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Filed pursuant to Rule 424(b)(1)
Registration No. 333-87299
4,500,000 Shares
LOGO
DIGITAL IMPACT
Common Stock
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Prior to this offering, there has been no public market for our common
stock. Our common stock has been approved for listing on The Nasdaq Stock
Market's National Market under the symbol "DIGI."
The underwriters have an option to purchase a maximum of 675,000 additional
shares to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS DIGITAL IMPACT
----------------- ----------------- -----------------
<S> <C> <C> <C>
Per Share............................................ $15.00 $1.05 $13.95
Total................................................ $67,500,000 $4,725,000 $62,775,000
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Delivery of the shares of common stock will be made on or about November
29, 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
HAMBRECHT & QUIST
DONALDSON, LUFKIN & JENRETTE
U.S. BANCORP PIPER JAFFRAY
The date of this prospectus is November 22, 1999.
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Inside Front Cover Graphics
Text: Delivering Relevant Emarketing Messages for Premier Companies.
[Logos of our clients: The Gap, Onsale, entry point, Tower Records, wine.com,
pets.com, garden.com, The Sharper Image, Foster & Smith, DigitalWorks,
Financial Engines, ebay, Macy's, cooking.com, Tavolo, Peet's Coffee & Tea,
shockwave.com, iGo.com, Fogdog Sports, SmarterKids.com, Another Universe,
Reel.com, doughNET, furniture.com, BMG Direct, proflowers.com, NexTag.com,
visualize and Agency.com]
[Photograph of a woman using a laptop computer, photograph of a boy dancing,
photograph of computer screens displaying our email campaigns]
[Logo of Digital Impact -- The Science of eMarketing]
Gatefold Graphics
Text: The Digital Impact Process: Providing Technology-Enabled Emarketing
Services.
[Five bubbles depicting the stages of our emarketing process, labeled: "customer
profiles", "content", "campaign management", "send", "track & report", and
"analyze". The campaign management bubble has smaller bubbles surrounding its
periphery, depicting our campaign management features, labeled: "schedule", "set
up", "import data", "target", "integrate content", and "test". Floating in the
background are computer screens displaying samples of our email campaigns.]
Text: Clients provide applicable content and customer information for each
campaign. List integrity and profile information are managed as part of the
service. Our structured campaign management process is used to target content
and test each email format. Response data is recorded, analyzed and fed back
into the customer profile for use in future campaign targeting.
[Logo of Digital Impact -- The Science of eMarketing]
Inside Back Cover Graphics
Text: Key Features of The Digital Impact Emarketing Services. Our emails are
formatted to take advantage of the graphical capabilities of each recipient's
email software. Offers are personalized based on customer preferences, profile,
or purchase data. Best practices guidelines and rigorous testing are used to
determine optimum subject lines, email structure and placement of offers.
[Photograph of computer screens displaying our email campaigns for The Gap,
garden.com, Onsale, Reel.com and sharperimage.com]
[Logo of Digital Impact -- The Science of eMarketing]
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY ................... 2
RISK FACTORS ......................... 6
YOU SHOULD NOT RELY ON FORWARD-
LOOKING STATEMENTS ................. 14
USE OF PROCEEDS ...................... 14
DIVIDEND POLICY ...................... 14
CAPITALIZATION ....................... 15
DILUTION ............................. 16
SELECTED FINANCIAL DATA .............. 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ...................... 19
BUSINESS ............................. 27
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PAGE
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MANAGEMENT ........................... 40
RELATED PARTY TRANSACTIONS ........... 50
PRINCIPAL STOCKHOLDERS ............... 52
DESCRIPTION OF CAPITAL STOCK ......... 54
SHARES ELIGIBLE FOR FUTURE SALE ...... 57
UNDERWRITING ......................... 59
NOTICE TO CANADIAN RESIDENTS ......... 61
LEGAL MATTERS ........................ 62
EXPERTS .............................. 62
WHERE YOU CAN FIND OTHER DIGITAL
IMPACT INFORMATION ................. 62
INDEX TO FINANCIAL STATEMENTS ........ F-1
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL DECEMBER 17, 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and our financial statements and notes to
those statements appearing elsewhere in this prospectus.
