UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[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
Commission File Number: 000-28687
DIGITALTHINK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3244366
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
601 BRANNAN STREET, SAN FRANCISCO, CALIFORNIA, 94107
(Address of principal executive offices)
(415) 625-4000
(Registrant's telephone number, including area code)
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 August 5, 2002, Registrant had outstanding 41,075,904 Common Stock, $0.001
par value.
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets - June 30, 2002 and March 31, 2002
Condensed Consolidated Statements of Operations - three months ended
June 30, 2002 and June 30, 2001
Condensed Consolidated Statements of Cash Flows - three months ended
June 30, 2002 and June 30, 2001
Notes to Condensed Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, including Factors Affecting Future Results
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities and Use of Proceeds
ITEM 3. Defaults Upon Senior Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Matters
ITEM 6. Exhibits and Reports on Form 8-K
Signatures
DIGITALTHINK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
June 30, March 31,
2002 2002
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 24,349 $ 29,470
Marketable securities 1,609 1,640
Accounts receivable, net of allowance for doubtful
accounts of $489 and $484, respectively 6,823 5,779
Prepaid expenses and other current assets 2,347 1,675
----------- -----------
Total current assets 35,128 38,564
Restricted cash and deposits 4,083 4,083
Property and equipment, net 18,177 18,325
Goodwill and other intangible assets 74,941 75,300
----------- -----------
Total assets $ 132,329 $ 136,272
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,541 $ 3,569
Accrued liabilities 5,772 7,938
Borrowings under line of credit 5,341 2,577
Deferred revenues 7,120 7,043
----------- -----------
Total current liabilities 21,774 21,127
Long-term liabilities 5,042 5,419
Stockholders' equity:
Common stock - $0.001 per share value; shares
authorized: 100,000; shares issued and outstanding:
40,965 at June 30, 2002 and 40,452 at March 31, 2002 268,167 267,814
Deferred stock compensation (490) (631)
Accumulated other comprehensive losses (331) (264)
Accumulated deficit (161,833) (157,193)
----------- -----------
Total stockholders' equity 105,513 109,726
----------- -----------
Total liabilities and stockholders' equity $ 132,329 $ 136,272
=========== ============
See accompanying notes to the condensed consolidated financial statements.
DIGITALTHINK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
---------------------------------
2002 2001
------------ -----------
Revenues:
Delivered Learning fees $ 4,994 $ 7,778
Learning Solution services 4,611 7,232
---------- ---------
Total revenues 9,605 15,010
Costs and expenses:
Cost of Delivered Learning fees 1,395 1,795
Cost of Learning Solution services 1,695 3,363
Content research and development 1,486 1,382
Technology research and development 1,953 3,246
Selling and marketing 3,450 7,210
General and administrative 2,167 1,758
Depreciation 1,695 1,067
Amortization of goodwill and other
intangibles 359 1,201
Amortization of warrants -- 2,751
Stock-based compensation * 140 628
------------ ----------
Total costs and expenses 14,340 24,401
------------ ----------
Loss from operations (4,735) (9,391)
Interest and other income 95 829
------------ -----------
Net loss $ (4,640) $ (8,562)
============ ===========
Basic and diluted loss per common share $ (0.11) $ (0.24)
============ ===========
Shares used in basic and diluted loss per
common share 40,798 35,062
============ ===========
(*) Stock-based compensation:
Cost of Delivered Learning fees $ 1 $ 10
Cost of Learning Solution services 14 55
Content research and development 1 13
Technology research and development 35 207
Selling and marketing 45 109
General and administrative 44 234
------------ -----------
Total $ 140 $ 628
============ ===========
See accompanying notes to the condensed consolidated financial statements.
DIGITALTHINK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
------------------------------
2002 2001
----------- -----------
Cash flows from operating activities:
Net loss $ (4,640) $ (8,562)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 1,695 1,067
Loss on disposal of fixed assets 36 --
Amortization of deferred stock compensation 140 628
Amortization of warrants -- 2,751
Amortization of goodwill and other intangibles 359 1,201
Changes in assets and liabilities:
Restricted cash and deposits -- (90)
Accounts receivable (1,044) (389)
Prepaid expenses and other current assets (672) 324
Deferred revenues 77 (2,142)
Other current liabilities (2,667) 671
-------- ---------
Net cash used in operating activities (6,716) (4,541)
-------- ---------
Cash flows from investing activities:
Purchases of property and equipment (1,603) (3,451)
Sale of fixed assets 19 --
Purchases of marketable securities -- (8,850)
Proceeds from maturities of marketable securities 31 19,988
-------- ---------
Net cash provided by (used in)
investing activities (1,553) 7,687
-------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes payable 2,855 --
Proceeds from issuance of common stock 353 1,002
-------- ---------
Net cash provided by financing activities 3,208 1,002
-------- ---------
Effect of exchange rates on cash and cash
equivalents (60) (84)
Net increase (decrease) in cash and cash
equivalents (5,121) 4,064
-------- ---------
Cash and equivalents, beginning of the period 29,470 30,512
-------- ---------
Cash and equivalents, end of period $ 24,349 $ 34,576
============ ============
See accompanying notes to the condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
DigitalThink, Inc. (the "Company"), was incorporated in California on April 22,
1996 to provide custom 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.
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although we believe the disclosures
which are made are adequate to make the information presented not misleading. It
is suggested that this document be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 2002.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal, recurring adjustments) which
are, in the opinion of management, necessary to state fairly the results for the
periods presented. The results for such periods are not necessarily indicative
of the results to be expected for the entire fiscal year ending March 31, 2003.
Certain prior year amounts in the condensed consolidated financial statements
have been reclassified to conform to the current year presentation.
2. Net Loss Per Share
The following table sets forth the computation of net loss per share (in
thousands, except for per share data):
Three Months Ended
June 30,
-------------------------
2002 2001
--------- ----------
Net loss $ (4,640) $ (8,562)
========= ===========
Weighted average common shares outstanding
used in computing basic and diluted loss
per share 40,798 35,062
========= ===========
Basic and diluted net loss per share $ (0.11) $ (0.24)
========= ===========
Basic net loss per 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 excludes the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock, as the effect of
such conversions in loss periods would be anti-dilutive.
