common Stock


 

Additional Paid-In Capital


    

Receivables from Stockholders


    

Unearned Stock-based Compensation


   

Treasury Stock


    

Accumulated Deficit


      

Accumulated Other Comprehensive Income


   

Total


 
   

Shares


    

Amount


         

Shares


   

Amount


           

Balances, December 31, 2000

 

13,980

 

  

$

14

 

$

239,612

 

  

$

(1,087

)

  

$

(22,555

)

 

—  

 

 

$

—  

 

  

$

(103,506

)

    

$

118

 

 

$

112,596

 

Issuance of common stock in connection with the acquisition of gForce

 

167

 

  

 

—  

 

 

1,019

 

  

 

—  

 

  

 

—  

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

—  

 

 

 

1,019

 

Amortization of unearned stock-based compensation

 

—  

 

  

 

—  

 

 

—  

 

  

 

—  

 

  

 

11,091

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

—  

 

 

 

11,091

 

Compensation expense—options to non-employees

 

—  

 

  

 

—  

 

 

44

 

  

 

—  

 

  

 

—  

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

—  

 

 

 

44

 

Stock-based compensation on acceleration of options upon termination

 

—  

 

  

 

—  

 

 

198

 

  

 

—  

 

  

 

—  

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

—  

 

 

 

198

 

Amortization of non-employee stock-based compensation

 

—  

 

  

 

—  

 

 

—  

 

  

 

—  

 

  

 

96

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

—  

 

 

 

96

 

Reversal of unearned deferred stock-based compensation for terminated employees

 

—  

 

  

 

—  

 

 

(3,076

)

  

 

—  

 

  

 

3,076

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

—  

 

 

 

—  

 

Issuance of common stock for cash upon exercise of options

 

113

 

  

 

—  

 

 

541

 

  

 

—  

 

  

 

—  

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

—  

 

 

 

541

 

Issuance of common stock upon exercise of warrants

 

58

 

  

 

—  

 

 

—  

 

  

 

—  

 

  

 

—  

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

—  

 

 

 

—  

 

Repurchase of unvested shares of restricted common stock

 

(95

)

  

 

—  

 

 

(387

)

  

 

107

 

  

 

—  

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

—  

 

 

 

(280

)

Treasury stock purchased

 

—  

 

  

 

—  

 

 

—  

 

  

 

—  

 

  

 

—  

 

 

(98

)

 

 

(667

)

  

 

—  

 

    

 

—  

 

 

 

(667

)

Issuance of common stock for employee stock purchase plan

 

28

 

  

 

—  

 

 

929

 

  

 

—  

 

  

 

—  

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

—  

 

 

 

929

 

Net loss

 

—  

 

  

 

—  

 

 

—  

 

  

 

—  

 

  

 

—  

 

 

—  

 

 

 

—  

 

  

 

(60,929

)

    

 

—  

 

 

 

(60,929

)

Change in unrealized loss on investments

 

—  

 

  

 

—  

 

 

—  

 

  

 

—  

 

  

 

—  

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

(14

)

 

 

(14

)

Foreign currency translation adjustments

 

—  

 

  

 

—  

 

 

—  

 

  

 

—  

 

  

 

—  

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

27

 

 

 

27

 

   

  

 


  


  


 

 


  


    


 


Comprehensive loss

 

—  

 

  

 

—  

 

 

—  

 

  

 

—  

 

  

 

—  

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

—  

 

 

 

(60,916

)

   

  

 


  


  


 

 


  


    


 


Balances, December 31, 2001

 

14,251

 

  

 

14

 

 

238,880

 

  

 

(980

)

  

 

(8,292

)

 

(98

)

 

 

(667

)

  

 

(164,435

)

    

 

131

 

 

 

64,651

 

   

  

 


  


  


 

 


  


    


 


Amortization of unearned stock-based compensation

 

  —  

 

  

 

—  

 

 

—  

 

  

 

—  

 

  

 

2,814

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

—  

 

 

 

2,814

 

Stock-based compensation credit for terminated employees

              

 

(3,007

)

                                                     

 

(3,007

)

Compensation expense—options to non-employees

 

—  

 

  

 

—  

 

 

14

 

  

 

—  

 

  

 

—  

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

—  

 

 

 

14

 

Stock-based compensation on acceleration of options upon termination

 

—  

 

  

 

—  

 

 

14

 

  

 

—  

 

  

 

—  

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

—  

 

 

 

14

 

Reversal of unearned deferred stock-based compensation for terminated employees

 

—  

 

  

 

—  

 

 

(4,552

)

  

 

—  

 

  

 

4,552

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

—  

 

 

 

—  

 

Issuance of common stock for cash upon exercise of options

 

51

 

  

 

—  

 

 

109

 

  

 

—  

 

  

 

—  

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

—  

 

 

 

109

 

Repurchase of unvested shares of restricted common stock

 

(42

)

  

 

—  

 

 

(474

)

  

 

325

 

  

 

—  

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

—  

 

 

 

(149

)

Repayment of receivables from stockholders

 

—  

 

  

 

—  

 

 

—  

 

  

 

458

 

  

 

—  

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

—  

 

 

 

458

 

Treasury stock purchased

 

—  

 

  

 

—  

 

 

—  

 

  

 

—  

 

  

 

—  

 

 

(1,133

)

 

 

(2,391

)

  

 

—  

 