DIGITAL IMPACT, INC.
Digital Impact offers internet direct marketing, or emarketing, services to
businesses that wish to communicate more effectively with their customers online
through email. We combine proprietary technologies, rigorous business processes
and expertise developed over thousands of marketing promotions delivered through
email, to provide a comprehensive, outsourced emarketing solution. These email
marketing promotions, or what we refer to as email campaigns, are designed to
maximize our clients' return on their marketing investment.
Our core set of services includes campaign management, targeting and
personalization, email format optimization, campaign tracking and reporting, and
database hosting and management. We sell these services under the name Merchant
Mail. In addition, we recently introduced the Email Exchange Network, an online
marketing network that provides our clients with a new method to acquire
additional online customers.
Businesses and other marketing organizations spent an estimated $285
billion on general advertising in 1998, of which $160 billion was spent on
direct marketing, according to the Direct Marketing Association. To capitalize
on the growth of ecommerce, businesses are increasingly shifting this spending
to online advertising and direct marketing. Forrester Research projects that
total internet advertising expenditures in the U.S. will increase from $1.3
billion in 1998 to over $10 billion in 2002. Forrester also estimates that
internet direct marketing will account for 60%, or $6.2 billion, of these
expenditures in 2002, up from 15% in 1998.
Email, the most widely used application on the internet today, is a
critical element of internet direct marketing. Email offers businesses
significant advantages over paper-based communications, including more rapid
delivery, reduced costs and a greater degree of personalization. Emarketing
campaigns using email generate response rates that are between three and ten
times higher than the response rates for traditional direct mail campaigns,
based on information reported by Jupiter Communications. In addition, many
businesses do not have the desire or the ability to effectively design,
implement and manage their own emarketing campaigns.
We offer our clients a suite of emarketing services that includes email
campaign services, customer acquisition tools, customer data analysis and
strategic consulting services. These services provide our clients with the
following benefits:
- Targeted content relevant to each recipient.
- Personalized formatting of customer emails.
- In-depth performance tracking and campaign analysis.
- Substantial emarketing domain expertise.
- A robust technological infrastructure.
- Significantly improved time to market.
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Our objective is to be the leading provider of emarketing services. As part
of our strategy, we intend to:
- Expand our service offerings.
- Exploit new market opportunities.
- Leverage our database of 20 million consumer profiles.
- Establish the Email Exchange Network as a leading service for client
acquisition.
- Build our brand.
We were incorporated in October 1997 and commenced sales of our services in
December 1997. Our principal executive offices are located at 177 Bovet Road,
Suite 200, San Mateo, California, 94402, and our telephone number is (650)
356-3400. Our web site is located at www.digitalimpact.com. Information
contained on our web site does not constitute part of this prospectus.
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THE OFFERING
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Common stock offered...................... 4,500,000 shares
Common stock to be outstanding after this
offering.................................. 23,548,954 shares
Use of proceeds........................... For general corporate purposes.
Nasdaq National Market symbol............. DIGI
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The share amounts in this table are based on shares outstanding as of
September 30, 1999. This table excludes:
- 8,795,000 shares of common stock reserved for issuance under our 1998
stock plan, of which options to purchase 3,517,715 shares were
outstanding as of September 30, 1999, at a per share weighted average
exercise price of $1.05.
- 128,000 shares of convertible preferred stock that are issuable upon the
exercise of outstanding warrants, at a per share weighted average
exercise price of $0.72, and are convertible into 128,000 shares of
common stock immediately before completion of this offering.
- 1,200,000 shares reserved for issuance under our 1999 employee stock
purchase plan and our 1999 director option plan.
Subsequent to September 30, 1999, we granted options to purchase 489,000
shares of common stock at a per share weighted average exercise price of $6.17.
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Except as otherwise indicated, information in this prospectus is based on
the following assumptions:
- Our reincorporation in Delaware.
- The conversion of each outstanding share of our convertible preferred
stock into one share of common stock immediately before completion of
this offering.