3. Restructuring Charge
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. The following
table sets forth the activity related to the restructuring charge in the quarter
ended June 30, 2002 (in thousands):
Remaining Amounts Remaining
Liability Recorded in Liability
Balances as of Cash Other Balances as of
March 31, 2002 Payments Accounts June 30, 2002
-----------------------------------------------------
Severance $ 210 $ (120) $ -- $ 90
Facilities and equipment 32 -- (32) --
Lease commitments 7,627 (831) (229) 6,567
---------- -------- -------- --------
Total $ 7,869 $ (951) $ (261) $ 6,657
========== ======== ======== ========
At March 31, 2002, restructuring charge obligations were recorded as $2.5
million in accrued liabilities and $5.3 million in long-term liabilities. At
June 30, 2002, restructuring charge obligations were recorded as $1.7 million in
accrued liabilities and $4.9 million in long-term liabilities.
4. 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 material 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.
5. Recent Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 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 has adopted SFAS
No. 142 for its fiscal year beginning April 1, 2002. During the second quarter
ending September 30, 2002, 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 of SFAS No. 142 on our financial position and
results of operations. It is likely we may incur a reduction in goodwill upon
our completion of our analysis, which would result in a charge to the results of
operations from the cumulative effect of the adoption of a new accounting
principle during the three months ended June 30, 2002. Additional impairment
charges could result in subsequent quarters under the provisions of SFAS No.
142.
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 No. 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 No. 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. The Company has
adopted SFAS No. 144 in its quarter ended June 30, 2002, which had no impact on
the financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which addresses accounting for restructuring and
similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force Issue No. 94-3. The Company will adopt
the provisions of SFAS 146 for restructuring activities initiated after December
31, 2002. SFAS No. 146 requires that the liability for costs associated with
an exit or disposal activity be recognized when the liability is incurred.
Under Issue 94-3, a liability for an exit cost was recognized at the date of the
Company's commitment to an exit plan. SFAS No. 146 also establishes that the
liability should initially be measured and recorded at fair value. Accordingly,
SFAS No. 146 may affect the timing of recognizing future restructuring costs as
well as the amounts recognized.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other parts of this Form 10-Q contain forward-looking statements
that involve risks and uncertainties. All forward-looking statements included in
this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-looking
statements. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in "Factors Affecting Future Results".
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2002 AND 2001
REVENUES
Revenues decreased from $15.0 million in the three months ended June 30, 2001 to
$9.6 million in the three months ended June 30, 2002. For the three months ended
June 30, 2002 and 2001, Delivered Learning fees represented 52% of revenues and
Learning Solution services represented 48% of revenues.
Delivered Learning Fees
Delivered Learning fees decreased from $7.8 million in the three months ended
June 30, 2001 to $5.0 million in the three months ended June 30, 2002. The total
number of customers increased from approximately 390 to 475 and the total number
of courses developed increased from 540 to 843. Even though the total number of
customers and courses increased, revenue decreased in the quarter ended June 30,
2002 as compared to the same period last year due to more courses being
delivered to our clients that have unlimited delivery relationships. We expect
that the number of courses and customers will continue to increase as we expand
our distribution channels and course offerings and as our content development
projects progress.
Learning Solution Services
Learning Solution services revenue decreased from $7.2 million in the three
months ended June 30, 2001 to $4.6 million in the three months ended June 30,
2002 as the dollar size of the contracts decreased. We expect that both
Delivered Learning fees and Learning Solution services revenues will continue to
account for a similarly significant portion of our total revenues in the near
term.
We market our products primarily through our direct sales channel and our system
integrator resellers in the United States. We also market our products through
resellers, customers, co-developers, and Internet portals. Internationally, we
have begun developing relationships with third-party integrators and resellers.
To date, our international revenues have been less than 5% of total revenues.
COSTS AND EXPENSES
Cost of Delivered Learning Fees
Cost of Delivered Learning fees include personnel related costs, maintenance and
facility costs required to operate our Website and to provide interactive tutor
support to participants in our courses. Cost of Delivered Learning fees
decreased from $1.8 million in the three months ended June 30, 2001 to $1.4
million in the three months ended June 30, 2002. This decrease was attributable
to decreased personnel and equipment related expense. Headcount related to cost
of Delivered Learning fees, decreased from 42 at June 30, 2001 to 27 employees
at June 30, 2002.
Cost of Learning Solution Services
Cost of Learning Solution services consists primarily of personnel related costs
and contractor expenses to develop custom and tailored courses for specific
customers. Cost of Learning Solution services decreased from $3.4 million in the
three months ended June 30, 2001 to $1.7 million in the three months ended June
30, 2002. This decrease was primarily attributable to the shifting of higher
cost headcount in the United States to lower cost headcount in India. Headcount
related to cost of Learning Solution services decreased from 122 employees at
June 30, 2001 to 114 employees at June 30, 2002.
Content Research and Development
Content research and development expenses are expensed as incurred in accordance
with SFAS No. 86, and represent costs to develop catalog courses, including
personnel related costs, content acquisition costs and content editing. Content
research and development expenses increased from $1.4 million in the three
months ended June 30, 2001 to $1.5 million in the three months ended June 30,
2002. This increase was due to more personnel costs. Headcount in content
research and development increased from 55 employees at June 30, 2001 to 180
employees at June 30, 2002, with a majority of these employees now in India.
Management believes that continued investment in content development and content
acquisition is necessary to expand the business. As a result, we expect these
expenses to remain at these leveles in future periods.
Technology Research and Development
Technology research and development expenses consist primarily of personnel
related costs in connection with product development efforts of underlying
technology. Technology research and development expenses decreased from $3.2
million in the three months ended June 30, 2001 to $2.0 million in the three
months ended June 30, 2002. This decrease was primarily attributable to a
decrease in contractor spending and the shifting of higher cost headcount in the
United States to lower cost headcount in India. Headcount increased from 64
employees at June 30, 2001 to 96 employees at June 30, 2002 with a majority of
this increase in India, offset with a reduction in the United States.
Selling and Marketing
Selling and marketing expenses consist primarily of personnel related costs,
commissions, advertising and other promotional expenses, royalties paid to
authors and travel and entertainment expenses. Selling and marketing expenses
decreased from $7.2 million in the three months ended June 30, 2001 to $3.5
million in the three months ended June 30, 2002 primarily due to less
advertising, a reduction in tradeshow activity and in personnel. Headcount in
selling and marketing decreased from 105 at June 30, 2001 to 52 at June 30,
2002. We expect selling and marketing expenses will remain flat as we reevaluate
our marketing efforts and review our promotional activities.
General and Administrative
General and administrative expenses consist primarily of personnel related
costs, occupancy costs, insurance related costs, and professional services fees.
General and administrative expenses increased from $1.8 million in the three
months ended June 30, 2001 to $2.2 million in the three months ended June 30,
2002. This increase was due to higher occupancy costs and fees related to
insurance and professional services. Headcount increased from 39 employees at
June 30, 2001 to 63 employees at June 30, 2002 with almost all of the increase
in India.