    

 

—  

 

 

 

(2,391

)

Issuance of common stock for employee stock purchase plan

 

77

 

  

 

—  

 

 

347

 

  

 

—  

 

  

 

—  

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

—  

 

 

 

347

 

Net loss

 

—  

 

  

 

—  

 

 

—  

 

  

 

—  

 

  

 

—  

 

 

—  

 

 

 

—  

 

  

 

(23,793

)

    

 

—  

 

 

 

(23,793

)

Change in unrealized loss on investments

 

—  

 

  

 

—  

 

 

—  

 

  

 

—  

 

  

 

—  

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

14

 

 

 

14

 

Foreign currency translation adjustments

 

—  

 

  

 

—  

 

 

—  

 

  

 

—  

 

  

 

—  

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

(73

)

 

 

(73

)

   

  

 


  


  


 

 


  


    


 


Comprehensive loss

 

—  

 

  

 

—  

 

 

—  

 

  

 

—  

 

  

 

—  

 

 

—  

 

 

 

—  

 

  

 

—  

 

    

 

—  

 

 

 

(23,852

)

   

  

 


  


  


 

 


  


    


 


Balances, December 31, 2002

 

14,337

 

  

$

14

 

$

231,331

 

  

$

(197

)

  

$

(926

)

 

(1,231

)

 

$

(3,058

)

  

$

(188,228

)

    

$

72

 

 

$

39,008

 

   

  

 


  


  


 

 


  


    


 


 

The accompanying notes are an integral part of these financial statements.

 

42


DOCENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

    

Years Ended December 31,


 
    

2002


    

2001


    

2000


 

Cash flows from operating activities

                          

Net loss

  

$

(23,793

)

  

$

(60,929

)

  

$

(64,690

)

Adjustments to reconcile net loss to net cash used in operating activities:

                          

Depreciation and amortization

  

 

2,002

 

  

 

1,858

 

  

 

978

 

Amortization of deferred interest expense

  

 

39

 

  

 

106

 

  

 

106

 

Amortization of intangible assets

  

 

1,415

 

  

 

300

 

  

 

—  

 

Amortization of unearned stock-based compensation

  

 

(193

)

  

 

11,187

 

  

 

12,334

 

In-process research and development

  

 

—  

 

  

 

707

 

  

 

—  

 

Non-cash restructuring charge

  

 

333

 

  

 

311

 

  

 

—  

 

Disposal of property and equipment

  

 

63

 

  

 

—  

 

  

 

—  

 

Acceleration of stock option vesting

  

 

14

 

  

 

198

 

  

 

—  

 

Issuance of options in exchange for services

  

 

14

 

  

 

44

 

  

 

655

 

Issuance of convertible preferred stock and common stock warrants in exchange for services

  

 

—  

 

  

 

—  

 

  

 

12,880

 

Issuance of common stock in exchange for services

  

 

—  

 

  

 

—  

 

  

 

1,146

 

Changes in operating assets and liabilities:

                          

Accounts receivable, net

  

 

4,034

 

  

 

(2,937

)

  

 

(6,136

)

Prepaid expenses and other assets

  

 

1,218

 

  

 

(1,319

)

  

 

(1,191

)

Accounts payable

  

 

(618

)

  

 

(410

)

  

 

701

 

Accrued liabilities

  

 

(1,841

)

  

 

405

 

  

 

4,943

 

Restructuring accrual

  

 

(1,985

)

  

 

3,969

 

  

 

—  

 

Deferred revenue

  

 

449

 

  

 

(248

)

  

 

5,165

 

    


  


  


Net cash used by in operating activities

  

 

(18,849

)

  

 

(46,758

)

  

 

(33,109

)

    


  


  


Cash flows from investing activities

                          

Purchases of property and equipment

  

 

(642

)

  

 

(2,641

)

  

 

(3,486

)

Payments for acquisition, net of cash acquired

  

 

—  

 

  

 

(526

)

  

 

—  

 

Restricted cash

  

 

410

 

  

 

(456

)

  

 

—  

 

Purchases of short term investments

  

 

(42,872

)

  

 

(73,038

)

  

 

(4,029

)

Sales of short term investments

  

 

72,752

 

  

 

43,212

 

  

 

—  

 

Sales (purchases) of long term investments

  

 

—  

 

  

 

18,450

 

  

 

(18,450

)

    


  


  


Net cash provided (used in) investing activities

  

 

29,648

 

  

 

(14,999

)

  

 

(25,965

)

    


  


  


Cash flows from financing activities

                          

Proceeds from issuance of common stock in initial public offering

  

 

—  

 

  

 

—  

 

  

 

92,159

 

Proceeds from issuance of convertible preferred stock, net

  

 

—  

 

  

 

—  

 

  

 

45,660

 

Proceeds from the exercising of common stock options and warrants, net

  

 

456

 

  

 

1,470

 

  

 

2,156

 

Proceeds from repayment of stockholder receivable

  

 

458

 

  

 

—  

 

  

 

286

 

Repurchase of common stock

  

 

(149

)

  

 

(280

)

  

 

(67

)

Treasury stock purchased

  

 

(2,391

)

  

 

(667

)

  

 

—  

 

Repayments of capital lease obligations

  

 

(202

)

  

 

(1,579

)

  

 

(77

)

Repayments of notes payable

  

 

(390

)

  

 

(1,572