- The filing of our amended and restated certificate of incorporation upon
completion of this offering.
- No exercise of the underwriters' over-allotment option.
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SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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OCTOBER 16, 1997 SIX MONTHS ENDED
(DATE OF INCEPTION) YEAR ENDED SEPTEMBER 30,
TO MARCH 31, MARCH 31, ------------------
1998 1999 1998 1999
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(UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Revenues.............................. $ 4 $ 1,307 $ 121 $ 3,257
Cost of revenues...................... 4 674 87 1,617
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Gross margin.......................... -- 633 34 1,640
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Operating expenses:
Research and development............ 27 966 209 2,518
Sales and marketing................. -- 670 134 2,544
General and administrative.......... 77 1,151 181 2,164
Stock-based compensation............ -- 1,157 162 3,295
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Total operating expenses......... 104 3,944 686 10,521
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Loss from operations.................. (104) (3,311) (652) (8,881)
Interest income (expense), net........ 1 71 10 82
------ ------- ------ --------
Net loss.............................. $ (103) $(3,240) $ (642) $ (8,799)
====== ======= ====== ========
Net loss per common share --
basic and diluted................... $(0.45) $ (2.86) $(1.95) $ (2.94)
====== ======= ====== ========
Shares used in net loss per common
share calculation -- basic and
diluted............................. 231 1,133 330 2,991
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Pro forma net loss per share -- basic
and diluted (unaudited)............. $ (0.39) $ (0.62)
======= ========
Shares used in pro forma net loss per
share calculation -- basic and
diluted (unaudited)................. 8,370 14,090
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SEPTEMBER 30, 1999
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PRO FORMA
ACTUAL AS ADJUSTED
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(UNAUDITED)
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 7,183 $68,658
Working capital............................................. 5,384 66,859
Total assets................................................ 14,002 75,477
Capital lease obligations, less current portion............. 713 713
Long term debt, less current portion........................ 197 197
Total stockholders' equity.................................. 9,625 71,100
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The preceding balance sheet data is shown on an actual basis and a pro
forma as adjusted basis to include the sale of shares of common stock by Digital
Impact in this offering at the initial public offering price of $15.00 per
share, after deducting underwriting discounts and commissions and offering
expenses.
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RISK FACTORS
An investment in our common stock is very risky. You should carefully
consider the risks described below, together with all of the other information
in this prospectus, before buying shares in this offering.
BECAUSE OF OUR LIMITED OPERATING HISTORY AND THE EMERGING NATURE OF THE
EMARKETING INDUSTRY, ANY PREDICTIONS ABOUT OUR FUTURE REVENUES AND EXPENSES MAY
NOT BE AS ACCURATE AS THEY WOULD BE IF WE HAD A LONGER BUSINESS HISTORY, AND WE
CANNOT DETERMINE TRENDS THAT MAY AFFECT OUR BUSINESS.
We were incorporated in October 1997 and first recorded revenue in December
1997. Our limited operating history makes financial forecasting and evaluation
of our business difficult. Since we have limited financial data, any predictions
about our future revenues and expenses may not be as accurate as they would be
if we had a longer business history. Because of the emerging nature of the
emarketing industry, we cannot determine trends that may emerge in our market or
affect our business. The revenue and income potential of the emarketing
industry, and our business, are unproven.
WE HAVE A HISTORY OF LOSSES, WE EXPECT CONTINUING LOSSES AND WE MAY NEVER
ACHIEVE PROFITABILITY.
Our operating costs have exceeded our revenues in each quarter since our
inception in October 1997. We incurred net losses of approximately $3.3 million
from October 1997 through March 31, 1999 and approximately $8.8 million for the
six months ended September 30, 1999. We had an accumulated deficit of
approximately $12.1 million as of September 30, 1999. We cannot assure you that
our revenues will continue to grow or that we will achieve or maintain
profitability in the future. In addition, we expect that our product
development, sales and marketing and administrative expenses will increase
significantly in the future. Accordingly, we will need to significantly increase
our revenues to achieve and maintain profitability. If we do not achieve or
sustain profitability in the future, we may be unable to continue our
operations.