Amortization of Goodwill and Other Intangibles
Amortization of goodwill and other intangibles totaled $1.2 million in the three
months ended June 30, 2001 associated with the acquisition of Arista Knowledge
Systems, Inc. ("Arista"). Amortization totaled $359,000 in the three months
ended June 30, 2002 related to amortization of intangibles associated with the
acquisition of LearningByte International, Inc. ("LBI").
Amortization of Warrants
Expenses related to warrants issued to EDS as part of a strategic alliance
entered into in July 2000 totaled $2.8 million in the three months ended June
30, 2001 and zero in the three months ended June 30, 2002 as a result of the
restructuring of the EDS agreement, whereby EDS surrendered its vested and
unvested warrants to purchase shares of the Company's common stock in March
2002.
Stock-Based Compensation
Stock-based compensation expense decreased from $628,000 in the three months
ended June 30, 2001 to $140,000 in the three months ended June 30, 2002.
Net Loss
The net loss decreased from $8.6 million in the three months ended June 30, 2001
to $4.6 million in the three months ended June 30, 2002.
Liquidity and Capital Resources
Net cash used in operating activities totaled $6.7 million for the three months
ended June 30, 2002 and $4.5 million for the comparable prior year period. Cash
used in operating activities for the current period resulted from net operating
losses, an increase in accounts receivable and decreases in current liabilities
and increases in other current assets. Deferred revenue increased from $7.0
million at March 31, 2002 to $7.1 million at June 30, 2002. Deferred revenue
results from customer advance billings and prepayments of Delivered Learning
fees and Learning Solution services. In both cases, prepayments remain in
deferred revenue until revenue recognition criteria have been met. Accrued
liabilities have decreased from $7.9 million at March 31, 2002 to $5.8 million
on June 30, 2002 resulting from the payment of invoices in the quarter and a
reduction of expenses.
Net cash used in investing activities totaled $1.6 million in the three months
ended June 30, 2002 and net cash provided by investing activities totaled $7.7
million for the comparable prior year period. The change resulted from the
acquisition of capital assets, including leasehold improvements, hardware for
our Website, and computer and office related equipment, and the purchase and
maturity of marketable securities.
Cash provided by financing activities totaled $3.2 million in the three months
ended June 30, 2002 and $1.0 million in the three months ended June 30, 2001.
The increase reflects the exercise of stock options and stock purchases in the
employee stock purchase program and borrowings on the Company's line of credit.
In December 2001, we entered into a $5.0 million line of credit agreement,
expiring in December 2002, and had available $2.8 million from this line of
credit as of March 31, 2002. Subsequent to March 31, 2002, the balance on the
line of credit of $2.2 million was repaid. In June 2002, we amended the line of
credit agreement to increase the line to $8.0 million We had available $2.9
million from this line of credit as of June 30, 2002. Subsequent to June 30,
2002, the balance on the line of credit of $5.1 million was repaid.
We believe our existing cash resources and available borrowings are sufficient
to finance our presently anticipated operating expenses and working capital
requirements for at least the next twelve months. Our future liquidity and
capital requirements will depend on numerous factors. The rate of expansion of
our operations in response to potential growth opportunities and competitive
pressures will affect our capital requirements as will funding of continued net
losses and negative cash flows. Additionally, we may need additional capital to
fund acquisitions of complementary businesses, products, and technologies. Our
forecast of the period of time through which our financial resources will be
adequate to support operations is a forward-looking statement that involves
risks and uncertainties. Actual resources sought may differ materially. We may
seek to sell additional equity or debt securities or secure a larger bank line
of credit. The sale of additional equity or debt securities could result in
additional dilution to our stockholders. Currently, we have no other immediately
available sources of liquidity. Additional financing may not be available in
amounts or on terms acceptable to us, if at all.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (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 has adopted SFAS No. 142 for its fiscal
year beginning April 1, 2002. During the second quarter ending September 30,
2002, 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 of SFAS No. 142 on our financial position and results of
operations. It is likely we may incur a reduction in goodwill upon our
completion of our analysis, which would result in a charge to the results of
operations from the cumulative effect of the adoption of a new accounting
principle during the three months ended June 30, 2002. Additional impairment
charges could result in subsequent quarters under the provisions of SFAS No.
142.
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 No. 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 No. 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 No. 144 for our fiscal year beginning April 1, 2002. The Company has
adopted SFAS No. 144 in its quarter ended June 30, 2002, which had no impact on
the financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which addresses accounting for restructuring and
similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force Issue No. 94-3. The Company will adopt
the provisions of SFAS 146 for restructuring activities initiated after December
31, 2002. SFAS No. 146 requires that the liability for costs associated with
an exit or disposal activity be recognized when the liability is incurred.
Under Issue 94-3, a liability for an exit cost was recognized at the date of the
Company's commitment to an exit plan. SFAS No. 146 also establishes that the
liability should initially be measured and recorded at fair value. Accordingly,
SFAS No. 146 may affect the timing of recognizing future restructuring costs as
well as the amounts recognized.
Special Note Regarding Forward-Looking Statements and Risk Factors
Certain statements in this Quarterly Report on Form 10-Q contain "forward-
looking statements." Forward-looking statements are any statements other than
statements of historical fact. Examples of forward-looking statements include
projections of earnings, revenues or other financial items, statements of the
plans and objectives of management for future operations, and statements
concerning proposed new products and services, and any statements of assumptions
underlying any of the foregoing. In some cases, you can identify forward-looking
statements by the use of words such as "may", "will", "expects", "should",
"believes", "plans", "anticipates", "estimates", "predicts", "potential", or
"continue", and any other words of similar meaning.
Statements regarding the Company's future financial performance or results of
operations, including expected revenue growth, EBITDA growth, future expenses,
future operating margins and other future or expected performance are subject to
the following risks: that projected cost-reduction initiatives will not be
achieved due to implementation difficulties or contractual spending commitments
that can't be reduced; the acquisition of businesses or the launch of new lines
of business, which could increase operating expense and dilute operating
margins; the inability to attract new customers; increased competition, which
could lead to negative pressure on the Company's pricing and the need for
increased marketing; the inability to maintain, establish or renew relationships
with customers, whether due to competition or other factors; costs associated
with the Company's initiatives to standardize its technology platforms or the
failure of the Company to successfully complete that initiatives; and to the
general risks associated with the Company's businesses.
