10-K/A 1 ka10_033102.txt MARCH 31, 2002 10K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 10-K/A ------------------- (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 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: DIGITALTHINK, INC. (Exact name of registrant as specified in its charter) Delaware 94-3244366 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 601 Brannan Street, San Francisco, California 94107 (Address of principal executive offices) (Zip code) (415) 625-4000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of Exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value (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 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 disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of registrant's voting stock held by non-affiliates of registrant, based upon the closing sale price of the common stock on May 23, 2002, as reported on the Nasdaq National Market, was approximately $55.7 million. Shares of common stock held by each officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. Outstanding shares of registrant's common stock, $.001 par value, as of May 23, 2002: 40,987,547 EXPLANATORY NOTE: PURSUANT TO THIS FORM 10-K/A, THE REGISTRANT AMENDS "ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" OF PART I OF ITS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 2002 TO CORRECT NOTE 8, STOCKHOLDER'S EQUITY (DEFICIT), TO THE CONSOLIDATED FINANCIAL STATEMENTS. THESE CHANGES, WHICH ARE DESCRIBED IN THE FOLLOWING PARAGRAPH AND NOTE 14, DID NOT IMPACT THE REGISTRANT'S CONSOLIDATED BALANCE SHEET, INCOME STATEMENT, OR NET OR PER SHARE LOSS FOR ANY OF THE PERIODS PRESENTED. THE COMPANY HAS CORRECTED CERTAIN PRO FORMA CALCULATIONS COMPUTED IN ACCORDANCE WITH STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. THESE CHANGES RELATE TO THE COMPUTATIONS OF PRO FORMA TOTAL AND PER SHARE NET LOSS FOR THE YEARS ENDED MARCH 31, 2000, 2001, AND 2002 AND THE EXPECTED LIFE AFTER VESTING FOR FISCAL 2000 TO REFLECT THE ACTUAL LIFE USED IN SUCH COMPUTATIONS. OTHER THAN THE CHANGES INDICATED IN NOTE 14, AND THE CORRECTION OF THE PRO FORMA AMOUNTS IN NOTE 8, NO OTHER CHANGES HAVE BEEN MADE TO THE REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 2002. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders DigitalThink, Inc. We have audited the accompanying consolidated balance sheets of DigitalThink, Inc. and subsidiaries as of March 31, 2001 and 2002, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended March 31, 2002. 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 of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of DigitalThink, Inc. and subsidiaries at March 31, 2001 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2002 in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP San Jose, California April 23, 2002 (August 12, 2002 as to Note 14) DIGITALTHINK, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) ASSETS
As of March 31, 2001 2002 ------------ -------- Current assets: Cash and cash equivalents........................ $ 30,512 $ 29,470 Marketable securities............................ 33,526 1,640 Accounts receivable, net of allowance for doubtful accounts of $247 and $484, respectively......... 9,027 5,779 Prepaid expenses and other current assets......... 4,118 1,675 ----------- ---------- Total current assets............................... 77,183 38,564 Restricted cash and deposits......................... 3,833 4,083 Property and equipment, net.......................... 15,061 18,325 Goodwill and other intangible assets................. 15,610 75,300 ----------- ---------- Total assets......................................$ 111,687 $ 136,272 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................. $ 4,471 $ 3,569 Accrued liabilities............................... 6,524 13,238 Borrowings under line of credit................... -- 2,577 Deferred revenues.................................. 11,548 7,043 ----------- ----------- Total current liabilities........................ 22,543 26,427 Long-term liabilities.............................. 17 119 Commitments and contingencies (Note 12) Stockholders' equity: Common stock-- $0.001 per share value; 250,000 shares authorized; issued and outstanding 34,999 in 2001 and 40,452 in 2002............... 187,583 267,814 Deferred stock compensation...................... (3,099) (631) Stockholders' notes receivable................... (9) -- Accumulated other comprehensive income........... 204 (264) Accumulated deficit.............................. (95,552) (157,193) ----------- ----------- Total stockholders' equity....................... 89,127 109,726 ----------- ----------- Total liabilities and stockholders' equity.......$ 111,687 $ 136,272 =========== =========== See accompanying notes to consolidated financial statements.
DIGITALTHINK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Year Ended March 31, 2000 2001 2002 ---------- ----------- -------- Revenues: Delivered Learning fees....................$ 4,994 $ 17,978 $ 20,401 Learning Solution services................ 5,821 20,680 22,955 --------- ---------- ---------- Total revenues.......................... 10,815 38,658 43,356 --------- ---------- ---------- Costs and expenses: Cost of Delivered Learning fees........... 2,409 5,509 6,619 Cost of Learning Solution services........ 3,337 11,211 11,934 Content research and development............ 4,082 6,092 7,094 Technology research and development......... 3,687 11,791 11,318 Selling and marketing....................... 11,596 23,105 21,208 General and administrative................... 2,342 6,046 7,355 Depreciation................................. 915 3,190 5,274 Amortization of warrants..................... -- 13,131 11,003 Stock-based compensation*.................... 3,663 5,432 1,888 Amortization of goodwill and other intangibles............................. -- 3,602 7,208 Write-off of in-process research and development............................ -- 7,118 -- Impairment of goodwill....................... -- -- 10,437 Acquisition related charges.......... -- -- 5,792 Restructuring charge......................... -- -- 9,778 --------- ---------- --------- Total costs and expenses.............. 32,031 96,227 116,908 --------- ---------- ---------- Loss from operations. ................... (21,216) (57,569) (73,552) Penalty income recognized (Note 13).. -- -- 10,000 Interest and other income........... 1,055 5,344 1,911 --------- ---------- ---------- Net loss........................... $ (20,161) $ (52,225) $ (61,641) ========= ========== ========== Accretion of redeemable convertible preferred stock..................... $ 7,593 $ -- $ -- --------- ---------- ---------- Loss attributable to common stockholders... $ (27,754) $ (52,225) $ (61,641) --------- ---------- ---------- Basic and diluted loss per common share.... $ (3.87) $ (1.51) $ (1.61) --------- ---------- ---------- Shares used in basic and diluted loss per common share...................... 7,164 34,524 38,176 --------- ---------- ---------- Pro forma basic and diluted loss per common share..................... $ (1.09) $ (1.51) $ (1.61) ========= ========== ========== Shares used in pro forma basic and diluted net loss per common share.......... 25,412 34,524 38,176 ========= ========== ========== (*) Stock-based compensation: Cost of Delivered Learning fees....... $ 143 $ 121 $ 28 Cost of Learning Solution services.... 318 500 165 Content research and development...... 72 76 34 Technology research and development... 473 1,329 555 Selling and marketing................. 1,042 1,391 451 General and administrative............ 1,615 2,015 655 --------- ---------- ---------- Total...............................$ 3,663 $ 5,432 $ 1,888 ======== ========== ========== See accompanying notes to consolidated financial statements.