OUR OPERATING RESULTS HAVE VARIED SIGNIFICANTLY IN THE PAST AND ARE LIKELY TO
VARY SIGNIFICANTLY FROM PERIOD TO PERIOD, AND OUR STOCK PRICE MAY DECLINE IF WE
FAIL TO MEET THE EXPECTATIONS OF ANALYSTS AND INVESTORS.
Our operating results have varied significantly in the past and are likely
to vary significantly from period to period. As a result, our operating results
are difficult to predict and may not meet the expectations of securities
analysts or investors. If this occurs, the price of our common stock would
likely decline.
SEASONAL TRENDS MAY CAUSE OUR QUARTERLY OPERATING RESULTS TO FLUCTUATE, WHICH
MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
The traditional direct marketing industry has typically generated lower
revenues during the summer months and higher revenues during the calendar
year-end months. We believe our business may be affected by similar revenue
fluctuations, but our limited operating history is insufficient to predict the
existence or magnitude of these effects. If we do experience these effects,
analysts and investors may not be able to predict our quarterly or annual
operating results, and if we fail to meet expectations of analysts and
investors, our stock price could decline.
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IF BUSINESSES AND CONSUMERS FAIL TO ACCEPT EMARKETING AS A MEANS TO ATTRACT NEW
CUSTOMERS, DEMAND FOR OUR SERVICES MAY NOT DEVELOP AND THE PRICE OF OUR COMMON
STOCK WOULD DECLINE.
The market for emarketing is new and rapidly evolving, and our business
will be harmed if sufficient demand for our services does not develop. Our
current and planned services are very different from the traditional methods
that many of our clients have historically used to attract new customers and
maintain customer relationships. Demand for emarketing, including our services,
may not materialize for several reasons, including:
- Businesses that have already invested substantial resources in other
methods of marketing and communications may be reluctant to adopt new
marketing strategies and methods.
- Consumers and businesses may choose not to accept emarketing messages.
- Businesses may elect not to engage in emarketing because consumers may
confuse permission-based email services with unsolicited commercial
email.
- The effectiveness of direct marketing through the use of emails may
diminish significantly if the volume of direct marketing email saturates
consumers.
A SMALL NUMBER OF CLIENTS ACCOUNT FOR A HIGH PERCENTAGE OF OUR REVENUES, AND THE
LOSS OF A MAJOR CLIENT COULD RESULT IN LOWER THAN EXPECTED REVENUES.
A small number of clients account for a high percentage of our revenues.
The loss of a major client could harm our business. For the fiscal year ended
March 31, 1999, three clients accounted for 26.8%, 11.5% and 10.9% of our
revenues. For the six months ended September 30, 1999, four of our clients
accounted for 9.7%, 8.4%, 8.4% and 8.2% of our revenues. We expect that a small
number of clients will continue to account for a high percentage of our revenues
for at least the next twelve months.
COMPETITION IN THE EMARKETING INDUSTRY IS INTENSE AND, IF WE ARE UNABLE TO
COMPETE EFFECTIVELY, THE DEMAND FOR, OR THE PRICES OF, OUR SERVICES MAY DECLINE.
The market for emarketing is intensely competitive, rapidly evolving and
experiences rapid technological change. We expect the intensity of competition
to increase significantly in the future because of the attention the internet
has received as a medium for advertising and direct marketing and because there
are no significant barriers to entry into our market. Intense competition may
result in price reductions, reduced sales, gross margins and operating margins,
and loss of market share.
Our principal competitors include:
- Providers of emarketing solutions such as @Once, Acxiom and its affiliate
Bigfoot, Exactis.com, Kana Communications, L-Soft, Media Synergy,
MessageMedia, NetCreations, Responsys.com and YesMail.com.
- The in-house information technology departments of our existing and
prospective clients.