The following additional factors could also impact our financial results and
cause our forward-looking statements to be inaccurate:
Accounting rules regarding the accounting for goodwill have recently been
changed by the Financial Accounting Standards Board (FASB). The changes in these
rules may have a significant impact on our reported financial results. In June
2001, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 141,
Business Combinations and SFAS No.142, Goodwill and Other Intangible Assets.
These statements would continue to require recognition of goodwill as an asset
but would not permit amortization of goodwill as is currently required by
Accounting Principles Board (APB) Opinion No. 17, Intangible Assets. Under the
SFAS 142, goodwill would be separately tested for impairment using a
fair-value-based approach when an event occurs indicating the potential for
impairment. Any required goodwill impairment charges would be presented as a
separate line item within the operating section of the income statement. The
change from an amortization approach to an impairment approach would apply to
previously recorded goodwill, as well as goodwill arising from acquisitions
completed after the application of the new standard. When these statements are
adopted by the Company, our goodwill amortization charges would cease. However,
it is possible that in the future, we would incur less frequent, but larger,
impairment charges related to the goodwill already recorded as well as any
goodwill arising out of future acquisitions. As these statements have just been
issued, it is difficult to predict whether our future earnings may be subject to
significant volatility, particularly on a period-to-period basis.
Any shortfall in revenue or earnings compared to analysts' or investors'
expectations could cause, an immediate and significant decline in the trading
price of our common stock. In addition, we may not learn of such shortfalls or
delays until late in the fiscal quarter, which could result in an even more
immediate and greater decline in the trading price of our common stock.
FACTORS AFFECTING FUTURE RESULTS
You should consider the risks described below before making an investment
decision. We believe that the risks and uncertainties described below are the
principal material risks facing our company as of the date of this Form 10-Q. In
the future, we may become subject to additional risks that are not currently
known to us. Our business, financial condition or results of operations could be
materially adversely affected by any of the following risks. The trading price
of our common stock could decline due to any of the following risks.
WE HAVE A HISTORY OF LOSSES AND A LARGE ACCUMULATED DEFICIT OF $161.8 MILLION AT
JUNE 30, 2002. WE EXPECT FUTURE LOSSES OVER THE NEXT TWO QUARTERS AND WE MAY NOT
ACHIEVE PROFITABILITY WITHIN THE TIMEFRAMES PUBLIC STOCKHOLDERS ANTICIPATE.
We have experienced losses in each quarter since our inception and expect that
our quarterly losses will continue at least through the next two quarters. Our
accumulated deficit as of June 30, 2002 was $161.8 million. We have experienced
losses in each quarter since our inception and expect that our quarterly losses
will continue at least through the next two quarters. Our accumulated deficit as
of June 30, 2002 was $161.8 million. We have never achieved a profitable quarter
and we expect to continue to incur quarterly losses as we expand our operations,
invest in our technology, fund the development of new content and support our
growth. We currently have approximately $26.0 million in cash and marketable
securities and if we do not achieve profitability within the next several
quarters, we will need to seek additional sources of cash in order to sustain
our operations. We plan to continue to spend resources to market, sell and
support our e-learning solutions, build infrastructure, and add additional
features to our product. We also plan to invest to develop and acquire new
course offerings with new areas of expertise, which may increase operating
expenses if those expenses are not immediately offset by new revenues.
We will need to increase our quarterly revenues to achieve profitability. Even
if we do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis in the future.
DEMAND FOR OUR PRODUCTS AND SERVICES HAS BEEN AND MAY CONTINUE TO BE EFFECTED BY
ADVERSE ECONOMIC CONDITIONS AFFECTING THE INFORMATION TECHNOLOGY INDUSTRY.
The information technology industry has been in a period of economic decline
during 2001 and 2002. This decline may be attributable in part to general
weakness in the overall economy, which has led to reduced levels of investment
by businesses in information technology products and systems. When businesses
are reducing investment in technologies or slowing the rate of adoption of new
technologies and systems, they have a reduced need for training of their
employees, customers and others in the use of these systems. In addition, many
of our current and potential customers have experienced adverse changes in their
financial performance, whether as a result of the general weakening of the
economy or other factors. Some companies may delay training initiatives or, if
these companies continue to experience disappointing operating results, whether
as a result of adverse economic conditions, competitive issues or other factors,
they may decrease or forego education and training expenditures overall before
limiting other expenditures. As a result of these factors, and possibly also due
to the aftermath of the September 11 terrorist attacks, our new contract
signings in the second half of fiscal 2002 were materially and adversely
affected. Therefore, continuation of the economic downturn in the United States
as well as continuation of the current adverse economic conditions in the
information technology industry would harm our results of operations.
WE HAVE A SIGNIFICANT BUSINESS PRESENCE IN INDIA, AND RISKS ASSOCIATED WITH
DOING BUSINESS THERE COULD DISRUPT OR HARM OUR BUSINESS.
In order to reduce costs associated with course development, we have established
a significant presence in India through two recent acquisitions. As of June 30,
2002, we had approximately 165 employees in India. Difficulties that we could
encounter with our Indian operation or with other international operations that
we may establish in the future include the following:
o difficulties in staffing and managing international operations; o multiple,
conflicting and changing governmental laws and regulations; o difficulties in
collecting accounts receivable; o fluctuations in currency exchange rates; o
political and economic instability, including the potential for more
terrorist acts;
o developments between the nations of India and Pakistan regarding the threat
of war;
o adverse tax consequences;
o difficulties in protecting our intellectual property rights; o increases in
tariffs, duties, price controls or other restrictions on foreign
currencies; and
o trade barriers imposed by foreign countries.
In particular, in recent months, the level of hostilities between India and
Pakistan has significantly increased as both nations have increased their troop
strength at the border. In addition, both India and Pakistan are known to
possess nuclear weapons. In the event war between India and Pakistan were to
occur, our operations in India could be materially and adversely effected.
Recently, in light of the continuing escalation of tensions between India and
Pakistan, the United States government has authorized the departure of
non-essential personnel from India and the State Department has issued an
advisory against travel to India.
If we encounter these problems in connection with our operations in India, our
revenues could fall below expectations, which would harm our business and
operating results. In this event, our stock price could decline.
OUR LIMITED OPERATING HISTORY AND THE NEW AND EMERGING E-LEARNING MARKET MAKES
IT DIFFICULT TO EVALUATE OUR BUSINESS AND FUTURE PROSPECTS.
