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Table of Contents
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 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
(State or other jurisdiction of
incorporation or organization)
  
77-0460705
(I.R.S. Employer
Identification No.)
 
2444 Charleston
Mountain View, California
(Address of principal executive offices)
  
94043
(Zip Code)
 
(650) 934-9500
(Registrant’s telephone number including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
 
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  ¨
 
As of July 31, 2002, the Registrant had outstanding approximately 42,969,000 shares of Common Stock, $0.001 par value per share.
 

Table of Contents
 
DOCENT, INC.
 
INDEX
 
        
    Page    
PART I
  
FINANCIAL INFORMATION
     
Item 1.
  
Financial Statements
     
      
3
      
4
      
5
      
6-10
Item 2.
     
11-19
Item 3.
     
19
PART II.
     
20
      
21
      
22-23
 
.

2

Table of Contents
 
PART I
 
DOCENT, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
    
June 30,
2002
     
December 31,
2001
  
(in thousands, except per share amounts)
  
(Unaudited)
     
(1)
  
ASSETS
                  
Current assets:
                  
Cash and cash equivalents
   
$
36,114
 
   
$
28,460
 
Short term investments
   
 
13,965
 
   
 
33,840
 
Restricted cash
   
 
456
 
   
 
456
 
Accounts receivable, net of allowances for doubtful accounts of $785 at June 30, 2002 and $541 at December 31, 2001
   
 
6,081
 
   
 
9,992
 
Prepaid expenses and other current assets
   
 
1,504
 
   
 
2,762
 
    
  
Total current assets
   
 
58,120
 
   
 
75,510
 
Property and equipment, net
   
 
4,025
 
   
 
4,702
 
Goodwill
   
 
760
 
   
 
900
 
Other intangible assets, net
   
 
2,273
 
   
 
2,992
 
Other assets
   
 
471
 
   
 
443
 
    
  
Total assets
   
$
65,649
 
   
$
84,547
 
    
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
Current liabilities:
                  
Accounts payable
   
$
419
 
   
$
1,116
 
Accrued payroll and related liabilities
   
 
2,496
 
   
 
3,297
 
Accrued liabilities
   
 
3,276
 
   
 
4,666
 
Current portion of restructuring accrual
   
 
4,071
 
   
 
2,996
 
Deferred revenue
   
 
6,277
 
   
 
6,177
 
Current portion of capital lease obligations
   
 
145
 
   
 
177
 
Notes payable
   
 
—  
 
   
 
351
 
    
  
Total current liabilities
   
 
16,684
 
   
 
18,780
 
Restructuring accrual
   
 
1,191
 
   
 
973
 
Capital lease obligations
   
 
75
 
   
 
143
 
    
  
Total liabilities
   
 
17,950
 
   
 
19,896
 
    
  
Contingencies
                  
Stockholders’ equity:
                  
Preferred stock, $0.001 par value per share; 5,000 shares authorized; no shares issued
   
 
—  
 
   
 
—  
 
Common stock, $0.001 par value per share; 250,000 shares authorized; 42,969 and 42,753 shares issued and outstanding as of June 30, 2002 and December 31, 2001, respectively
   
 
43
 
   
 
43
 
Additional paid-in capital
   
 
231,375
 
   
 
238,851
 
Receivables from stockholders
   
 
(197
)
   
 
(980
)
Unearned stock-based compensation
   
 
(1,793
)
   
 
(8,292
)
Treasury stock, at cost: 295 shares as of June 30, 2002 and December 31, 2001
   
 
(667
)
   
 
(667
)
Accumulated deficit
   
 
(181,071
)
   
 
(164,435
)
Accumulated other comprehensive income
   
 
9
 
   
 
131
 
    
  
Total stockholders’ equity
   
 
47,699
 
   
 
64,651
 
    
  
Total liabilities and stockholders’ equity
   
$
65,649
 
   
$
84,547
 
    
  
(1)
 
Derived from the Company’s audited financial statements as of December 31, 2001.
 
The accompanying notes are an integral part of these financial statements.

3

Table of Contents
 
DOCENT, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
    
Three Months Ended
June 30,
     
Six Months Ended
June 30,
  
    
2002
     
2001
     
2002
     
2001
  
    
(in thousands, except per share amounts)
  
Revenue:
                                    
License
   
$
2,720
 
   
$
4,778
 
   
$
7,106
 
   
$
8,961
 
Services and maintenance
   
 
3,925
 
   
 
4,140
 
   
 
7,545
 
   
 
7,051
 
    
  
  
  
Total revenue
   
 
6,645
 
   
 
8,918
 
   
 
14,651
 
   
 
16,012
 
    
  
  
  
Cost of revenue:
                                    
Cost of license
   
 
26
 
   
 
50
 
   
 
77
 
   
 
72
 
Cost of services and maintenance(1)
   
 
2,476
 
   
 
4,389
 
   
 
4,947
 
   
 
7,586
 
    
  
  
  
Total cost of revenue
   
 
2,502
 
   
 
4,439
 
   
 
5,024
 
   
 
7,658
 
    
  
  
  
Gross profit (loss):
                                    
License
   
 
2,694
 
   
 
4,728
 
   
 
7,029
 
   
 
8,889
 
Services and maintenance
   
 
1,449
 
   
 
(249
)
   
 
2,598
 
   
 
(535
)
    
  
  
  
Total gross profit
   
 
4,143
 
   
 
4,479
 
   
 
9,627
 
   
 
8,354
 
    
  
  
  
Operating expenses:
                                    
Research and development(1)
   
 
2,525
 
   
 
2,527
 
   
 
6,882
 
   
 
5,017
 
Sales and marketing(1)
   
 
4,740
 
   
 
12,981
 
   
 
12,650
 
   
 
26,148
 
General and administrative(1)
   
 
708
 
   
 
3,909
 
   
 
2,873
 
   
 
7,294
 
Restructuring charges
   
 
3,361
 
   
 
—  
 
   
 
4,286
 
   
 
—  
 
    
  
  
  