DIGITALTHINK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) Years ended March 31, 2000, 2001 and 2002 (in thousands) Common stock ---------------- Deferred Stock Shares Amount Compensation -------- --------- -------------- Balances, March 31, 1999.................. 4,131 $ 400 $ (332) Components of comprehensive income: Net loss................................ -- -- -- Total comprehensive income Exercise of stock options............... 707 506 -- Accretion for redemption value on Series A, B, C and D preferred stock -- -- -- Conversion of preferred stock to common stock 22,815 58,242 -- Common stock issued for cash in initial public offering and concurrent private placement, net of issuance costs.................... 6,135 78,728 -- Deferred stock compensation............. -- 11,284 (11,284) Amortization of deferred stock compensation -- -- 3,663 -------- --------- ------------ Balances, March 31, 2000.................. 33,788 149,160 (7,953) Components of comprehensive income: Net loss................................ -- -- -- Change in unrealized gain on available-for-sale investments......... -- -- -- Translation adjustment.................. -- -- -- Total comprehensive income Exercise of stock options............... 525 480 -- Employee stock purchase plan............ 100 1,187 -- Stockholders' notes receivable.......... -- -- -- Forfeited and unvested options.......... -- (974) 974 Amortization of deferred stock compensation............................. -- -- 5,432 Amortization of warrants................ -- 13,131 -- Issuance of common stock and assumption of stock options in connection with acquisition 586 24,599 (1,552) -------- ---------- ----------- Balances, March 31, 2001.................. 34,999 187,583 (3,099) Components of comprehensive income: Net loss................................ -- -- -- Change in unrealized gain on available-for-sale investments......... -- -- -- Translation adjustment.................. -- -- -- Total comprehensive income Exercise of stock options and warrants.. 516 993 -- Employee stock purchase plan............ 228 1,629 -- Repayment of stockholders' notes receivable................................ -- -- -- Forfeited and unvested options.......... -- (580) 580 Amortization of deferred stock compensation............................. -- -- 1,888 Amortization of warrants................ -- 11,003 -- Issuance of common stock and assumption of warrants in connection with acquisition 4,709 67,186 -- --------- -------- ----------- Balances, March 31, 2002.................. 40,452 $ 267,814 $ (631) ========= ========= ============ See accompanying notes to consolidated financial statements. Accumulated Stockholders' Other Notes Comprehensive Accumulated Receivable Income Deficit Total ------------- ------------ ------------ --------- Balances, March 31, 1999......$ -- $ -- $ (15,573) $ (15,505) Components of comprehensive income: Net loss.................... -- -- (20,161) (20,161) ----------- Total comprehensive income (20,161) ----------- Exercise of stock options.... -- -- -- 506 Accretion for redemption value on Series A, B, C and D preferred stock stock....................... -- -- (7,593) (7,593) Conversion of preferred stock to common stock.............. -- -- -- 58,242 Common stock issued for cash in initial public offering and concurrent private placement, net of issuance costs........ -- -- -- 78,728 Deferred stock compensation...... -- -- -- -- Amortization of deferred stock compensation -- -- -- 3,663 -------- --------- -------- ---------- Balances, March 31, 2000........ -- -- (43,327) 97,880 Components of comprehensive income: Net loss.................... -- -- (52,225) (52,225) Change in unrealized gain on available-for-sale investments.. -- 177 -- 177 Translation adjustment......... -- 27 -- 27 ---------- Total comprehensive income (52,021) ---------- Exercise of stock options........ -- -- -- 480 Employee stock purchase plan..... -- -- -- 1,187 Stockholders' notes receivable... (9) -- -- (9) Forfeited and unvested options... -- -- -- -- Amortization of deferred stock compensation -- -- -- 5,432 Amortization of warrants......... -- -- -- 13,131 Issuance of common stock and assumption of stock options in connection with acquisition -- -- -- 23,047 --------- --------- --------- --------- Balances, March 31, 2001...... (9) 204 (95,552) 89,127 Components of comprehensive income: Net loss...................... -- -- (61,641) (61,641) Change in unrealized gain on available-for-sale investments -- (165) -- (165) Translation adjustment.......... -- (303) -- (303) ---------- Total comprehensive income (62,109) ---------- Exercise of stock options and warrants -- -- -- 993 Employee stock purchase plan..... -- -- -- 1,629 Repayment of stockholders' notes receivable..................... 9 -- -- 9 Forfeited and unvested options... -- -- -- -- Amortization of deferred stock compensation.................. -- -- -- 1,888 Amortization of warrants....... -- -- -- 11,003 Issuance of common stock and assumption of warrants in connection with acquistion -- -- -- 67,186 --------- --------- --------- -------- Balances, March 31, 2002..... $ -- $ (264) $(157,193) $ 109,726 ========= ========= ========= ========= See accompanying notes to consolidated financial statements.