We commenced operations in April 1996 and did not begin to generate significant
revenues until fiscal 1999. In the first fiscal quarter of fiscal 2003, we had
revenues of $9.6 million and expenses of $14.3 million. We are still in the
early stages of our development, which, when combined with the new and emerging
e-learning market, and general economic factors affecting the technology sector,
make it difficult to evaluate our business or our prospects. Because of our
limited operating history, we have a limited and unproven ability to predict the
trends in the e-learning market and in our business. The uncertainty of our
future performance, in particular, and the uncertainty regarding the acceptance
of e-learning, in general, increases the risk that we will be unable to build a
sustainable business and that our stockholder value will decline.
WE MAY NOT BE ABLE TO SECURE NECESSARY FUNDING IN THE FUTURE; ADDITIONAL FUNDING
MAY RESULT IN DILUTION TO OUR STOCKHOLDERS.
We require substantial working capital to fund our business. We have had
significant operating losses and negative cash flow from operations since
inception and expect this to continue for the foreseeable future. We expect to
use our available cash resources and credit facility primarily to fund sales and
marketing activities, research and development, and continued operations, and
possibly make future acquisitions. We believe that our existing capital
resources will be sufficient to meet our capital requirements for the next
twelve months. However, if our capital requirements increase materially from
those currently planned or if revenues fall below our expectations, we may
require additional financing sooner than anticipated. If additional funds are
raised through the issuance of equity securities, the percentage ownership of
our stockholders will be reduced, stockholders may experience dilution, or such
equity securities may have rights, preferences or privileges senior to those of
the holders of our common stock. Additional financing may not be available when
needed on terms favorable to us or at all. If adequate funds are not available
or are not available on acceptable terms, we may be unable to develop or enhance
our products and services, take advantage of future opportunities or respond to
competitive pressures.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS WHICH COULD CAUSE
OUR STOCK PRICE TO DECLINE.
Our revenue and operating results are volatile and difficult to predict and may
be susceptible to declines in future periods. Our quarterly results of
operations may fluctuate significantly in the future due to the delays in the
progress of ongoing work, shortfalls in revenues or orders or the timing of
orders. We therefore believe that quarter-to-quarter comparisons of our
operating results may not be a good indication of our future performance. In the
event of a revenue or order shortfall or unanticipated expenses in some future
quarter or quarters, our operating results may be below the expectations of
public market analysts or investors. In such an event, the price of our common
stock may decline significantly. Our operating expenses are largely fixed in the
short term and based, to a significant degree, on our estimates of future
revenue. We will likely be unable to, or may elect not to, reduce spending
quickly enough to offset any unexpected revenue shortfall. Therefore, any
significant shortfall in revenue in relation to our expectations would cause our
quarterly results for a particular period to decline.
IN RECOGNIZING REVENUE WE DEPEND ON THE TIMELY ACHIEVEMENT OF VARIOUS
MILESTONES, AND OUR INABILITY TO RECOGNIZE REVENUE IN ACCORDANCE WITH OUR
EXPECTATIONS WILL HARM OUR OPERATING RESULTS.
In accordance with our revenue recognition policy, our ability to record
revenues depends upon several factors. These factors include acceptance by our
customers of new courses and the pace of participant registrations in courses
once they are completed and made available for access from our Website. All of
our customer contracts provide that at least a portion of our revenues depend on
either course completion or participant registration, or both. Revenues from
custom course development accounted for approximately 52% of our total revenues
for the quarter ended June 30, 2002. Our ability to recognize revenues from
custom-tailored courses depends upon our customers providing us with subject
matter experts and content to be incorporated into the courses as well as our
completion of production and obtaining customer acceptance at each stage of
development. Accordingly, if customers do not provide us with the subject matter
experts or content in a timely manner, we will not be able to recognize the
revenues associated with that project, which would harm our operating results.
In addition, if the expected number of participants do not sign up for a course,
our ability to recognize revenues will be delayed, which could also harm our
operating results in any quarter. Participant registration depends in large part
on the promotional activities of our customers. If customers fail to take
necessary measures to require employee enrollment in courses or if they fail to
promote the course effectively to persons outside their organization, our
ability to recognize revenues, and therefore our operating results, could be
harmed.
WE ARE LIKELY TO BE DEPENDENT UPON A SMALL GROUP OF MAJOR CUSTOMERS FOR A
SIGNIFICANT PORTION OF OUR REVENUES, AND CHANGES IN SALES TO THESE CUSTOMERS
COULD HARM OUR PERFORMANCE.
We expect that we will continue to depend upon a small number of customers for a
significant portion of our revenues. As a result, our operating results could
suffer if we lost any of these customers or if these customers slowed or
cancelled purchases or delayed payment in any future fiscal period. In the first
fiscal quarter of 2003, our five largest customers accounted for 74.7% of our
total revenues of $9.6 million. We expect that major customers will continue to
account for a significant portion of our revenues during future fiscal periods.
Accordingly, changes in these customers' businesses and in their views regarding
the value of e-learning in general and our products and services in particular
could harm our financial performance.
THE LENGTH AND VARIABILITY OF OUR SALES CYCLE MAY MAKE OUR OPERATING RESULTS
UNPREDICTABLE AND VOLATILE.
The period between our initial contact with a potential customer and the first
purchase of our solution by that customer typically ranges from three to nine
months. In some cases the cycle has extended for close to two years. Because we
rely on large sales for a substantial portion of our revenues, these long sales
cycles can adversely effect our financial performance in any quarter. Factors
which may contribute to the variability and length of our sales cycle include
the time periods required for:
o our education of potential customers about the benefits of our e-learning
solutions;
o our potential customers' assessment of the value of online solutions compared
to traditional educational solutions;
o our potential customers' evaluation of competitive online solutions; and o our
potential customers' internal budget and approval processes.
Our lengthy sales cycle limits our ability to forecast the timing and size of
specific sales. This, in turn, makes it difficult to predict quarterly financial
performance.
IF WE RELEASE UPDATED FUNCTIONALITY OR NEW PRODUCTS CONTAINING DEFECTS, WE MAY
NEED TO RECONFIGURE AND RE-RELEASE AND OUR BUSINESS AND REPUTATION WOULD BE
HARMED.
Products as complex as ours often contain unknown and undetected errors or
performance problems. Many serious defects are frequently found during the
period immediately following introduction and initial deployment of new products
or enhancements to existing products. Although we attempt to resolve all errors
that we believe would be considered serious by our customers before release to
them, our products are not error-free. These errors or performance problems
could result in lost revenues or delays in customer acceptance and would be
detrimental to our business and reputation. As is typical in the industry, with
each release we have discovered errors in our products after introduction. We
will not be able to detect and correct all errors before releasing our products
commercially and these undetected errors could be significant. We cannot assure
that these undetected errors or performance problems in our existing or future
products will not be discovered in the future or that known errors considered
minor by us will not be considered serious by our customers, resulting in a
decrease in our revenues.