Total operating expenses
   
 
11,334
 
   
 
19,417
 
   
 
26,691
 
   
 
38,459
 
    
  
  
  
Loss from operations
   
 
(7,191
)
   
 
(14,938
)
   
 
(17,064
)
   
 
(30,105
)
Interest expense
   
 
(46
)
   
 
(121
)
   
 
(136
)
   
 
(193
)
Other income and (expense), net
   
 
197
 
   
 
(40
)
   
 
50
 
   
 
(177
)
Interest income
   
 
245
 
   
 
1,051
 
   
 
608
 
   
 
2,610
 
    
  
  
  
Loss before provision for income taxes
   
 
(6,795
)
   
 
(14,048
)
   
 
(16,542
)
   
 
(27,865
)
Provision for income taxes
   
 
46
 
   
 
24
 
   
 
94
 
   
 
44
 
    
  
  
  
Net loss
   
 
(6,841
)
   
 
(14,072
)
   
 
(16,636
)
   
 
(27,909
)
    
  
  
  
Net loss per share—basic and diluted
   
$
(0.16
)
   
$
(0.35
)
   
$
(0.39
)
   
$
(0.69
)
    
  
  
  
Weighted average common shares outstanding
   
 
42,297
 
   
 
40,561
 
   
 
42,204
 
   
 
40,422
 
    
  
  
  
(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:
 
    
Three Months Ended June 30,
   
Six Months Ended
June 30,
    
2002
     
2001
   
2002
     
2001
Cost of services and maintenance
   
$
77
 
   
$
291
   
$
194
 
   
$
646
    
  
  
  
Operating expenses:
                                
Research and development
   
 
(567
)
   
 
389
   
 
(423
)
   
 
825
Sales and marketing
   
 
(629
)
   
 
1,329
   
 
(117
)
   
 
2,883
General and administrative
   
 
(1,081
)
   
 
1,332
   
 
(601
)
   
 
2,743
    
  
  
  
Total included in operating expenses
   
$
(2,277
)
   
$
3,050
   
$
(1,141
)
   
$
6,451
    
  
  
  
 
The accompanying notes are an integral part of these financial statements.

4

Table of Contents
 
DOCENT, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
    
Six Months Ended
June 30,
  
    
2002
     
2001
  
    
(in thousands)
  
Cash flows from operating activities
                  
Net loss
   
$
(16,636
)
   
$
(27,909
)
Adjustments to reconcile net loss to net cash used in operating activities:
                  
Depreciation and amortization
   
 
1,080
 
   
 
743
 
Amortization of deferred interest expense
   
 
38
 
   
 
53
 
Amortization of intangible assets
   
 
719
 
   
 
—  
 
Amortization of unearned stock-based compensation
   
 
(962
)
   
 
6,953
 
Non-cash restructuring charges
   
 
209
 
   
 
—  
 
Acceleration of stock option vesting
   
 
15
 
   
 
100
 
Issuance of options in exchange for services
   
 
—  
 
   
 
44
 
Changes in operating assets and liabilities:
                  
Accounts receivable, net
   
 
3,911
 
   
 
(1,757
)
Prepaid expenses and other assets
   
 
1,126
 
   
 
(730
)
Accounts payable
   
 
(697
)
   
 
113
 
Accrued liabilities
   
 
(2,051
)
   
 
57
 
Restructuring accrual
   
 
1,293
 
   
 
—  
 
Deferred revenue
   
 
100
 
   
 
(1,442
)
    
  
Net cash used in operating activities
   
 
(11,855
)
   
 
(23,775
)
    
  
Cash flows from investing activities
                  
Purchases of property and equipment
   
 
(481
)
   
 
(1,877
)
Sales of short term and long term investments
   
 
38,844
 
   
 
49,813
 
Purchases of short term and long term investments
   
 
(18,944
)
   
 
(38,480
)
    
  
Net cash provided by investing activities
   
 
19,419
 
   
 
9,456
 
    
  
Cash flows from financing activities
                  
Proceeds from the employee stock purchase plan and exercising of common
  stock options and warrants, net
   
 
398
 
   
 
1,120
 
Proceeds from repayment of stockholder receivable
   
 
783
 
   
 
—  
 
Repurchase of common stock
   
 
(428
)
   
 
(15
)
Repayments of capital lease obligations
   
 
(127
)
   
 
(43
)
Repayments of notes payable
   
 
(389
)
   
 
(699
)
    
  
Net cash provided by financing activities
   
 
237
 
   
 
363
 
    
  
Net increase (decrease) in cash and cash equivalents
   
 
7,801
 
   
 
(13,956
)
Cash and cash equivalents, beginning of period
   
 
28,460
 
   
 
92,818
 
Effect of exchange rate change on cash and cash equivalents
   
 
(147
)
   
 
(42
)
    
  
Cash and cash equivalents, end of period
   
$
36,114
 
   
$
78,820
 
    
  
Supplemental disclosures of cash flow information
                  
Interest paid
   
$
94
 
   
$
117
 
    
  
Income taxes paid
   
$
83
 
   
$
4
 
    
  
Supplemental disclosures of noncash investing and financing activities
                  
Equipment acquired under capital leases
   
$
27
 
   
$
168
 
    
  
Unearned stock-based compensation
   
$
(4,454
)
   
$
(520
)
    
  
Unrealized gain on available for sale investments
   
$
25
 
   
$
15
 
    
  
Adjustment to goodwill
   
$
140
 
   
$
—  
 
    
  
 
The accompanying notes are an integral part of these financial statements.

5

Table of Contents

DOCENT, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.    Basis of Presentation
 
The accompanying unaudited interim condensed consolidated financial statements have been prepared by Docent, Inc. (the “Company”) in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. In the opinion of management, the interim consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the information required to be included. Operating results for the three and six-month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for any future periods, including the full fiscal year. Reference should also be made to the Annual Consolidated Financial Statements, Notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.
 