In addition, we expect competition to persist and intensify in the future,
which could harm our ability to increase sales and maintain our prices. In the
future, we may experience competition from Internet service providers,
advertising and direct marketing agencies and other large established businesses
such as America Online, DoubleClick, Microsoft, IBM, AT&T, Yahoo!, ADVO and the
Interpublic Group of Companies. Each of these companies possess large, existing
customer bases, substantial financial resources and established distribution
channels and could develop, market or
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resell a number of emarketing solutions. These potential competitors may also
choose to enter the market for emarketing by acquiring one of our existing
competitors or by forming strategic alliances with these competitors. Any of
these occurrences could harm our ability to compete effectively.
For a further discussion of our competition, please see
"Business -- Competition."
RAPID TECHNOLOGICAL CHANGES COULD CAUSE OUR SERVICES TO BECOME OBSOLETE AND
UNMARKETABLE OR REQUIRE US TO REDESIGN OUR SERVICES, WHICH COULD BE COSTLY AND
TIME-CONSUMING.
The market for emarketing services is characterized by rapid technological
change. Our services could become obsolete and unmarketable if we are unable to
adapt our services to these new technologies. For example, the emergence of new
media formats such as streaming video and audio may require us to adapt our
services to remain competitive which could be costly and time-consuming.
IF WE DO NOT ATTRACT AND RETAIN ADDITIONAL HIGHLY-SKILLED PERSONNEL WE MAY BE
UNABLE TO EXECUTE OUR BUSINESS STRATEGY.
Our business depends on the continued technological innovation of our core
services and our ability to provide comprehensive emarketing expertise. Our main
offices are located in the San Francisco Bay Area, where competition for
personnel with internet-related technology and marketing skills is extremely
intense. If we fail to identify, attract, retain and motivate these highly
skilled personnel, we may be unable to successfully introduce new services or
otherwise implement our business strategy. We plan to significantly expand our
operations, and we will need to hire additional personnel as our business grows.
In particular, we have experienced difficulties in hiring highly skilled
technical and client services personnel due to significant competition for
experienced personnel in our market.
WE RELY ON THE SERVICES OF OUR FOUNDERS AND OTHER KEY PERSONNEL, WHOSE KNOWLEDGE
OF OUR BUSINESS AND TECHNICAL EXPERTISE WOULD BE EXTREMELY DIFFICULT TO REPLACE.
Our future success depends to a significant degree on the skills,
experience and efforts of our senior management. In particular, we depend upon
the continued services of William Park, our Chief Executive Officer and
co-founder and Gerardo Capiel, our Chief Technology Officer and co-founder,
whose vision for our company, knowledge of our business and technical expertise
would be extremely difficult to replace. In addition, we have not obtained life
insurance benefiting Digital Impact on any of our key employees. If any of our
key employees left or was seriously injured and unable to work and we were
unable to find a qualified replacement, the level of services we are able to
provide could decline or we may be otherwise unable to execute our business
strategy.
SEVERAL KEY MEMBERS OF OUR MANAGEMENT TEAM HAVE ONLY RECENTLY JOINED US AND IF
THEY ARE UNABLE TO EFFECTIVELY INTEGRATE THEMSELVES INTO OUR BUSINESS OR WORK
TOGETHER AS A MANAGEMENT TEAM, WE MAY NOT BE ABLE TO MANAGE OUR BUSINESS
EFFECTIVELY.
Several key members of our management team have joined us recently. David
Oppenheimer, our Chief Financial Officer, Alan Flohr, our Vice President of
Sales and Client Services, Ronald Rasmussen, our Vice President of Engineering,
and Harry Drake, our Vice President of Client Services Engineering have joined
since March 31, 1999. These individuals must spend a significant amount of time
learning our business model and management system, in addition to performing
their regular duties. If they are unable to effectively integrate themselves
into our business or work together as a management team, we may not be able to
manage our business effectively.
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IF WE ARE UNABLE TO IMPLEMENT APPROPRIATE CONTROLS, SYSTEMS AND PROCEDURES TO
MANAGE OUR EXPECTED GROWTH, WE MAY NOT BE ABLE TO SUCCESSFULLY OFFER OUR
SERVICES AND IMPLEMENT OUR BUSINESS PLAN.