DIGITALTHINK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended March 31, 2000 2001 2002 ---------- ---------- -------- Cash flows from operating activities: Net loss.................................$ (20,161) $ (52,225) $ (61,641) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation............................ 915 3,190 5,274 Amortization of deferred stock compensation....................... 3,663 5,432 1,888 Amortization of warrants................ -- 13,131 11,003 Amortization of goodwill and other intangibles........................ -- 3,602 7,208 Impairment of goodwill..................... -- -- 10,437 Restructuring charges...................... -- -- 2,333 Acquisition related charges................ -- -- 5,328 Write-off of in-process research and development.............. -- 7,118 -- Changes in assets and liabilities: Accounts receivable.................... (4,207) (3,705) 4,078 Prepaid expenses and other current assets................... (758) (1,705) 2,427 Accounts payable........................ 1,868 1,868 (2,433) Accrued liabilities..................... 2,307 652 1,397 Deferred revenues....................... 5,869 4,456 (6,294) ---------- ---------- ------------ Net cash used in operating activities... (10,504) (18,186) (18,995) ---------- ---------- ------------ Cash flows from investing activities: Restricted cash......................... -- (2,033) (250) Purchases of property and equipment..... (5,781) (12,404) (14,402) Net cash paid in acquisition............ -- (1,732) (169) Purchases of marketable securities...... (43,644) (52,799) (17,300) Proceeds from maturities of marketable securities................ -- 61,117 49,186 Other assets........................ 27 -- 9 ---------- ---------- ----------- Net cash (used in) provided by investing activities...... (49,398) (7,851) 17,074 ---------- ---------- ----------- Cash flows from financing activities: Proceeds from sale of preferred stock. 26,067 -- -- Payments of notes payable............. -- -- (1,440) Proceeds from sale of common stock..... 79,234 1,668 2,622 ---------- ---------- ----------- Net cash provided by financing activities 105,301 1,668 1,182 ---------- ---------- ----------- Effect of exchange rate changes on cash and cash equivalents....... -- 27 (303) Net increase(decrease) in cash and cash equivalents................ 45,399 (24,342) (1,042) Cash and cash equivalents, beginning of year....................... 9,455 54,854 30,512 ---------- ---------- ----------- Cash and cash equivalents, end of year $ 54,854 $ 30,512 $ 29,470 ========== ========== =========== Supplemental disclosure of cash flow information: Cash paid for interest $ -- $ -- $ 41 Supplemental disclosure of noncash investing and financing activities: Unrealized gain/(loss) on marketable securities $ -- $ 177 $ (165)
See accompanying notes to consolidated financial statements. DIGITALTHINK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Organization DigitalThink, Inc. (the "Company"), was incorporated in California on April 22, 1996 to provide Web-based training courses and training delivery technology. The Company completed the development of its delivery technology and initial content, and began substantial sales and marketing efforts in fiscal year 1998. In November 1999, the Company reincorporated in Delaware. Principles of Consolidation The consolidated financial statements include the accounts of DigitalThink Inc., and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Accounts denominated in foreign currencies have been translated using the U.S. dollar as the functional currency. Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues and expenses as of the dates and for the periods presented. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid debt instruments purchased with a remaining maturity of three months or less to be cash equivalents. Marketable Securities At March 31, 2002 all short-term marketable securities were due in one year or less and consisted of the following (in thousands):
Gross Gross Estimated Cost Unrealized Gains Unrealized Losses Fair Value ------ --------------- ---------------- ---------- Short-Term Investments Government agencies $ 1,652 $ -- $ (12) $ 1,640
At March 31, 2001 all short-term marketable securities were due in one year or less and consisted of the following (in thousands):
Gross Gross Estimated Cost Unrealized Gains Unrealized Losses Fair Value ------- ---------------- ----------------- ----------- Short-Term Investments Commercial paper........$ 18,015 $ 47 $-- $ 18,062 Government agencies..... 15,334 130 -- 15,464 -------- ---- ----- ---------- $ 33,349 $177 $-- $ 33,526 ======= ==== ===== ========
The Company classifies these investments as available for sale. Unrealized gains or losses are included in a separate component of stockholders' equity. Realized gains and losses are computed based on the specific determination method and were not material during any of the periods presented. Restricted Cash and Deposits Restricted cash and deposits represent deposits held as collateral relating to operating leases and letters of credit. Concentration of Credit Risk Financial instruments potentially subjecting the Company to concentrations of credit risk consist primarily of cash, cash equivalents, short term investments and accounts receivable. The Company invests its excess cash in deposits with major banks, in U.S. Treasury and U.S. agency obligations and in debt securities of corporations with strong credit ratings. No losses have been experienced on such investments. Accounts receivable are unsecured, and the Company is at risk to the extent that such amounts become uncollectible. The Company closely monitors its outstanding receivable balances on an on-going basis. At March 31, 2001, one account represented 21% of gross accounts receivable, although less than 30 days outstanding. At March 31, 2002, one account represented 23% of gross accounts receivable, although less than 30 days outstanding. In fiscal 2000, one customer accounted for 32% of total revenues. In fiscal 2001, one customer accounted for 10% of total revenues. In fiscal 2002, our largest customer, EDS, accounted for 8.8% and another customer accounted for 15.5% of our total revenues of $43.4 million, or 25.9% and 12.6%, respectively, when excluding the forgiveness of a $10 million penalty associated with the restructuring of an agreement with EDS. Property and Equipment Property and equipment is stated at cost. Depreciation is computed using the straight-line method over estimated useful lives of three to four years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives or the remaining lease terms. Long-Lived Assets The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of that asset may not be recoverable. An impairment loss would be recognized when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Goodwill Goodwill is recorded when the consideration paid for acquisitions exceeds the estimated fair value of identifiable net tangible and intangible assets acquired. Goodwill related to acquisitions occurring prior to July 1, 2001 and other acquisition-related intangibles are amortized on a straight-line basis up to four years. Goodwill and other acquisition-related intangibles are reviewed for recoverability periodically or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. As part of our ongoing review of the Company's operations and financial performance, we performed an assessment of the carrying value of the our long-lived assets to be held for use including goodwill and other intangible assets recorded in connection with our various acquisitions. The assessment was performed pursuant to SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The conclusion of that assessment was that the value of the technology purchased associated with the Arista acquisition was no longer being used in the current product offerings and was not part of the product roadmap for the future. As a result, we recorded charges of $10.4 million to write off the Arista