OUR INTERNATIONAL PRESENCE COULD SUBJECT US TO NEW RISKS BECAUSE OF CURRENCY AND
POLITICAL CHANGES, LEGAL AND CULTURAL DIFFERENCES OR ECONOMIC INSTABILITY.
Our strategy includes international sales. Our current plans include continued
sales overseas, which began during fiscal 2001, as well as the creation of a
partner-based support infrastructure for customers around the world. In addition
to our operations in India, we could be affected by political and monetary
changes, including instability in the Middle East and Central Asia, European
unification and the introduction of the Euro.
This international presence will require significant management attention and
financial resources and could harm our financial performance by increasing our
costs. We have very limited experience in marketing, selling and distributing
courses internationally. We could become subject to additional risks as we grow
internationally, including:
o difficulties in staffing and managing international operations;
o inability to develop content localized for international jurisdictions;
o protectionist laws and business practices that favor local competition;
o multiple, conflicting and changing governmental laws and regulations;
o slower adoption of e-learning solutions;
o different learning styles;
o longer sales and payment cycles;
o difficulties in collecting accounts receivable;
o fluctuations in currency exchange rates;
o political and economic instability;
o adverse tax consequences;
o little or no protection of our intellectual property rights in certain
foreign countries;
o increases in tariffs, duties, price controls or other restrictions on foreign
currencies; and
o trade barriers imposed by foreign countries.
If we encounter these problems in connection with our current and future sales
growth internationally, our revenues could fall below expectations, which would
harm our business and operating results. In this event, our stock price could
decline.
OUR GROWTH DEPENDS ON HIRING AND RETAINING QUALIFIED PERSONNEL IN A HIGHLY
COMPETITIVE EMPLOYMENT MARKET.
The growth of our business and revenues will depend in large part upon our
ability to attract and retain sufficient numbers of highly skilled employees,
particularly database engineers, course content developers, web designers and
technical and sales personnel. We primarily rely on individual third parties to
provide the majority of our tutoring and our ability to support our courses
depends on the availability and competency of these third-party tutors.
Education and Internet related industries create high demand for qualified
personnel and candidates experienced in both areas are limited. Our failure to
attract and retain sufficient skilled personnel may limit the rate at which we
can grow, which will harm our business and financial performance.
THE GROWTH OF OUR BUSINESS REQUIRES WIDE ACCEPTANCE OF E-LEARNING SOLUTIONS.
The market for e-learning solutions is new and rapidly evolving. A number of
factors could impact the acceptance of our e-learning solutions, including:
o historic reliance on traditional education methods;
o limited allocation of our customers' and prospective customers' education
budgets to e-learning; and
o ineffective use of online learning solutions.
Our e-learning solutions are new, largely untested and less familiar to
prospective customers than more established education methods. If the market for
e-learning fails to develop or develops more slowly than we expect, we will not
achieve our growth and revenue targets and our stock price will likely decline.
WE MAY NOT HAVE ADEQUATE RESOURCES TO COMPETE EFFECTIVELY, ACQUIRE AND RETAIN
CUSTOMERS AND ATTAIN FUTURE GROWTH IN THE HIGHLY COMPETITIVE E-LEARNING MARKET.
The e-learning market is evolving quickly and is subject to rapid technological
change, shifts in customer demands and evolving learning methodologies. As a
result, customers and potential customers have more choices. This challenges us
to distinguish our offerings. If we fail to adapt to changes and competition in
our industry, we may lose existing customers or fail to gain new customers. No
single competitor accounts for a dominant market share, yet competition is
intense. We compete primarily with:
o third-party suppliers of instructor-led education and learning;
o internal education departments; and
o other suppliers of technology-based learning solutions.
Due to the high market fragmentation, we do not often compete head-to-head with
any particular company. On occasion, our customers may evaluate our solution by
comparison with solutions offered by other e-learning companies. These companies
may include click2learn.com, Docent, IBM, NETg, Saba, Skillsoft, SmartForce and
other regional web development organizations. We may not provide solutions that
compare favorably with traditional or new instructor-led techniques or other
technology-based learning methodologies. Our competitors vary in size and in the
scope and breadth of the courses and services they offer. Several of our
competitors have longer operating histories and significantly greater financial,
technical and marketing resources. Larger companies may enter the e-learning
market through the acquisition of our competitors. We anticipate that the lack
of significant entry barriers to the e-learning market will allow other
competitors to enter the market, increasing competition.
To succeed, we must continue to expand our course offerings, upgrade our
technology and distinguish our solution. We may not be able to do so
successfully. Any failure by us to anticipate or respond adequately to changes
in technology and customer preferences, or any significant delays in course
development or implementation, could impact our ability to capture market share.
As competition continues to intensify, we expect the e-learning market to
undergo significant price competition. We also expect to face increasing price
pressures from customers as they demand more value for their learning related
expenditures. Increased competition, or our inability to compete successfully
against current and future competitors, could reduce operating margins, loss of
market share and thought leadership resulting in a diminution of our brand.
WE RELY ON COOPERATION FROM OUR CUSTOMERS AND THIRD PARTIES TO DEVELOP AND
DELIVER COURSES AND OUR BUSINESS WILL SUFFER IF SUCH COOPERATION OCCURS IN AN
UNTIMELY OR INEFFICIENT MANNER.
To be competitive, we must develop and introduce on a timely basis new course
offerings, which meet the needs of companies seeking to use our e-learning
solutions. The quality of our learning solutions depends in large part on our
ability to frequently update our courses and develop new content as the
underlying subject matter changes. We create courses by incorporating subject
matter expertise provided by our customers and third party content developers
into an e-learning delivery platform. The quality of our courses depends on
receiving content and cooperation from our customers, subject matter experts
provided by our customers, and third-party content developers. If we do not
receive materials from these sources in a timely manner, we may not be able to
develop or deliver specialized courses to our customers in the expected time
frame. Even if we do receive necessary materials from third parties, our
employees and consultants must complete their work in a timely manner or we will
not meet customer expectations. In the past, we have experienced delays in
obtaining access to our customers' experts, which has contributed to a longer
development cycle and inefficient allocation of our resources. Any prolonged
delays, even when caused by our customers, can result in failure to satisfy a
customer's demands and damage our reputation.