2.    Net Loss Per Share
 
Basic and diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss per share excludes potential common shares since their effect is antidilutive. Potential common shares are comprised of common stock subject to repurchase rights, incremental shares of common stock issuable upon the exercise of stock options or warrants.
 
The following table sets forth the computation of basic and diluted net loss per share for the periods indicated (in thousands, except per share amounts):
 
    
Three Months Ended
June 30,
     
Six Months Ended
June 30,
  
    
2002
     
2001
     
2002
     
2001
  
    
(Unaudited)
  
Net loss
   
$
(6,841
)
   
$
(14,072
)
   
$
(16,636
)
   
$
(27,909
)
    
  
  
  
Basic and diluted shares:
                                    
Weighted average common shares outstanding
   
 
42,570
 
   
 
42,006
 
   
 
42,540
 
   
 
41,973
 
Weighted average unvested common shares subject to repurchase
   
 
(273
)
   
 
(1,445
)
   
 
(336
)
   
 
(1,551
)
    
  
  
  
Weighted average shares used to compute basic and diluted net loss per share
   
 
42,297
 
   
 
40,561
 
   
 
42,204
 
   
 
40,422
 
    
  
  
  
Net loss per share—basic and diluted
   
$
(0.16
)
   
$
(0.35
)
   
$
(0.39
)
   
$
(0.69
)
    
  
  
  

6

Table of Contents

DOCENT, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
3.    Restructuring Charges
 
During the third quarter of fiscal 2001, the Company announced and implemented restructuring actions to better align operating expenses with anticipated revenue. The Company 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, the Company announced and implemented additional restructuring actions to better align operating expenses with anticipated revenue. The Company 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 exist 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, the Company announced and implemented additional restructuring actions to better align operating expenses with anticipated revenue. The Company 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, the Company announced and implemented additional restructuring actions to better align operating expenses with anticipated revenue. The Company 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.
 
During the second quarter of fiscal 2002, the Company 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, offset by the settlement of another lease obligation of $74,000.
 
The following table depicts the restructuring activity during the six months ended June 30, 2002 (in thousands):
 
Category
   
Balance at
Dec. 31, 2001
   
Additions
   
Provision
Adjustments
   
Expenditures
   
Balance at
June 30, 2002
           
Cash
   
Non-cash
   
Vacated facilities
   
$
3,309
   
$
2,051
   
$
298
   
$
687
   
$
62
   
$
4,909
Employee severance
   
 
369
   
 
1,708
   
 
—  
   
 
1,893
   
 
—  
   
 
184
Operating assets
   
 
57
   
 
163
   
 
—  
   
 
58
   
 
147
   
 
15
Other costs
   
 
234
   
 
66
   
 
—  
   
 
146
   
 
—  
   
$
154
    
  
  
  
  
  
Total
   
$
3,969
   
$
3,988
   
$
298  
   
$
2,784
   
$
209
   
$
5,262
    
  
  
  
  
  
 
4.    Comprehensive Income
 
The Company’s components of comprehensive income consist of net loss, foreign currency translation adjustments and unrealized gains and losses on available for sale investments. The total comprehensive loss was $6,959,000 for the three months ended June 30, 2002 and $14,087,000 for the three months ended June 30, 2001. The comprehensive loss was $16,758,000 for the six months ended June 30, 2002 and $27,936,000 for the six months ended June 30, 2001.

7

Table of Contents

DOCENT, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
5.    Goodwill and Intangible Assets
 
Goodwill and intangible assets arose from the Company’s acquisition of the business of gForce Systems, Inc. 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 what was recorded at the time of the merger. The intangible assets are being amortized on a straight-line basis over periods ranging from fourteen to thirty six months and consist of (in thousands):
 
    
June 30, 2002
   
December 31, 2001
    
Gross Carrying Amount
   
Accumulated Amortization
     
Net
   
Gross Carrying Amount
     
Accumulated Amortization
     
Net
Developed technology
   
$
568
   
$
(345
)
   
$
223
   
$
568
     
$
(101
)
   
$
467
Core technology
   
 
2,493
   
 
(589
)
   
 
1,904
   
 
2,493
     
 
(174
)
   
 
2,319
Trade name
   
 
83
   
 
(50
)
   
 
33
   
 
83
     
 
(15
)
   
 
68
Patents
   
 
148
   
 
(35
)
   
 
113
   
 
148
     
 
(10
)
   
 
138
    
  
  
  
    
  
    
$
3,292
   
$
(1,019
)
   
$
2,273
   
$
3,292
     
$
(300
)
   
$
2,992
    
  
  
  
    
  
 
The total estimated amortization expense related to intangible assets is provided in the table below (in thousands):
 
Fiscal Year
     
Remainder 2002
   
$
697
      2003
   
 
880
      2004
   
 
696
    
    
$
2,273
    
 
6.    Segment Reporting
 
Financial Accounting Standards Board Statement No. 131, “Disclosure about Segments of an Enterprise and Related Information” (“SFAS 131”), requires that companies report separately in the financial statements certain financial and descriptive information about operating segments, profit or loss, certain specific revenue and expense items and segment assets. Additionally, companies are required to report information about the revenue derived from their products and service groups, about geographic areas in which the company earns revenue and holds assets, and about major customers. The Company has one reporting segment.
 
The following table sets forth revenue by geographic region for the periods indicated (in thousands):
 
    
Three months ended June 30,
   
Six months ended June 30,
    
2002
   
2001
   
2002
   
2001
United States
   
$
4,542
   
$
7,948
   
$
11,183
   
$
13,578
Europe
   
 
2,020
   
 
970
   
 
3,283
   
 
2,434
Asia/Pacific
   
 
83
   
 
—  
   
 
185
   
 
—  
    
  
  
  
    
$
6,645
   
$
8,918
   
$
14,651
   
$
16,012
    
  
  
  

8

Table of Contents
 
DOCENT, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
The following table sets forth long-lived assets by geographic region as of the dates indicated (in thousands):
 
    
June 30,
2002
   
December 31,
2001
United States
   
$
7,038
   
$
8,664
Europe
   
 
375
   
 
361
Asia/Pacific
   
 
116
   
 
12
    
  
    
$
7,529
   
$
9,037
    
  
 
In the three and six months ended June 30, 2002 and June 30, 2001, no customer accounted for sales greater than 10% of the Company’s total revenues.
 