goodwill during the fourth quarter of fiscal 2002 as it no longer had any recoverable value. Revenue Recognition Delivered learning fees allow access to training systems, courses hosted by the Company, tutor support, and other learning materials for a fixed period, typically six months. Delivered Learning fees are recognized ratably over this access period. Revenues for Learning Solution services (custom course development or consulting services) are recognized as earned in accordance with Statement of Position (SOP) 81-1, Accounting for Performance of Construction/Production-Type Contracts, as development progresses based on the percentage of completion method. The percentage of completion is based on the ratio of actual custom development or service costs incurred to date, to total estimated costs to complete the custom course or service. Provisions for estimated losses on incomplete contracts will be made on a contract by contract basis and recognized in the period in which such losses become probable and can be reasonably estimated. To date, there have been no such losses. Custom contracts typically call for non-refundable payments due upon achievement of certain milestones in production of the courses or in consulting services. Deferred revenues represent customer prepayments for both Delivered Learning fees and Learning Solution services. Content research and development Expenses charged to operations as incurred include course development personnel related costs. Course development expenses and subject matter expert payments to course authors are expensed as incurred, in accordance with SFAS No. 86, as the recoverability of such costs against future revenues is uncertain. Technology research and development Expenses are charged to operations as incurred. Such expenses include Web site development costs. Web site development costs which meet the capitalization criteria of SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use are capitalized and amortized over the useful economic life. Income Taxes The Company accounts for income taxes using an asset and liability approach. Deferred tax liabilities are recognized for future taxable amounts and deferred tax assets are recognized for future deductions and operating loss carryforwards, net of a valuation allowance to reduce net deferred tax assets to amounts that are more likely than not to be realized. Stock-Based Awards The Company accounts for stock-based awards to employees under its stock option plan and employee stock purchase plan as noncompensatory in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Translation of Foreign Currency The Company's foreign operations are measured using local currencies as the functional currency. Assets and liabilities are translated into U.S. dollars at year-end rates of exchange, and results of operations are translated at average rates for the year. Loss per Common Share Basic loss per common share excludes dilution and is computed by dividing loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Common share equivalents are excluded from the computation in loss periods as their effect would be anti-dilutive. Pro Forma Net Loss per Common Share Pro forma basic and diluted loss per share is computed by dividing net loss by the weighted average number of shares outstanding for the period and the weighted average number of common shares resulting from the assumed conversion of outstanding shares of redeemable convertible preferred stock. Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes a new model for accounting for derivatives and hedging activities and supercedes and amends a number of existing accounting standards. SFAS No. 133 requires that all derivatives be recognized in the balance sheet at their fair market value and the corresponding derivative gains or losses be either reported in the statement of operations or as a deferred item depending on the type of hedge relationship that exists with respect of such derivatives. In July 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133. SFAS No. 137 deferred the effective date until years beginning after June 30, 2000. In June 2000, the FASB issued SFAS No. 138, Accounting for Derivative Instruments and Hedging Activities--An Amendment of FASB Statement No. 133. SFAS No. 138 amends the accounting and reporting standards for certain derivatives and hedging activities such as net settlement contracts, foreign currency transactions and intercompany derivatives. The Company has adopted SFAS No. 133 in its quarter ending June 30, 2001. To date, the Company has not engaged in derivative or hedging activities, and accordingly, the adoption of SFAS No. 133 had no impact on the financial statements. In June 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS No.142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. The Company will adopt SFAS No. 142 for its fiscal year beginning April 1, 2002. During the first half of fiscal year 2003, we will perform the first of the required impairment tests of goodwill and indefinite-lived intangible assets as of April 1, 2002. We are currently assessing the impact, if any, of SFAS 142 on our financial position and results of operations. In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires businesses to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. We are required to adopt SFAS No. 143 for our fiscal year beginning April 1, 2003. We are currently assessing the impact, if any, of SFAS No. 143 on our financial position and results of operations. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and APB No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS No. 144 also amends Accounting Research Bulletin No. 51, Consolidated Financial Statements. SFAS 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. The statement also significantly changes the criteria required to classify an asset as held-for-sale. Additionally, SFAS 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. We are required to adopt SFAS 144 for our fiscal year beginning April 1, 2002. We are currently assessing the impact, if any, of SFAS 144 on our financial position and results of operations. Comprehensive Income The Company is required to report comprehensive income in the financial statements, in addition to net income. The primary differences between net income and comprehensive income are foreign currency translation adjustments and net unrealized gains or losses on securities available for sale. Reclassification Certain prior year amounts in the consolidated financial statements and notes thereto have been reclassified to conform to the current year presentation. 2. Business Combinations On July 6, 2000 DigitalThink, Inc. acquired Arista Knowledge Systems, Inc. ("Arista"), a company providing Internet-based learning management systems. DigitalThink issued approximately 746,000 shares of DigitalThink common stock in exchange for outstanding stock, options and warrants of Arista. The total cost of the acquisition, including transaction costs, was approximately $26.3 million. The acquisition was accounted for as a purchase business combination; accordingly the results of operations of Arista have been included with the Company's results of operations since July 6, 2000. The purchase price paid for the Arista acquisition was allocated based on the estimated fair values of the net assets acquired as follows (in thousands): In-process research and development.......................... $ 7,118 Acquired technology, workforce intangible and goodwill... 19,212 Intrinsic value of unvested Arista options assumed........ 1,552 Tangible assets acquired..................................... 1,718 Liabilities assumed.......................................... (3,269) -------- Net assets acquired.......................................... $ 26,331 ========
The consideration given in the acquisition of Arista was as follows: DigitalThink common stock........................ $ 20,523 Stock options assumed............................ 3,976 Net cash paid.................................... 1,732 Transaction costs................................ 100 -------- Total purchase price............................. $ 26,331 ========