OUR PLANS TO EXPAND THE SCOPE OF OUR COURSES TO FIELDS OTHER THAN INFORMATION
TECHNOLOGY DEPENDS ON OUR ABILITY TO DEVELOP RELATIONSHIPS WITH EXPERTS, AND IF
WE ARE UNABLE TO ATTRACT THE RIGHT EXPERTS, WE MAY NOT BE SUCCESSFUL IN ENTERING
NEW FIELDS.
Our strategy involves broadening the fields presently covered by our courses. In
particular, to date we have been primarily focused on courses in the information
technology area. We are currently planning to develop and introduce new course
offerings in soft skills, financial services and other fields. These new course
offerings may encompass areas in which we have little or no experience or
expertise. Therefore, our ability to expand our courses into these areas will
depend in part on our ability to negotiate and execute content development
relationships with recognized experts or leading corporations in the new fields.
If we cannot locate these experts, we may fail to develop the courses that our
current and future customers will demand. The failure to expand our course
offerings to new fields could constrain our revenue growth and harm our future
prospects.
TO REMAIN COMPETITIVE, WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES IN OUR
INDUSTRY.
Rapidly changing technologies, frequent new service introductions, short
development cycles and evolving standards characterize the e-learning market. We
must adapt to rapidly changing technologies by maintaining and improving the
performance features and reliability of our courses. We may experience technical
difficulties that could delay or prevent the successful development,
introduction or marketing of new courses and related services. For instance,
adding capabilities to deliver video over the Internet to our courses may be
desired by some customers, but may nevertheless pose a serious technical
challenge and could have a negative impact on our ability to develop and deliver
courses on a profitable basis. In addition, any new enhancements to our courses
must meet the requirements of our current and prospective customers and
participants. We could incur substantial costs to modify our services or
infrastructure to adapt to rapid technological change.
WE COULD INHIBIT INCREASES IN OUR REVENUES IF WE DO NOT DEVELOP INDIRECT SALES
CHANNELS.
To date, more than 90% of our sales have been made through direct sales efforts.
We believe that we will need to diversify our sales efforts to be successful. If
we do not develop indirect sales channels, we may miss sales opportunities. We
are currently investing in personnel and marketing activities to develop
indirect sales channels, particularly through our relationships with EDS and
KPMG, who provide learning as an additional service to their clients.
Although we are currently investing to develop these indirect sales channels, we
may not succeed in establishing a channel that can effectively market our
e-learning solutions on a profitable basis. Our direct sales force may compete
with these resellers, and we may not be able to manage conflicts across our
direct and indirect sales channels. Our focus on increasing sales through our
indirect channel may divert management resources and attention from direct
sales. Conflicts across sales channels could cause us to encounter pricing
pressures and lose revenue opportunities, which could harm our business and
cause our operating results to decline.
THE EXPECTED GROWTH IN OUR BUSINESS REQUIRES CONTINUOUS IMPROVEMENT IN THE
CAPACITY OF OUR TECHNOLOGY INFRASTRUCTURE AND A FAILURE TO COORDINATE SUCH
IMPROVEMENTS WITH OUR GROWTH COULD LEAD TO CUSTOMER DISSATISFACTION AND REVENUE
LOSSES.
In order to address continued growth in our enrollments, we must continue to
improve the capacity of our technology infrastructure. Our success requires the
continuing and uninterrupted performance of our internal computer network and
Internet course servers. Any system failure that causes interruptions or delays
in our ability to make our courses accessible to customers could reduce customer
satisfaction. If sustained or repeated, a system failure could reduce the
attractiveness of our courses and services, resulting in significant revenue
losses. We are particularly vulnerable to network failures during periods of
rapid growth when our roster of courses and participants can outpace our network
capacity. The continued viability of our business requires us to support
multiple participants concurrently and deliver fast response times with minimal
network delays. We continue to add system capacity, but we may not adequately
address network capacity, especially during periods of rapid growth. Any failure
to meet these capacity requirements could lead to additional expenditures, lost
business opportunities and damage to our reputation and competitive position.
ANY FAILURE OF, OR CAPACITY CONSTRAINTS IN, THE SYSTEMS OF THIRD PARTIES ON
WHICH WE RELY COULD ADVERSELY AFFECT OUR BUSINESS.
Our success is highly dependent on the consistent performance of our Internet
and communications infrastructure. Our communications hardware and some of our
other computer hardware operations are located at the facilities of Exodus, in
Santa Clara, California. Unexpected events such as natural disasters, power
losses and vandalism could damage our systems. Telecommunications failures,
computer viruses, electronic break-ins, earthquakes, fires, floods, other
natural disasters or other similar disruptive problems could adversely affect
the operation of our systems. Despite precautions we have taken, unanticipated
problems affecting our systems in the future could cause interruptions or delays
in the delivery of our courses.
Our telecommunications vendor and Exodus together provide us with our Internet
connection. Their failure to provide sufficient and timely data communications
capacity and network infrastructure could cause service interruptions or slower
response times, resulting in reduced customer demand for our courses and
services. Our insurance policies may not adequately compensate us for any losses
that may occur due to any damages or interruptions in our systems. We could be
required to make capital expenditures in the event of damage. Any system
failures could adversely affect customer usage in any future quarters, which
could adversely affect our revenues and operating results and harm our
reputation with corporate customers, subscribers and commerce partners.
We do not currently have fully redundant systems or a formal disaster recovery
plan. Our Web site must accommodate a high volume of traffic and deliver courses
and other information in a timely manner. If our Web site fails for any reason
or if we experience periods of unscheduled downtimes, even for a short period of
time, our business and reputation would be materially harmed. We cannot
accurately project the rate or timing of any increases in traffic to our Web
site and the failure to expand and upgrade the Web site or any system error,
failure or extended downtime could materially harm our business, reputation,
financial condition or results of operations. We have recently contracted with a
third party to provide fully redundant systems to our live site outside the San
Francisco Bay area. We are in the process of developing the redundant site,
expected to be operational in the last half of fiscal 2003.
WE MAY BECOME SUBJECT TO GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES THAT
COULD REDUCE DEMAND FOR OUR PRODUCTS AND SERVICES OR INCREASE THE COST OF DOING
BUSINESS, THEREBY ADVERSELY AFFECTING OUR FINANCIAL RESULTS.
We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
export control laws and laws or regulations directly applicable to Internet
commerce. However, due to the increasing popularity and use of the Internet, it
is possible that a number of laws and regulations may become applicable to us or
may be adopted in the future with respect to the Internet covering issues such
as:
o user privacy;
o taxation;
o content;
o right to access personal data;
o copyrights;
o distribution; and
o characteristics and quality of services.