7.    Recent Pronouncements
 
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. The new rules require business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and goodwill acquired after this date will no longer be amortized, but will be subject to annual impairment tests. Application of non-amortization provisions of Statement 142 is not expected to result in change to results of operations in 2002, as there was no goodwill being amortized in 2001. All other intangible assets will continue to be amortized over their estimated useful lives.The Company performed the first of the required impairment tests of goodwill as of January 1, 2002. No impairment of goodwill was determined as of January 1, 2002. The Company intends to do an annual impairment test of goodwill associated with the gForce purchase as of October 1, 2002. If the current business environment remains at its current levels and the Company’s market value remains lower than its book value, an impairment charge for all, or a portion, of the goodwill and intangibles book value may be required.
 
In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a segment of a business. FAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company adopted FAS 144 as of January 1, 2002 and the adoption did not have an impact on the Company’s financial position and results of operations.
 
8.    Contingencies
 
From time to time, the Company may become involved in litigation relating to claims arising from the Company’s ordinary course of business. The Company believes that there are no claims or actions pending or threatened, the ultimate disposition of which would have a material adverse effect on the Company.
 
9.    Income Taxes
 
The Company incurred operating losses for all periods from inception through June 30, 2002, and therefore has not recorded a provision for U.S. income taxes. The Company recorded a provision for foreign and state income taxes of $46,000 for the three months ended June 30, 2002, and $94,000 for the six months ended June 30, 2002. For the three and six months ended June 30, 2001, the Company recorded a provision for foreign income taxes of $24,000 and $44,000, respectively. The Company has recorded a valuation allowance for the full amount of its net deferred tax assets.

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DOCENT, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
10.    Related Party
 
In March 2000, the Company entered into an alliance agreement with Accenture, which is a shareholder of the Company and one of whose retired partners is a director of the Company. The alliance agreement provides for the resale of the Company’s software products and services by Accenture, the submission of joint proposals to potential clients where either the Company would be subcontracting its services to Accenture or Accenture would be subcontracting its services to the Company; 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. At June 30, 2002, the Company believes Accenture held approximately 793,000 shares of its common stock and had warrants to purchase an additional 2,396,000 shares at $7.52 per share. These warrants expire on March 31, 2003. Accenture’s holdings in the Company’s common stock on a fully diluted basis on June 30, 2002 represented approximately 7.0% of outstanding shares its common stock.
 
As part of an alliance agreement, Accenture resells the Company’s software products to third party customers. In 2001, the Company recognized $864,000 of revenue from Accenture as part of this resale arrangement. During the six months ended June 30, 2002, the Company recognized $324,000 of revenue from Accenture as part of this resale arrangement. Pricing for Accenture resale agreements represents the fair value of comparable resale agreements with the Company’s other reseller partners. In 2000, the Company sold to Accenture a Docent Enterprise software license for Accenture’s internal use and recognized $663,000 of 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 the Company to prospective third party customers, Accenture is entitled to a portion of the contracted license fee, if the Company sells 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. The Company’s license revenue related to such sales is decreased by the revenue sharing amount due to Accenture. During 2001, the Company decreased its license revenue by $858,000, due to the revenue sharing agreement with Accenture. During the six months ended June 30, 2002, the Company decreased its license revenue by $306,000, due to the revenue sharing agreement with Accenture. At June 30, 2002, the Company owed Accenture $208,000 related to license agreements signed that are subject to revenue sharing.
 
The Company subcontracted to Accenture $68,000 in 2001 and $11,000 in 2000 of consulting work for the Company’s third party customers. During the six months ended June 30, 2002, the Company did not subcontract with Accenture any consulting work for its third party customers. Accenture charges the Company its standard hourly rates for consulting. Accenture subcontracted to the Company consulting work for Accenture’s third party customers in the amount of $337,000 during 2001 and $60,000 during 2000. During the six months ended June 30, 2002, Accenture subcontracted to the Company $5,000 of consulting work for its third party customers. The Company charges Accenture its standard hourly rates for consulting, and records such amounts as service revenue.
 
Concurrent with the alliance agreement, the Company entered into a consulting services agreement with Accenture pursuant to which the Company is currently committed to purchase $809,000 of consulting services from Accenture prior to April 1, 2003.

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Item 2     Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and related Notes thereto contained elsewhere in this document. Operating results for the three and sixth months period ended June 30, 2002 are not necessarily indicative of the results that may be expected for any future periods, including the full fiscal year. Reference should also be made to the Annual Consolidated Financial Statements, Notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.
 
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 forward-looking statements. Factors that could contribute to such differences include those discussed in this document, such as a significant decrease in our cash level, a material change in our operating losses and a failure to realize the anticipated cash savings from the three and six months ended June 2002 restructuring programs. 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
 
We were incorporated in June 1997 to develop, market and sell eLearning products and services. We provide infrastructure software and related services that allow our customers to create, deploy and manage learning and knowledge exchanges 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. The preparation of these financial statements requires us to make estimates and judgments 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, including those related to revenue recognition, allowance for doubtful accounts, goodwill and intangible assets, allowance for deferred tax assets and restructuring. Estimates are 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 affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
 
    Revenue Recognition
 
Our revenue recognition policy is significant because our revenue is a key component of our results of operations. We follow very specific and detailed guidelines in measuring revenue; however, certain judgments affect the application of our revenue recognition policy. 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.
 
    Goodwill and Intangible Assets
 
In assessing the recoverability of goodwill and other identified intangible assets we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If the current business environment remains at its current levels, and the Company’s stock price remains below book value, an impairment charge for all, and or a portion, of the goodwill and intangibles book value may be required.