Of the purchase price, $7.1 million represents purchased in-process technology that had not yet reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately expensed in the consolidated statement of operations upon consummation of the acquisition. The value assigned to purchased in-process technology was based on a valuation prepared by an independent third-party appraiser. Intangible assets acquired will be amortized on a straight-line basis over a period of four years. The following unaudited pro forma results of operations for the years ended March 31, 2000 and 2001 give effect to the acquisition as if it had occurred at the beginning of fiscal 2000. The pro forma results of operations exclude the $7.1 million of nonrecurring charges that were recorded in conjunction with the acquisition (in thousands, except per share amounts):
Years Ended March 31, ----------------------- 2000 2001 ---------- ---------- Net revenues................................ $ 10,832 $ 38,658 Loss from operations........................ $ 26,189 $ 62,061 Net loss.................................... $(25,406) $(58,353) Basic and diluted loss per share attributable to common shareholders $ (4.61) $ (1.69)
Effective August 28, 2001, the Company acquired LearningByte International, Inc. ("LBI"), a provider of custom e-learning courseware, in exchange for approximately 4.7 million shares of DigitalThink common stock and assumed approximately 500,000 warrants outstanding, for a total purchase price of approximately $68 million, including transaction costs, as follow (in thousands): DigitalThink common stock...................... $ 63,656 Warrants assumed at fair value................. 3,530 Transaction costs ............................. 800 --------- Total purchase price $ 67,986 =========
The acquisition of LBI was accounted for by the purchase method. LBI's results of operations have been included in the Company's results of operations since the effective date of the acquisition. The assets acquired and liabilities assumed were recorded at estimated fair values as determined by the Company's management based on information currently available and on current assumptions as to future operations. The Company obtained an independent appraisal of the fair value of the acquired tangible and identified intangible assets, and their remaining useful lives. The allocation of the purchase price is based on preliminary estimates that are not expected to change materially. Intangible assets acquired will be amortized on a straight-line basis over a weighted average period of 4.6 years. Goodwill will not be amortized in accordance with SFAS 141. A summary of the assets acquired and liabilities assumed in the acquisition follows (in thousands): Acquired technology and customer list................. $ 6,800 Goodwill.............................................. 70,040 Net fair value of tangible assets acquired and liabilities assumed................................. (8,854) -------- Net assets acquired................................... $ 67,986 =======
The following table reflects the results of operations on a pro forma basis as if the acquisition had been completed on April 1, 2001 and 2000, and does not consider the effects of synergies and cost reduction initiatives directly related to all acquisitions. Therefore, the pro forma financial information is as follows (in thousands, except per share amounts):
Years Ended March 31, ----------------------- 2002 2001 ----------------------- Net revenues $ 46,387 $ 32,216 Loss from operations $(70,513) $(58,781) Net loss $(70,162) $(54,476) Basic and diluted loss per share $ (1.75) $ (1.39)
In connection with the LBI acquisition, the Company recorded a charge of $5.8 million comprised of approximately $5.3 million for the write-off of internal use software made obsolete by the acquisition of LBI and $0.5 million for severance-related costs. Effective November 16, 2001, the Company acquired TCT Technical Training Pvt. Ltd. ("TCT"), of Kolkata, India, a content developer of custom courseware. DigitalThink acquired all the outstanding shares of TCT for $500,000 after we received governmental approval in November 2001. TCT has been acting exclusively as a contractor to the Company since April 2001, when the transaction was first announced. Upon acquisition, $215,000 was recorded as an intangible to be amortized over one year and $285,000 was the net fair value of tangible assets acquired and liabilities assumed. The acquisition of TCT was accounted for by the purchase method. TCT's results of operations have been included in the Company's results of operations since the effective date of the acquisition. Pro forma financial information in connection with the TCT acquisition has not been provided, as results would not have differed materially from actual reported results. 3. Restructuring Charge (in thousands)
Remaining Charged to Liability Fiscal 2002 Cash Non-Cash Other Balances as of Expense Payments Charges Accounts March 31, 2002 ------- -------- ------- --------- -------------- Severance......... $ 650 $(440) $ -- $ -- $ 210 Facilities and equipment....... 2,365 -- (2,333) -- 32 Lease commitments.. 6,763 -- -- 864 7,627 ----- ------ -------- ------ ------- Total $9,778 $(440) $(2,333) $ 864 $ 7,869 ====== ====== ======== ====== =======
In March 2002 we initiated a strategic initiative, under which we restructured our business in response to the current market environment and as part of our continuing program to create efficiencies within our operations. We recorded total restructuring charges of $9.8 million as part of our strategic initiative, which included the following: - Reducing our workforce by approximately 80 employees, mainly within the learning services organization, resulting in a $700 thousand severance charge. Approximately $400 thousand was paid in March 2002, and approximately $300 thousand will be paid in the first and second quarters of fiscal 2003. - Consolidating our sales, administrative and content and technology development facilities through building and site closures, from a total of approximately 244,000 square feet into approximately 100,000 square feet. As of March 31, 2002, seven sites have been vacated: San Diego, California; Chislom, Minnesota; Detroit, Michigan; Alameda, California; two facilities in San Francisco, California and our office in the United Kingdom. Property and equipment that was disposed or removed from operations resulted in a charge of $2.3 million and consisted primarily of leasehold improvements, computer equipment and furniture and fixtures. In addition, we incurred a charge of $6.8 million associated with leases related to excess or closed facilities, which represents the excess of the remaining lease obligations over estimated market value, net of anticipated sublease income. Amounts accrued (net of anticipated sublease proceeds) related to the consolidation of facilities will be paid over the respective lease terms through 2016. The Company has been recording deferred rent for those leased facilities that met the criteria in accordance with SFAS No. 13, Accounting for Leases. Nine leased facilities were included in the restructuring costs and for two of those facilities; the Company had recorded deferred rent of approximately $864 thousand. This amount of deferred rent was a liability as of March 2002 and noted as part of the restructuring liability. 4. Property and Equipment Property and equipment consist of the following (in thousands):
March 31, ------------------ 2001 2002 -------- ------- Furniture and fixtures..................... $ 671 $ 737 Computer hardware and software............. 11,587 18,812 Leasehold improvements..................... 2,473 8,337 Assets in progress......................... 4,879 -- Accumulated depreciation................... (4,549) (9,561) --------- --------- Property and equipment, net................ $ 15,061 $ 18,325 ========= =========