Our ability to successfully offer services and implement our business plan
requires an effective planning and management process. Since we began
operations, we have significantly increased the size of our operations. This
growth has placed, and we expect that any future growth we experience will
continue to place, a significant strain on our management, systems and
resources. To manage the anticipated growth of our operations, we will be
required to improve existing and implement new operational, financial and
management information controls, reporting systems and procedures. For example,
we expect to substantially upgrade our accounting and billing system within the
next twelve months.
IF WE FAIL TO EXECUTE OUR STRATEGY TO EXPAND INTO NEW MARKETS, THE MARKET FOR
OUR SERVICES AND OUR POTENTIAL REVENUE WILL BE LIMITED.
The majority of our emarketing clients to date have been online
business-to-consumer retailers. We intend to expand our presence among clients
in other consumer markets, in markets where the customers are businesses rather
than consumers, and in international markets. If this strategy fails, the market
for our services and our potential revenue will be limited. We have limited
experience in these markets and may encounter obstacles which we have not
anticipated.
IF WE FAIL TO INTRODUCE NEW SERVICES, SUCH AS OUR RECENTLY-INTRODUCED EMAIL
EXCHANGE NETWORK, OUR REVENUES MAY NOT INCREASE.
Part of our strategy is to increase our revenues by introducing new
services. If we fail to introduce new services our revenues may not increase.
For example, we recently introduced our Email Exchange Network which we expect
will account for a growing percentage of our future revenues. If the Email
Exchange Network is not accepted by our clients, our revenues may be lower.
IF WE ARE UNABLE TO ENHANCE OUR SERVICES AND ADD CLIENT SERVICES PERSONNEL TO
HANDLE INCREASED EMAIL VOLUME AND CONSUMER RESPONSES, WE MAY BE UNABLE TO
ADEQUATELY RESPOND TO OUR CLIENTS' DEMANDS FOR EMARKETING SERVICES AND MAY LOSE
MARKET SHARE.
If we are unable to expand capacity to keep pace with our clients' demands,
we may lose market share. The volume of emails we are sending has grown
significantly and we expect this volume to continue to grow. We will need to
enhance our services to handle both any increased email volume and the increased
level of response from consumers that are generated by this volume. In addition,
as we seek to grow our base of clients, we must add client services personnel to
handle the increased volume of emails and campaigns. If we are unable to add
client services personnel, the level of services we are able to provide our
clients could decline.
IF THE DELIVERY OF OUR EMAILS IS LIMITED OR BLOCKED, THEN OUR CLIENTS MAY
DISCONTINUE THEIR USE OF OUR SERVICES.
Our business model relies on our ability to deliver emails over the
internet through internet service providers and to recipients in major
corporations. In particular, a significant percentage of our emails are sent to
recipients who use America Online. We do not have, and we are not required to
have, an agreement with America Online to deliver emails to their customers.
America Online uses a proprietary set of technologies to handle and deliver
email and the value of our services will be reduced if we are unable to provide
emails compatible with these technologies. In addition, America Online and other
internet service providers are able to block unwanted messages to their users.
If
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these companies limit or halt the delivery of our emails, or if we fail to
deliver emails in such a way as to be compatible with these companies' email
handling technologies, then our clients may discontinue their use of our
services.
OUR FACILITIES AND SYSTEMS ARE VULNERABLE TO NATURAL DISASTERS AND OTHER
UNEXPECTED EVENTS, AND ANY OF THESE EVENTS COULD RESULT IN AN INTERRUPTION OF
OUR ABILITY TO EXECUTE OUR CLIENT'S EMARKETING CAMPAIGNS.
We depend on the efficient and uninterrupted operations of our data center
and hardware systems. Our data center and hardware systems are located in
Northern California, an area susceptible to earthquakes. Our data center and
hardware systems are also vulnerable to damage from fire, floods, power loss,
telecommunications failures, and similar events. If any of these events result
in damage to our data center or systems, we may be unable to execute our
clients' emarketing campaigns until the damage is repaired, and may accordingly
lose clients and revenues. In addition, we may incur substantial costs in
repairing any damage.