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    Restructuring
 
During fiscal year 2001 and the six months ended June 30, 2002, we recorded significant reserves in connection with our restructuring programs. These reserves include estimates pertaining to the ability to sub-lease facilities closed in Sunnyvale and 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 June 30, 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 facilities consolidation 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, content providers, and reseller partners. To date, we have generated our license and services revenue primarily from direct sales, and referral sales from our system integrators, to enterprise customers. The remainder of our revenue has been derived primarily from our content providers.
 
Enterprise customers have the option of purchasing perpetual licenses or renting time-based licenses for the Docent Enterprise™ and Docent Exchange™ software. Our perpetual 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 professional 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.
 
In accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position 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.

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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 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 is 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.
 
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 which 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 which 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.
 
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.
 
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 manuals and product documentation, 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.

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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 June 30, 2002, had an accumulated deficit of $181.1 million. We believe our success depends on increasing our customer and partner base and continually enhancing our products. We expect to continue to incur operating losses through fiscal year 2002.
 
Results of Operations
 
Three and Six Months Ended June 30, 2002 and 2001
 
    Revenue
 
Total revenue decreased $2.3 million, from $8.9 million for the three months ended June 30, 2001 to $6.6 million for the three months ended June 30, 2002. Total revenue decreased $1.3 million, from $16.0 million for the six months ended June 30, 2001, to $14.7 million for the six months ended June 30, 2002. The decreases in total revenue were primarily attributable to a decrease in licenses sales to new customers and less business referred from our reseller partners.
 
Total license revenue decreased $2.1 million, from $4.8 million for the three months ended June 30, 2001 to $2.7 million for the three months ended June 30, 2002. Total license revenue decreased $1.9 million, from $9.0 million for the six months ended June 30, 2001 to $7.1 million for the six months ended June 30, 2002.
 
Total service and maintenance revenue decreased $215,000, from $4.1 million for the three months ended June 30, 2001 to $3.9 million for the three months ended June 30, 2002. Total service and maintenance revenue increased $494,000, from $7.1 million for the six months ended June 30, 2001 to $7.6 million for the six months ended June 30, 2002. The decrease in service and maintenance revenue in the three month period ended June 30, 2002 was primarily attributable to decrease in the number of new customer implementations, partially offset by the cumulative effect of renewals of annual maintenance agreements. The increase in service and maintenance revenue in the six month period ended June 30, 2002 was primarily attributable to the cumulative effect of renewals of annual maintenance agreements.
 
In the three and six months ended June 30, 2002 and June 30, 2001, no customer accounted for sales greater than 10% of the Company’s total revenues.
 
    Costs of revenue
 
Cost of license revenue decreased $24,000, from $50,000 for the three months ended June 30, 2001 to $26,000 for the three months ended June 30, 2002. Cost of license revenue decreased for the three month period ended June 30, 2002 due to decreased license revenue. Cost of license revenue increased $5,000, from $72,000 for the six months ended June 30, 2001 to $77,000 for the six months ended June 30, 2002. Cost of license revenue increased for the six months ended June 30, 2002 due to costs associated with Docent Exchange studio equipment in the first quarter of 2002, a gForce product acquired in October 2001.
 
Cost of service and maintenance revenue decreased $1.9 million, from $4.4 million for the three months ended June 30, 2001 to $2.5 million for the three months ended June 30, 2002. Cost of service and maintenance revenue decreased $2.7 million, from $7.6 million for the six months ended June 30, 2001, to $4.9 million for the six months ended June 30, 2002. The decreases in the cost of service and maintenance revenue was due to decreased use of third party implementation service partners, decreased personnel in our professional services organization, and a decrease in stock-based compensation.
 
Expenses relating to third party implementation service partners decreased $1.1 million, from $2.0 million in the three months ended June 30, 2001 to $850,000 in the three months ended June 30, 2002. Expenses relating to service and maintenance personnel decreased $575,000, from $2.1 million in the three months ended June 30, 2001 to $1.5 million in the three months ended June 30, 2002. Stock-based compensation decreased $214,000, from $291,000 in the three months ended June 30, 2001 to $77,000 in the three months ended June 30, 2002.
 
Expenses relating to third party implementation service partners decreased $1.2 million, from $2.8 million in the six months ended June 30, 2001 to $1.6 million in the six months ended June 30, 2002. Expenses relating to service and maintenance personnel decreased $1.0 million, from $4.1 million in the six months ended June 30,

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2001 to $3.1 million in the six months ended June 30, 2002. Stock-based compensation decreased $452,000, from $646,000 in the six months ended June 30, 2001 to $194,000 in the three months ended June 30, 2002.
 
Service and maintenance gross profit (loss) percentage increased from (6%) gross loss for the three months ended June 30, 2001 to 37% gross profit for the three months ended June 30, 2002. Service and maintenance gross profit (loss) percentage increased from (8%) gross loss for the six months ended June 30, 2001 to 34% gross profit for the six months ended June 30, 2002. The increases in the both periods are primarily attributable to the improved billable utilization of employee consultants that perform implementation and other consulting services for customers.
 
Operating expenses
 
Stock-based compensation.    Stock-based compensation expense relating to common stock, options and warrants was a $3.3 million expense for the three months ended June 30, 2001 and $2.2 million credit for the three months ended June 30, 2002. Stock-based compensation expense relating to common stock, options and warrants was $7.1 million expense for the six months ended June 30, 2001 and $947,000 credit for the six months ended June 30, 2002.
 
Stock-based compensation is being expensed using an accelerated amortization method, thus more expenses were recorded early in the life of the options. The 2002 termination of certain Docent officers with unvested options, that had already been expensed under the accelerated method, created an overall stock-based compensation credit of $2.2 million for the three months ended June 30, 2002 and $947,000 for the six months ended June 30, 2002.
 
Research and development expenses.    Research and development expenses were $2.5 million for the three months ended June 30, 2001 and the three months ended June 30, 2002. Research and development expenses increased $1.9 million, from $5.0 million for the six months ended June 30, 2001, to $6.9 million for the six months ended June 30, 2002. The increase in the six month period was primarily attributable to increases in the number of external development consultants and research and development personnel, the cost of amortized developed and core technology from the gForce acquisition, partially offset by a decrease in stock-based compensation. To date, all software development costs have been expensed in the period incurred.
 