5. Accrued Liabilities (in thousands):
March 31, -------------------- 2001 2002 -------- --------- Payroll and related expenses................. $ 2,865 $ 1,464 Deferred rent................................ 531 103 Restructuring charge......................... -- 7,869 Other........................................ 3,128 3,802 ------- -------- Total accrued liabilities.................... $ 6,524 $ 13,238 ======= ========
6. Income Taxes: No income taxes were provided for any of the periods presented due to the Company's net losses. Deferred tax assets (liabilities) are comprised of the following (in thousands):
March 31, --------------------- 2001 2002 -------- ---------- Deferred tax assets: Accruals and reserves.......................... $ 617 $ 539 Net operating losses and tax credits carried forward...................................... 19,189 31,755 Basis difference in fixed assets............... 400 392 ---------- ---------- Total gross deferred tax asset before valuation allowance.................................... 20,206 32,686 Valuation allowance............................ (20,206) (32,686) ---------- ---------- Net deferred tax asset......................... $ -- $ -- ========== ==========
At March 31, 2002, the Company had available federal and California state net operating loss carryforwards of approximately $77.0 million and $74.6 million, respectively, to offset future taxable income. These net operating loss carryforwards begin to expire in 2012 and 2005 for federal and state purposes, respectively. The Company has federal and California state research and development credit carryforwards of $326,000 and $271,000 respectively. The Company also has California state enterprise zone credit carryforwards of $613,000. At March 31, 2002, the Company's wholly owned foreign subsidiaries in the United Kingdom and India had foreign net operation loss carryforwards of approximately $3.0 million to offset future foreign taxable income. At March 31, 2001 and 2002, the net deferred tax assets have been fully reserved due to the uncertainty surrounding the realization of such benefits. Internal Revenue Code Section 382 places a limitation (the "Section 382 Limitation") on the amount of taxable income which can be offset by net operating loss ("NOL") carryforwards after a change in control (generally greater than 50% change in ownership) of a loss corporation. California has similar rules. Generally, after a control change, a loss corporation cannot deduct NOL carryforwards in excess of the Section 382 Limitation. Due to these "change in ownership" provisions, utilization of the NOL carryforwards may be subject to an annual limitation regarding their utilization against taxable income in future periods. 7. Redeemable Convertible Preferred Stock In July 1996, the Company issued 2,910,000 shares of Series A preferred stock for cash at $0.50 per share. In December 1996, 274,000 shares of Series A preferred stock were issued upon conversion of $137,000 of convertible notes. In June 1997, the Company issued 7,726,668 shares of Series B preferred stock for $0.75 per share. In December 1998 and March 1999, the Company issued 7,824,305 shares of Series C preferred stock for $1.50 per share. In November 1999, the Company issued 3,999,617 shares of Series D preferred stock for $6.50 per share. Beginning in 2001, the shares of each series of preferred stock were redeemable at the option of the holders of a majority of the outstanding preferred shares of that series, provided that the Company had not completed a public offering meeting certain criteria. The redemption price of Series A preferred stock was $0.50 per share plus a 25% compound annual rate of return from July 19, 1996 (as adjusted for any stock dividends, combinations, or splits). The redemption price of Series B preferred stock was $0.75 per share plus a 25% compound annual rate of return from June 1, 1997. The redemption price of Series C preferred stock was $1.50 per share plus a 25% compound annual rate of return from October 30, 1998. The redemption price of Series D preferred stock was $6.50 per share plus a 25% compound annual rate of return from November 1, 1999. The redemption value was accreted over the redemption period. Accretion for Series A was $278,000, $468,000, $584,000, and $658,000 in fiscal 1997, 1998, 1999 and 2000, respectively. Accretion for Series B was $1,202,000, $1,719,000 and $1,934,000 in fiscal 1998, 1999 and 2000 respectively. Accretion for Series C was $1,214,000 and $2,900,000 in fiscal 1999 and 2000 respectively. Accretion for Series D was $2,101,000 in fiscal 2000. Upon the closing of the Company' initial public offering on March 1, 2000 all of the outstanding shares of Series A, B, C and D redeemable convertible preferred stock were automatically converted into shares of common stock on a one-to-one basis. 8. Stockholders' Equity (Deficit) Initial Public Offering On February 25, 2000, the Company completed its initial public offering of 5,060,000 shares, resulting in net proceeds of $64.7 million to the Company. Private Placement In February 2000, concurrent with its initial public offering, the Company completed a private placement of 1,075,269 shares, resulting in proceeds of $14.0 million to the Company. Stock Option Plan The Company's stock option plans provide for grants of incentive or nonstatutory stock options to officers, employees, directors and consultants. Options vest over four years and expire over terms up to ten years. One of the Company's stock option plans provides for annual increases in the number of shares available for issuance equal to the lesser of 2 million shares, 5% of the outstanding shares on the date of the annual increase, or a lesser amount as may be determined by the board of directors. The Company had 2,472,986 shares available for future grant at March 31, 2002. A summary of the activity under the Company's stock option plans is as follows:
Weighted Average Number Exercise of Shares Price ----------- -------- Balances, March 31, 1999 (397,626 exercisable at a weighted average exercise price of $0.074 per share). 2,185,049 $ 0.23 Granted (weighted average fair value of $3.69)......... 3,709,550 4.18 Canceled............................................... (307,874) 0.68 Exercised.............................................. (707,461) 0.71 ----------- ------- Balances, March 31, 2000 (487,576 exercisable at a weighted average exercise price of $4.18 per share).. 4,879,264 3.13 Granted (weighted average fair value of $14.47)........ 4,627,554 17.12 Options assumed in acquisition......................... 159,704 17.44 Canceled............................................... (1,012,929) 15.77 Exercised.............................................. (524,698) 0.90 ------------ ------- Balances, March 31, 2001 (1,407,436 exercisable at a weighted average exercise price of $3.14 per share) .... 8,128,895 9.89 Granted (weighted average fair value of $7.99)......... 1,629,519 9.63 Canceled............................................... (2,277,736) 14.44 Exercised.............................................. (505,066) 1.96 ------------ ------- Balances, March 31, 2002............................... 6,975,612 $ 8.89 ========= =======
The following table summarizes information as of March 31, 2002 concerning options outstanding:
Options Outstanding Vested Options ---------------------------------------------- ------------------ Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Life Exercise Number Exercise Prices Outstanding (Years) Price Vested Price --------- ------------ ---------- ---------- -------- ------- $ 0.05 - $0.25 704,440 6.09 $ 0.14 631,287 $ 0.12 0.50 - 1.50 1,350,117 7.47 1.37 774,806 1.38 4.43 - 7.75 1,292,504 8.96 7.63 316,791 7.66 7.82 - 11.00 2,618,386 8.70 9.51 771,526 9.78 11.19 - 34.25 684,552 8.73 17.48 210,899 20.97 34.63 - 56.00 325,613 8.37 41.00 144,288 41.08 ------- ---- -------- ------- ------- Total 6,975,612 8.23 $ 8.89 2,849,597 $ 7.53 ========= ==== ======== ========= =======