OUR DATA CENTER IS LOCATED AT FACILITIES PROVIDED BY A THIRD PARTY, AND IF THIS
PARTY IS UNABLE TO ADEQUATELY PROTECT OUR DATA CENTER, OUR REPUTATION MAY BE
HARMED AND WE MAY LOSE CLIENTS.
Our data center, which is critical to our ongoing operations, is located at
facilities provided by a third party. Our operations depend on this party's
ability to protect our data center from damage or interruption from human error,
break-ins, sabotage, computer viruses, intentional acts of vandalism and similar
events. If this party is unable to adequately protect our data center and
information is lost or our ability to deliver our services is interrupted, our
reputation may be harmed and we may lose clients.
IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, THIRD PARTIES
COULD USE OUR INTELLECTUAL PROPERTY WITHOUT OUR CONSENT.
Our ability to successfully compete is substantially dependent upon our
internally developed technology and intellectual property, which we protect
through a combination of copyright, trade secret and trademark law, and
contractual obligations. We have no issued patents and have two U.S. patent
applications pending. We have no registered trademarks and have two U.S.
trademark applications pending. We may not be able to adequately protect our
proprietary rights. Unauthorized parties may attempt to obtain and use our
proprietary information. Policing unauthorized use of our proprietary
information is difficult, and we cannot be certain that the steps we have taken
will prevent misappropriation, particularly in foreign countries where the laws
may not protect our proprietary rights as fully as in the United States.
For a further discussion of our intellectual property, please see
"Business -- Intellectual Property Rights."
OUR OPERATING RESULTS WOULD SUFFER IF WE WERE FORCED TO DEFEND AGAINST A
PROTRACTED INFRINGEMENT CLAIM OR IF A THIRD PARTY WERE AWARDED SIGNIFICANT
DAMAGES.
There is a substantial risk of litigation regarding intellectual property
rights in our industry. A successful claim of technology infringement against us
and our failure or inability to license the infringed or similar technology
could harm our business.
We expect that our technologies may experience an increase in third-party
infringement claims as the number of our competitors grows. In addition, we
believe that many of our competitors have
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filed or intend to file patent applications covering aspects of their technology
that they may claim our intellectual property infringes. We cannot be certain
that third parties will not make a claim of infringement against us relating to
our technology. Any claims, with or without merit, could:
- Be time-consuming and costly to defend.
- Divert management's attention and resources.
- Cause delays in delivering services.
- Require the payment of monetary damages which may be tripled if the
infringement is found to be willful.
- Result in an injunction which would prohibit us from offering a
particular service.
- Require us to enter into royalty or licensing agreements which, if
required, may not be available on acceptable terms.
IF ANY OF THE THIRD PARTY TECHNOLOGIES WE USE BECOME UNAVAILABLE TO US, WE WILL
NOT BE ABLE TO OPERATE OUR BUSINESS UNTIL EQUIVALENT TECHNOLOGY CAN BE OBTAINED.
We are highly dependent on technologies we license from TIBCO, Oracle, Sun
Microsystems and Microsoft which enable us to send email through the internet
and allow us to offer a variety of targeted marketing capabilities. Our market
is evolving, and we may need to license additional technologies to remain
competitive. However, we may not be able to license these technologies on
commercially reasonable terms or at all. Our inability to obtain any of these
licenses could delay the development of our services until equivalent technology
can be identified, licensed or developed and integrated.
IF WE ARE UNABLE TO SAFEGUARD THE CONFIDENTIAL INFORMATION IN OUR DATA
WAREHOUSE, OUR REPUTATION MAY BE HARMED AND WE MAY BE EXPOSED TO LIABILITY.
We currently retain highly confidential customer information in a secure
data warehouse. We cannot assure you, however, that we will be able to prevent
unauthorized individuals from gaining access to this data warehouse. If any
compromise or breach of security were to occur, it could harm our reputation and
expose us to possible liability. Any unauthorized access to our servers could
result in the misappropriation of confidential customer information or cause
interruptions in our services. It is also possible that one of our employees
could attempt to misuse confidential customer information, exposing us to
liability. In addition, our reputation may be harmed if we lose customer
information maintained in our data warehouse due to systems interruptions or
other reasons.