Stock-based compensation decreased $956,000, from $389,000 of expense in the three months ended June 30, 2001 to a credit of $567,000 in the three months ended June 30, 2002. This was partially off-set by expenses relating to research and development personnel increasing $545,000, from $2.0 million in the three months ended June 30, 2001 to $2.6 million in the three months ended June 30, 2002. There was no amortization of developed and core technology expense in the three months ended June 30, 2001, compared to $359,000 in the three months ended June 30, 2002.
 
Expenses relating to research and development personnel increased $1.6 million, from $3.6 million in the six months ended June 30, 2001 to $5.2 million in the six months ended June 30, 2002. Expenses relating to external development consultants increased $914,000, from $465,000 in the six months ended June 30, 2001 to $1.4 million in the six months ended June 30, 2002. There was no amortization of developed and core technology expense in the six months ended June 30, 2001, compared to $719,000 in the six months ended June 30, 2002. This was partially off-set by stock-based compensation decreasing $1.2 million, from $825,000 of expense in the six months ended June 30, 2001 to a credit of $423,000 in the six months ended June 30, 2002.
 
Sales and marketing expense.    Sales and marketing expenses decreased $8.3 million, from $13.0 million for the three months ended June 30, 2001 to $4.7 million for the three months ended June 30, 2002. Sales and marketing expenses decreased $13.4 million, from $26.1 million for the six months ended June 30, 2001 to $12.7 million for the six months ended June 30, 2002. The decreases in the three and six months periods were attributable to the decrease in the number of employees, stock-based compensation, and outside professional services and consultants.
 
Expenses relating to sales and marketing personnel decreased $5.9 million, from $10.5 million in the three months ended June 30, 2001 to $4.6 million in the three months ended June 30, 2002. Stock-based compensation decreased $2.0 million, from $1.3 million of expense in the three months ended June 30, 2001 to a credit of $629,000 in the three months ended June 30, 2002.
 
Expenses relating to sales and marketing personnel decreased $9.1 million, from $19.8 million in the six months ended June 30, 2001 to $10.7 million in the six months ended June 30, 2002. Stock-based compensation decreased $3.0 million, from $2.9 million of expense in the six months ended June 30, 2001 to a credit of $117,000 in the six months ended June 30, 2002. Expenses relating to outside services and consultants decreased $1.3

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million in the six months ended June 30, 2002, from $1.6 million in the six months ended June 30, 2001 to $328,000 in the six months ended June 30, 2002.
 
General and administrative expense.    General and administrative expense decreased $3.2 million, from $3.9 million for the three months ended June 30, 2001 to $708,000 for the three months ended June 30, 2002. General and administrative expense decreased $4.4 million, from $7.3 million for the six months ended June 30, 2001, to $2.9 million for the six months ended June 30, 2002. The decrease was primarily attributable to the decreases in stock-based compensation expense, consulting fees for recruiting and investor relations, and legal and international accounting fees.
 
Stock-based compensation decreased $2.4 million, from $1.3 million of expense in the three months ended June 30, 2001 to a credit of $1.1 million in the three months ended June 30, 2002. Legal and accounting fees decreased $362,000, from $841,000 for the three months ended June 30, 2001 to $479,000 for the three months ended June 30, 2002. Consulting fees decreased $299,000, from $318,000 for the three months ended June 30, 2001 to $19,000 for the three months ended June 30, 2002.
 
Stock-based compensation decreased $3.3 million, from $2.7 million of expense in the six months ended June 30, 2001 to a credit of $601,000 in the six months ended June 30, 2002. Consulting fees decreased $605,000, from $686,000 for the six months ended June 30, 2001 to $81,000 for the six months ended June 30, 2002. Legal and accounting fees decreased $526,000 from $1.3 million for the six months ended June 30, 2001 to $843,000 for the six months ended June 30, 2002.
 
Restructuring charge.    During the three and six months ended June 30, 2002, the Company implemented restructuring programs to better align operating expenses with anticipated revenues.
 
During the first quarter of fiscal 2002, the Company 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, the Company 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.
 
During the second quarter of fiscal 2002, the Company 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, offset by the settlement of another lease obligation of $74,000.
 
We expect that the restructuring programs will save the Company approximately $2.6 million per quarter of cash.
 
    Interest expense, other income and expense, net, and interest income
 
Interest expense.    Interest expense decreased $75,000, from $121,000 for the three months ended June 30, 2001 to $46,000 for the three months ended June 30, 2002. Interest expense decreased $57,000, from $193,000 for the six months ended June 30, 2001 to $136,000 for the six months ended June 30, 2002. These decreases were attributable to lower capital lease and equipment loan balances.
 
Other income and expense, net.    Other income and expense, net, increased $237,000, from $40,000 net expense for the three months ended June 30, 2001 to $197,000 net income for the three months ended June 30, 2002. Other income and expense, net, increased $227,000, from $177,000 net expense for the six months ended June 30, 2001 to $50,000 net income for the six months ended June 30, 2002. These increases were attributable to a foreign exchange gain, net of $261,000 in the three months ended June 30, 2002 and $215,000 for the six months ended June 30, 2002.
 
Interest income.    Interest income decreased $806,000, from $1.1 million for the three months ended June 30, 2001 to $245,000 for the three months ended June 30, 2002. Interest income decreased $2.0 million, from $2.6 million for the six months ended June 30, 2001 to $608,000 for the six months ended June 30, 2002. These decreases were the result of lower average cash and investments balances maintained by the Company, reflecting the use of cash to fund operations.

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Provision for income taxes
 
We incurred operating losses for all periods from inception through June 30, 2002, and therefore have not recorded a provision for U.S. income taxes. We recorded a provision for foreign and state income taxes of $46,000 for the three months ended June 30, 2002, and $94,000 for the six months ended June 30, 2002. We recorded a provision for foreign and state income taxes of $24,000 for the three months ended June 30, 2001, and $44,000 for the six months ended June 30, 2001. We have recorded a valuation allowance for the full amount of our net deferred tax assets.
 