Additional Stock Plan Information As discussed in Note 1, the Company accounts for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and its related interpretations. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), requires the disclosure of pro forma net income (loss) had the Company adopted the fair value method. Under SFAS 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including expected time to exercise, which greatly affect the calculated values. Until the date of the initial public offering the Company's calculations were made using the minimum value pricing method. The following weighted average assumptions were used: expected life after vesting, 0.5 years in fiscal 2000, 3 years in fiscal 2001 and 2.5 years in fiscal 2002; average risk-free interest rate, 6.0% in fiscal 2000, 5.3% in fiscal 2001 and 4.5% in fiscal 2002. The Company's calculations include volatility of 100% in the period following the public offering through March 31, 2000, 115% in fiscal 2001 and 120% in fiscal 2002 and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach, and forfeitures are recognized as they occur. If the computed values of the Company's stock-based awards to employees had been amortized to expense over the vesting period of the awards as specified under SFAS No. 123, net loss and basic and diluted net loss per share on a pro forma basis (as compared to such items as reported) would have been:
Years Ended March 31, --------------------------------- 2000 2001 2002 ---------- ----------- -------- Net loss (in thousands): As reported......................... $ (20,161) $ (52,225) $ (61,641) Pro forma........................... $ (20,560) $ (68,141) $ (76,935) Basic and diluted net loss per share: As reported......................... $ (3.87) $ (1.51) $ (1.61) Pro forma........................... $ (3.93) $ (1.97) $ (2.02)
Stock-Based Compensation During fiscal 2000, the Company issued 3,709,550 common stock options at a weighted average price of $4.18 per share, which was less than the deemed weighted average fair value of $7.22 per share. Accordingly, the Company recorded $11,284,000 as the value of such options. Stock-based compensation of $3,663,000 was amortized to expense in the year ended March 31, 2000. During fiscal 2001, the Company assumed 159,704 unvested common stock options at a weighted average price of $17.44 per share, which was less than the fair value of $35 per share, related to the Arista acquisition. Accordingly, the Company recorded $1.6 million as the value of such options. Stock-based compensation of $5.4 million was amortized to expense in the year ended March 31, 2001. In addition, the Company recorded a $974,000 decrease in deferred stock compensation in fiscal 2001 due to unvested options of terminated employees. At March 31, 2002, the Company had $631,000 in deferred stock compensation related to options, which will be amortized to expense through fiscal 2004. 9. Net Loss Per Share For fiscal 2000, 2001 and 2002, the Company had stock options outstanding of 4,879,264, 8,128,895, and 6,975,612, respectively, which could potentially dilute basic earnings per share in the future, but were excluded in the computation of diluted net loss per share in the periods presented, as their effect would have been antidilutive. 10. Related Party Transactions: During fiscal 2000, the Company generated revenues of approximately $549,000, $526,000, $230,000, $158,000, $143,000, and $113,000 from six customers who are investors in the Company. Additionally, the Company generated revenues of $3.5 million from one customer of which one of the Company's directors is an executive officer. During fiscal 2001, the Company generated revenues of approximately $4.0 million, $3.0 million, $831,000, $827,000, and $199,000 from 5 customers who are investors in the Company. Additionally, the Company generated revenues of $2.5 million from one customer of which one of the Company's directors is a director. Receivables at fiscal year-end relating to these six customers totaled $752,000. During fiscal 2002, the Company generated revenues of approximately $4.0 million, $1.5 million, $335,000, and $10,000 from 4 customers who are investors in the Company. Additionally, the Company generated revenues of $3.9 million from one customer of which one of the Company's directors is an executive officer. Receivables at fiscal year-end relating to these six customers totaled $486,000. 11. Employee Benefit Plans 401(k) Plan The Company has a 401(k) retirement plan (the Plan) that covers substantially all employees of the Company. The Plan provides for voluntary salary reduction contributions of up to 20% of eligible participants' annual compensation. The Company has not provided matching contributions for any of the periods presented. Employee Stock Purchase Plan The Company has a Qualified Employee Stock Purchase Plan (ESPP) under which 200,000 shares of common stock were originally reserved for issuance. The ESPP allows for annual increases equal to the lesser of 1% of the outstanding shares of common stock on the first day of the fiscal year, 400,000 shares, or such lesser amount as may be determined by the board. Under the ESPP, eligible employees may purchase shares of the Company's common stock through payroll deductions of up to 10% of the participant's compensation. Under this plan, eligible employees may purchase shares of the Company's common stock at 85% of fair market value at specific, predetermined dates. In fiscal 2001, approximately 100,000 shares were purchased at an average price of $11.87. In fiscal 2002, approximately 228,000 shares were purchased at an average price of $7.18. At March 31, 2002, approximately 227,000 shares were available for purchase under the ESPP. 12. Lease Commitments The Company leases its principal office facilities under operating leases. As of March 31, 2002, future minimum payments under facilities operating leases are as follows (in thousands):
Fiscal Year Ending March 31, ---------------------------- 2003................... $ 7,196 2004................... 6,677 2005................... 6,554 2006................... 6,710 2007................... 6,722 Thereafter............. 27,585 --------- Total................... $ 61,444 =========
Rent expense under operating leases was $978, $2,730, and $4,366 for the years ended March 31, 2000, 2001 and 2002, respectively. 13. Strategic Alliance with Electronic Data Systems Corporation On July 11, 2000 the Company entered into an agreement with EDS pursuant to which EDS was issued two separate performance warrants to purchase shares of DigitalThink common stock. Under the terms of the first warrant, EDS could earn warrants to purchase up to 862,955 shares of DigitalThink common stock exercisable at $29 per share. The warrant could have been earned when EDS delivered third-party customers from the United States prior to July 31, 2003, which generated a total of $50 million of contractually committed revenue to DigitalThink recognizable by July 31, 2005. The warrants expired October 31, 2003. This warrant contained a significant disincentive for non-performance. If EDS failed to deliver the full $50 million of contracted, United States revenue by July 31, 2003, EDS agreed to pay DigitalThink $5 million. Under the terms of the second warrant, EDS could earn warrants for up to 690,364 shares of DigitalThink common stock exercisable at $29 per share. The warrant could have been earned when EDS delivered third-party customers from outside the United States prior to July 31, 2003, which generated a total of $50 million of contractually committed revenue to DigitalThink recognizable by July 31, 2005. The warrants expired October 31, 2003. This warrant contained a significant disincentive for non-performance. If EDS failed to deliver the full $50 million of contracted, non-United States revenue by July 31, 2003, EDS agreed to pay DigitalThink $5 million. The Company calculated a fixed non-cash charge of $38 million related to this transaction, based on the fair value of the warrants issued. A portion of the warrant vested at the date of the transaction resulting in an immediate charge of $4.9 million. Amortization of the remaining warrant expense would occur over three years from July 2000 through July 2003, in proportion to the amount of revenue generated under the agreement, or on a straight-line basis, whichever is faster. Through March 31, 2002, amortization was recorded on a straight-line basis totaling $24.1 million. On March 27, 2002, DigitalThink restructured the agreement entered into with EDS, whereby EDS has surrendered its vested and unvested warrants to purchase shares of DigitalThink common stock and DigitalThink has forgiven the $10 million total non-performance penalty associated with these warrants. Therefore, a charge of approximately $10 million was recorded as a reduction of revenue and a credit of approximately $10 million was recorded as other income. 