The applicability of existing laws governing issues such as property ownership,
copyrights, and other intellectual property issues, encryption, taxation, libel,
export or import matters and personal privacy to the Internet is uncertain. The
vast majority of these laws were adopted prior to the broad commercial use of
the Internet and related technologies. As a result, they do not contemplate or
address the unique issues of the Internet and related technologies. Changes to
these laws, including some recently proposed changes, could create uncertainty
in the Internet marketplace. Such uncertainty could reduce demand for our
services or increase the cost of doing business due to increased costs of
litigation or increased service delivery costs.
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS AND
OUR INTERNET DOMAIN NAME COULD LEAD TO UNAUTHORIZED USE OF OUR COURSES OR
RESTRICT OUR ABILITY TO MARKET OUR COURSES.
Our success depends on our ability to protect our proprietary rights and
technology. We rely on a combination of copyrights, trademarks, service marks,
trade secret laws and employee and third-party nondisclosure agreements to
protect our proprietary rights. Despite our efforts, unauthorized parties may
attempt to duplicate or copy our courses or our delivery technology or obtain
and use information that we regard as proprietary. The laws of many countries do
not protect our proprietary rights to the same extent as the laws of the United
States. Effective trademark, service mark, copyright and trade secret protection
may not be available in every country in which we provide our courses and
services.
We have registered the trademark DigitalThink and we own the domain names
digitalthink.com, digitalthink.org, digitalthink.net. It is possible, however,
that third parties could acquire trademarks or domain names that are
substantially similar or conceptually similar to our trademarks or domain names.
This could decrease the value of our trademarks or domain names and could hurt
our business. The regulation of domain names in the United States and in foreign
countries could change. The relationship between regulations governing domain
names and laws protecting trademarks and similar proprietary rights is unclear.
As a result, we may not acquire or maintain exclusive rights to our domain names
in the United States or in other countries in which we conduct business.
We may from time to time encounter disputes over rights and obligations
concerning intellectual property. We obtain the content for many of our courses
from our customers and it is possible that the use of this content may subject
us to the intellectual property claims of third parties. Although we generally
seek indemnification from our customers to protect us from these types of
claims, we may not be fully protected from extensive damage claims or claims for
injunctive relief. Our customers may assert that some of the courses we develop
for our general catalog or under contract with other customers may improperly
use their proprietary content. Our involvement in any litigation to resolve
intellectual property ownership matters would require us to incur substantial
costs and divert management's attention and resources. We cannot predict the
effect of a failure to prevail in any litigation of this kind.
THE PRICE OF OUR COMMON STOCK HAS FLUCTUATED SIGNIFICANTLY IN THE PAST AND MAY
CONTINUE TO DO SO.
Our common stock price has fluctuated significantly since our initial public
offering in February 2000. While much of the fluctuation in our common stock
price may be due to our business and financial performance, we believe that
these fluctuations are also due to fluctuations in the stock market in general
based on factors not directly related to our performance, such as general
economic conditions or prevailing interest rates. As a result of these
fluctuations in the price of our common stock, it is difficult to predict what
the price of our common stock will be at any point in the future, and you may
not be able to sell your common stock at or above the price that you paid for
it.
WE ARE SUBJECT TO A PENDING LEGAL PROCEEDING AND MAY BECOME SUBJECT TO
ADDITIONAL PROCEEDINGS AND ADVERSE DETERMINATIONS IN THESE PROCEEDINGS COULD
HARM OUR BUSINESS.
In October 2001, a complaint was filed in the United States District Court for
the Southern District of New York against the Company, certain of its officers
and directors, and certain underwriters of the Company's initial public
offering. The complaint was purportedly filed on behalf of a class or certain
persons who purchased the Company's common stock between February 24, 2000 and
December 6, 2000. The complaint alleges violations by the Company and its
officers and directors of the Securities Act of 1933 in connection with certain
alleged compensation arrangements entered into by the underwriters in connection
with the offering. Substantially similar complaints have been filed against over
300 other issuers that have had initial public offerings since 1998.
We believe that this action is without merit and intend to vigorously defend
ourselves against it. Although we cannot presently determine the outcome of this
action, an adverse resolution of this matter could significantly negatively
impact our financial position and results of operations.
We may be from time to time involved in various lawsuits and legal proceedings,
which arise in the ordinary course of business. An adverse resolution of these
matters could significantly negatively impact our financial position and results
of operations.
PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY HAVE ANTI-TAKEOVER
EFFECTS THAT COULD PREVENT A CHANGE IN OUR CONTROL, EVEN IF THIS WOULD BE
BENEFICIAL TO STOCKHOLDERS.
The Company has put in place a Shareholder Rights Plan that grants existing
shareholders additional rights in the event that a single holder acquires
greater than 15% of our shares. In July 2002, the Company's Board of Directors
amended the Shareholder Rights Plan to permit WaldenVC and their affiliated
persons to purchase, in the aggregate, up to 20% of the outstanding shares of
DigitalThink. At the same time, the Company also entered into an agreement with
WaldenVC, in which WaldenVC agreed to vote their shares in direct proportion to
the votes cast by all of the Company's shareholders in each shareholder
election.
Provisions of our amended and restated certificate of incorporation, bylaws and
Delaware law could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders. These provisions include:
o a classified board of directors, in which our board is divided into three
classes with three year terms with only one class elected at each annual
meeting of stockholders, which means that a holder of a majority of our
common stock will need two annual meetings of stockholders to gain control
of the board;
o a provision which prohibits our stockholders from acting by written
consent without a meeting;
o a provision which permits only the board of directors, the president or
the chairman to call special meetings of stockholders; and
o a provision which requires advance notice of items of business to be
brought before stockholders meetings.
Amending any of the above provisions will require the vote of the holders of 66
2/3% of our outstanding common stock.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes to the Company's exposure to market risk
as disclosed in the Company's Annual Report on Form 10-K for the year ended
March 31, 2002.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER MATTERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 99.1 Certification Pursuant To 18 U.S.C. Section 1350,
As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley
Act Of 2002
Exhibit 99.2 Certification Pursuant To 18 U.S.C. Section 1350,
As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley
Act Of 2002
(b) Reports on Forms 8-K: None
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.
DIGITALTHINK, INC.
(Registrant)
Date: August 13, 2002
/s/ Michael W. Pope
Michael W. Pope
Chief Executive Officer, President and
Director
(Principal Executive Officer)
Date: August 13, 2002 /s/ ROBERT J. KROLIK
Robert J. Krolik
Chief Financial Officer
(Principal Financial and Accounting Officer)