At December 31, 2001, the Company had federal and state net operating loss carry-forwards of approximately $93.3 and $41.4 million respectively, available to offset future taxable income. The Company’s federal and state net operating loss carry-forwards will expire in 2004 through 2021, if not utilized.
 
At December 31, 2001, the Company also has federal and state research and development credit carry-forwards of approximately $740,000 and $520,000, respectively. The federal carry-forwards will expire in 2018 through 2021, if not fully utilized.
 
Utilization of the net operating losses and credits 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 through the sale of equity securities, from which we raised net proceeds of $172.1 million through June 30, 2002. As of June 30, 2002, we had approximately $36.1 million of cash and cash equivalents and $14.0 million of short term investments.
 
Cash used in operating activities was $11.9 million for the six months ended June 30, 2002, as compared to $23.8 million for the six months ended June 30, 2001. The cash used during these periods was attributable to net losses of $16.6 million for the six months ended June 30, 2002 and $27.9 million for the six months ended June 30, 2001. During the six months ended June 30, 2002, cash used to fund net losses was partially off-set by a decrease in accounts receivable of $3.9 million. The decrease in accounts receivable is due to lower revenue levels and improved cash collections. During the six months ended June 30, 2001, cash used to fund net losses was less than the amount of such net losses because a component of net losses were non-cash compensation charges related to various equity instruments granted to employees and non-employees. Total expenses in relation to these grants were $7.1 million for the six months ended June 30, 2001.
 
The investment in property and equipment, excluding equipment acquired under capital leases, was $481,000 in the six months ended June 30, 2002 and was $1.9 million in the six months ended June 30, 2001. During the first six months of 2002, we sold $38.8 million of short term investments, partially offset by the purchase of $18.9 million of short term investments. During the first six months of 2001, we purchased $49.8 million of short and long term investments, partially offset by the sale of $38.5 million of short and long term investments.
 
Cash provided by financing activities was $237,000 during the six months ended June 30, 2002, and $363,000 for the three months ended June 30, 2001. The cash provided by financing activities in the first six months of 2002 resulted from the repayment of stockholder receivables totaling $783,000, partially off-set by payments of notes payable and capital lease obligations of $516,000. The cash provided by financing activities in the first six months of 2001 resulted from proceeds from the employee stock purchase plan of $1.1 million, partially off-set by the payments of notes payable and capital lease obligations of $742,000.
 
At June 30, 2002, our contractual obligations and commercial commitments were as follows (in thousands):
 
         
Payment Due by Period
    
Total
   
Less than
1 year
   
1-3
Years
Capital lease obligation
   
$
220
   
$
145
   
$
75
Operating leases
   
 
4,358
   
 
1,427
   
 
2,931
Restructuring operating leases
   
 
4,909
   
 
3,718
   
 
1,191
Accenture consulting obligation
   
 
809
   
 
809
   
 
—  
    
  
  
Total contractual cash obligations
   
$
10,296
   
$
6,099
   
$
4,197
    
  
  

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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, develop new or enhanced applications and services, respond to competitive pressures, acquire complementary businesses or technologies, or take advantage of unanticipated opportunities.
 
Related Party
 
In March 2000, we entered into an alliance agreement with Accenture, which is a shareholder of ours and one of whose retired partners is a director of the Company. 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. At June 30, 2002, we believe Accenture held approximately 793,000 shares of our common stock and had warrants to purchase an additional 2,396,000 shares at $7.52 per share. These warrants expire on March 31, 2003. Accenture’s holdings in our common stock on a fully diluted basis on June 30, 2002 represented approximately 7.0% of outstanding shares of our common stock.
 
As part of the alliance agreement, Accenture resells our software products to third party customers. In 2001, we recognized $864,000 of revenue from Accenture as part of this resale arrangement. During the six months ended June 30, 2002, we recognized $324,000 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 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 2001, we decreased our license revenue by $858,000, due to the revenue sharing agreement with Accenture. During the six months ended June 30, 2002, we decreased our license revenue by $306,000, due to the revenue sharing agreement with Accenture. At June 30, 2002, we owed Accenture $208,000 related to license agreements signed 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 the six months ended June 30, 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 $337,000 during 2001 and $60,000 during 2000. During the six months ended June 30, 2002, Accenture subcontracted to us $5,000 of consulting work for its third party customers. 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 $809,000 of consulting services from Accenture prior to April 1, 2003.
 
Recent Accounting Pronouncements
 
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. The new rules require business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and goodwill acquired after this date will no longer be amortized, but will be subject to annual impairment tests. Application of the non-amortization provisions of Statement 142 is not expected to result in any change to results of operations in 2002, as there was no goodwill being amortized in 2001. All other intangible assets will continue to be amortized over their estimated useful lives. The Company performed the first of the required impairment tests of goodwill as of January 1, 2002. No impairment of goodwill was determined as of January 1, 2002. The Company intends to do an annual impairment test of goodwill associated with the gForce purchase as of October 1, 2002. If the current business environment remains at its current levels and the Company’s market value remains lower than its book value, an impairment charge for all, or a portion, of the goodwill and intangibles book value may be required.

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In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a segment of a business. FAS 144 is effective for fiscal years beginning after December 15, 2001., with earlier application encouraged. The Company adopted FAS 144 as of January 1, 2002 and the adoption did not have an impact on the Company’s financial position and results of operations.
 
Item 3     Quantitative and Qualitative Disclosures about Market Risk
 
Market and Currency Risk
 
Our market and currency risk disclosure set forth in Item 7A of our annual report on Form 10-K for the year ended December 31, 2001 has not changed significantly.

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PART II
 
Item 1.    Legal Proceedings
 
Not applicable.
 
Item 2.    Changes in Securities
 
Not applicable.
 
Item 3.    Defaults Upon Senior Securities
 
Not applicable.
 