14. Revision of SFAS No. 123 Pro Forma Information Subsequent to the issuance of the Company's fiscal 2002 consolidated financial statements, the Company's management determined that the pro forma total and per share net loss (which assume the use of SFAS 123 for the purposes of recording compensation for stock-based awards to employees) had been improperly calculated. As a result, the pro forma total and per share net loss have been revised in Note 8 from the amounts previously reported. A summary of the effects of this revision are as follows:
Years Ended March 31, 2000 2000 2001 2001 2002 2002 As As As Previously As Previously As Previously As Reported Revised Reported Revised Reported Revised ------------ -------- ----------- -------- -------- --------- Net loss $(20,161) $(20,161) $(52,225) $(52,225) $(61,641) $(61,641) Pro forma net loss $(20,407) $(20,560) $(53,411) $(68,141) $(62,222) $(76,935) Pro forma basic and diluted loss per share $ (3.91) $ (3.93) $ (1.55) $ (1.98) $ (1.63) $ (2.02)
In addition, the assumption disclosed in Note 8 for the expected life after vesting for fiscal 2000 was corrected to be 0.5 years, rather than 2.5 years as previously stated. * * * * * PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K (a)1. Consolidated Financial Statements The following Consolidated Financial Statements of DigitalThink, Inc. and Report of Deloitte & Touche LLP, have been filed as part of this Form 10-K/A. See Index to Consolidated Financial Statements under Item 8, above: Index to Consolidated Financial Statements Independent Auditors' Report Consolidated Balance Sheets as of March 31, 2001 and 2002 Consolidated Statements of Operations for the years ended March 31, 2000, 2001 and 2002 Consolidated Statement of Stockholders' Equity (Deficit) for the years ended March 31, 2000, 2001 and 2002 Consolidated Statements of Cash Flows for the years ended March 31, 2000, 2001 and 2002 Notes to Consolidated Financial Statements (a)2. Financial Statement Schedule The following financial statement schedule of DigitalThink, Inc. for the fiscal years ended March 31, 2000, 2001, and 2002 is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of DigitalThink, Inc. Schedule II - Valuation and Qualifying Accounts Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Note thereto. (a)3. Exhibits Refer to (C) below. (b) Reports on Form 8-K The Company filed an 8-K on August 22, 2001, amended on October 26, 2001, describing the LearningByte acquisition. The Company filed an 8-K on April 5, 2002, press release dated April 2, 2002 announcing DigitalThink's Preliminary Results for Fourth Quarter; Revises Outlook and a press release dated April 2, 2002 announcing Executive Appointments naming Jon Madonna as Chairman and Michael Pope, President and CEO. (c) Exhibits
Exhibit Number Description of Document --------- -------------------------------------- ^2.1 Agreement and Plan of Reorganization among and between DigitalThink, LearningByte International and Merger Sub, dated August 14, 2001 **3.1 Amended and Restated Certificate of Incorporation #3.2 Bylaws of DigitalThink, Inc. *5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation **10.15 Restated 1996 ISO Stock Plan **10.16 Change of Control Severance Agreement between DigitalThink and Jon C. Madonna dated September 14, 2001 **10.17 Change of Control Severance Agreement between DigitalThink and Michael W. Pope dated September 14, 2001 **10.18 Standard Industrial/Commercial Single Tenant Lease dated July 17, 2000 between Thomas A. Price and Gwendolyn L.Price, as trustees of the Price Trust UTD October 5, 1984 and DigitalThink, for office space located at 601 Brannan Street, San Francisco, California, and addenda and inserts thereto **21.1 DigitalThink subsidiaries **23.1 Independent Auditors' Consent and Report on Schedule 23.2 Independent Auditors' Consent and Report on Schedule **24.1 Power of Attorney (included in Form 10K filed on June 4, 2002 on page 58)
---------- ^ Incorporated by reference to exhibit 99.1 filed with our Report on Form 8-K (File No. 000-28687). # Incorporated by reference to exhibit 4.2(b) filed with our Registration Statement on Form S-1 (File No. 333-92429), as amended. * Incorporated by reference to the same number exhibit filed with our Registration Statement on Form S-1 (File No. 333-92429), as amended. ** Incorporated by reference to the same number exhibit filed with our Form 10K on June 4, 2002 (File No. 000-28687). SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DIGITALTHINK, INC. (Registrant) August 28, 2002 By: /s/ MICHAEL W. POPE ------------------------------------- Michael W. Pope President and Chief Executive Officer August 28, 2002 By: /s/ ROBERT J. KROLIK ---------------------------------------- Robert J. Krolik Chief Financial Officer Schedule II DigitalThink, Inc. and Subsidiaries Valuation and Qualifying Accounts For the Years Ended March 31, 2000, 2001, 2002
Balance at Charges to Charged Balance at Beginning Costs and To Other End of of Period Expenses Deductions Accounts (1)Period ---------- -------- ---------- -------- -------- Year ended March 31, 2000: Allowance for doubtful accounts $ 75,000 $170,000 $ (40,000) $ -- $205,000 Year ended March 31, 2001: Allowance for doubtful accounts $205,000 $170,000 $(128,000) $ -- $247,000 Year ended March 31, 2002: Allowance for doubtful accounts $247,000 $96,000 $(342,000) $483,000 $484,000
(1) Recorded on the books of acquired company EXHIBIT LIST Exhibit Number Description of Document ^2.1 Agreement and Plan of Reorganization among and between DigitalThink, LearningByte International and Merger Sub, dated August 14, 2001 **3.1 Amended and Restated Certificate of Incorporation #3.2 Bylaws of DigitalThink, Inc. *5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation **10.15 Restated 1996 ISO Stock Plan **10.16 Change of Control Severance Agreement between DigitalThink and Jon C. Madonna dated September 14, 2001 **10.17 Change of Control Severance Agreement between DigitalThink and Michael W. Pope dated September 14, 2001 **10.18 Standard Industrial/Commercial Single Tenant Lease dated July 17, 2000 between Thomas A. Price and Gwendolyn L. Price, as trustees of the Price Trust UTD October 5, 1984 and DigitalThink, for office space located at 601 Brannan Street, San Francisco, California, and addenda and inserts thereto **21.1 DigitalThink subsidiaries **23.1 Independent Auditors' Consent and Report on Schedule 23.2 Independent Auditors' Consent and Report on Schedule **24.1 Power of Attorney (included in Form 10K filed on June 4, 2002 on page 58) __________ ^ Incorporated by reference to exhibit 99.1 filed with our Report on Form 8-K (File No. 000-28687). # Incorporated by reference to exhibit 4.2(b) filed with our Registration Statement on Form S-1 (File No. 333-92429), as amended. * Incorporated by reference to the same number exhibit filed with our Registration Statement on Form S-1 (File No. 333-92429), as amended. ** Incorporated by reference to the same number exhibit filed with our Form 10K on June 4, 2002 (File No. 000-28687).