Item 4.    Submission of Matters to a Vote of Security Holders
 
At our annual meeting of stockholders, held on June 7, 2002, the following matters were submitted to a vote of the stockholders:
 
1)  Election of directors
 
Name
  
For
  
Withhold
Kevin G. Hall       
  
26,649,129
  
277,465
David Mandelkern
  
25,551,190
  
1,375,404
 
After the June 7, 2002 Annual Stockholders’ Meeting, the following individuals were also directors of the Company: R. Andrew Eckert, Jos C. Henkens, Ali Kutay and Robert A. Lauer.
 
2)  Ratification of selection of Ernst & Young LLP as independent auditors for fiscal year ended December 31, 2002
 
For
  
Against
  
Abstain
26,711,498
  
177,979
  
37,117
 
Item 5.     Other Information
 
Not applicable.
 
Item 6.    Exhibits and Reports on Form 8-K
 
Exhibits:
 
(a
)
   
The exhibits listed on the accompanying index to exhibits are filed or incorporated by reference (as stated therein) as part of this report on 10-Q.
 
Form 8-K:
 
(a
)
   
Report on Form 8-K filed on May 21, 2002 regarding 20% reduction in force, changes to management team, and revised revenue estimates for second quarter of 2002.
(b
)
   
Report on Form 8-K filed on July 5, 2002 regarding preliminary second quarter financial results, and revised revenue estimates for second quarter of 2002.
(c
)
   
Report on Form 8-K filed on July 29, 2002 regarding departure of the Company’s Chief Financial Officer, Arthur T. Taylor, and the appointment of Steven D. Lance as acting Chief Financial Officer.
(d
)
   
Report on Form 8-K filed on August 12, 2002 regarding certification pursuant to 18 U.S.C. as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
 
DOCENT, INC.
  (Registrant)
 
By:
  
/s/    R. ANDREW ECKERT        
   
R. Andrew Eckert
President, Chief Executive Officer and Director
 
 
By:
  
/s/    NEIL J. LAIRD        
   
Neil J. Laird
Sr. Vice President and Chief Financial Officer
 
Date: August 12, 2002

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EXHIBIT INDEX
 
Item 6.    Exhibits and Reports on Form 8-K
 
3.1  
   
Amended and restated Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to the Company’s registration statement on Form S-1 (File No. 333-34546)).
3.2  
   
Amended and restated Bylaws of the Company (incorporated by reference to Exhibit 3.3 to the Company’s registration statement on Form S-1 (File No. 333-34546)).
4.1  
   
Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s registration statement on Form S-1 (File No. 333-34546)).
4.2  
   
Amended and Restated Investor Rights Agreement, dated August 29, 2000 (incorporated by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2000).
10.1  
   
Company’s 1997 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-1 (No. 333-34546)).
10.2  
   
Company’s 2000 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-1 (No. 333-34546)).
10.3  
   
Company’s 2000 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-1 (No. 333-34546)).
10.4  
   
Form of Directors’ and Officers’ Indemnification Agreement (incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement on Form S-1 (No. 333-34546)).
10.5  
   
Integrator Reseller Agreement dated January 7, 2000 by and between the Company and Hewlett-Packard Company, as amended July 31, 2000 (incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1 (No. 333-34546)).
10.6  
   
Master Consulting Services dated April 1, 2000 between the Company and Accenture (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1 (No. 333-34546)).
10.7  
   
Master Alliance Agreement dated June 30, 2000 between the Company and Accenture (incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1 (No. 333-34546)).
10.8  
   
Master License and Services Agreement dated June 26, 2000 between the Company and Qwest Communications (incorporated by reference to Exhibit 10.14 to the Company’s Registration Statement on Form S-1 (No. 333-34546)).
10.9  
   
Professional Services Agreement dated June 27, 2000 between the Company and Qwest Communications (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1 (No. 333-34546)).
10.10
   
Marketing Agreement dated June 30, 2000 between the Company and Harvard Business School Publishing (incorporated by reference to Exhibit 10.17 to the Company’s Registration Statement on Form S-1 (No. 333-34546)).
10.11
   
Lease Agreement dated September 22, 1999 by and between the Company and Limar Realty Corp. #17 (incorporated by reference to Exhibit 10.22 to the Company’s Registration Statement on Form S-1 (No. 333-34546)).
10.12
   
Lease Agreement dated February 1, 2000 by and between the Company and Connecticut General Life Insurance Company (incorporated by reference to Exhibit 10.23 to the Company’s Registration Statement on Form S-1 (No. 333-34546)).

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10.13
   
Subordinated Loan and Security Agreement dated April 23, 1999 by and between the Company and Comdisco, Inc. (incorporated by reference to Exhibit 10.25 to the Company’s Registration Statement on Form S-1 (No. 333-34546)).
10.14
   
Promissory Note from David Mandelkern to the Company (incorporated by reference to Exhibit 10.27 to the Company’s Registration Statement on Form S-1 (No. 333-34546)).
10.15
   
Stock Pledge Agreements dated July 9, 1997 by and between the Company and David Mandelkern (incorporated by reference to Exhibit 10.28 to the Company’s Registration Statement on Form S-1 (No. 333-34546)).
10.16
   
Sublease Agreement dated April 23, 2001 by and between the Company and Loudcloud, Inc. (incorporated by reference to Exhibit 10.33 to the Company’s 10-Q filed on May 10, 2001).
10.17
   
Employment Letter from the Company to R. Andrew Eckert dated December 11, 2001 (incorporated by reference to Exhibit 10.23 to the Company’s 10-K filed on April 1, 2002).
10.18
   
Form of Officers Change in Control Agreement entered into by the Company (incorporated by reference to Exhibit 10.24 to the Company’s 10-K filed on April 1, 2002).
10.19
   
Employment Letter from the Company to Dave Crussell dated January 23, 2002 (incorporated by reference to Exhibit 10.24 to the Company’s 10-Q filed on May 13, 2002).
10.20
   
Employment Letter from the Company to Neil J. Laird dated August 2, 2002.

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