THE TERMINATION OF RELATIONSHIPS WITH DIRECT MARKETING FIRMS AND ADVERTISING
AGENCIES COULD SIGNIFICANTLY REDUCE OUR FUTURE REVENUES AND INCREASE OUR COSTS.
We have relationships with direct marketing firms and advertising agencies
which we anticipate will provide significant revenues in the future. If these
relationships are terminated or otherwise fail, our revenues may suffer and we
may be required to devote additional resources to our sales, marketing and
client services efforts. These companies generally are not obligated to offer
our services to their clients or restricted from working with our competitors.
Accordingly, our success will depend on their willingness to devote resources
and efforts to marketing our services.
ACTIVITIES OF OUR CLIENTS COULD DAMAGE OUR REPUTATION OR GIVE RISE TO LEGAL
CLAIMS AGAINST US.
Our clients' promotion of their products and services may not comply with
federal, state and local laws. We cannot predict whether our role in
facilitating these marketing activities would expose
11
<PAGE> 14
us to liability under these laws. Any claims made against us could be costly and
time-consuming to defend. If we are exposed to this kind of liability, we could
be required to pay substantial fines or penalties, redesign our business
methods, discontinue some of our services or otherwise expend resources to avoid
liability.
Our services involve the transmission of information through the internet.
Our services could be used to transmit harmful applications, negative messages,
unauthorized reproduction of copyrighted material, inaccurate data or computer
viruses to end-users in the course of delivery. Any transmission of this kind
could damage our reputation or could give rise to legal claims against us. We
could spend a significant amount of time and money defending against these legal
claims.
NEW REGULATION OF AND UNCERTAINTIES REGARDING THE APPLICATION OF EXISTING LAWS
AND REGULATIONS TO, EMARKETING AND THE INTERNET, COULD PROHIBIT, LIMIT OR
INCREASE THE COST OF OUR BUSINESS.
Legislation has recently been enacted in several states restricting the
sending of unsolicited commercial email. We cannot assure you that existing or
future legislation regarding commercial email will not harm our business. The
federal government and several other states are considering, or have considered,
similar legislation. These provisions generally limit or prohibit both the
transmission of unsolicited commercial emails and the use of forged or
fraudulent routing and header information. Some states, including California,
require that unsolicited emails include opt-out instructions and that senders of
these emails honor any opt-out requests.
Our business could be negatively impacted by new laws or regulations
applicable to emarketing or the internet, the application of existing laws and
regulations to emarketing or the internet or the application of new laws and
regulations to our business as we expand into new jurisdictions. There is a
growing body of laws and regulations applicable to access to or commerce on the
internet. Moreover, the applicability to the internet of existing laws is
uncertain and may take years to resolve. Due to the increasing popularity and
use of the internet, it is likely that additional laws and regulations will be
adopted covering issues such as privacy, pricing, content, copyrights,
distribution, taxation antitrust, characteristics and quality of services and
consumer protection. The adoption of any additional laws or regulations may
impair the growth of the internet or emarketing, which could, in turn, decrease
the demand for our services and prohibit, limit or increase our cost of doing
business.
YEAR 2000 ISSUES PRESENT TECHNOLOGICAL RISKS, COULD CAUSE DISRUPTION TO OUR
BUSINESS AND COULD HARM SALES OF OUR SERVICES.
Any failure of our technology or systems, third-party software or hardware
on which we rely or the internet to be Year 2000 compliant could cause
disruption to our business and could harm our sales. Many currently installed
computer systems and software products are coded to accept or recognize only two
digit entries in the date code field. These systems and software products will
need to accept four digit entries to distinguish dates before and after January
1, 2000. As a result, computer systems and software used by many companies and
governmental agencies may need to be upgraded to comply with these Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities.
We are currently assessing the Year 2000 readiness of the software,
computer technology and other services that we use that may not be Year 2000
compliant. We expect to complete this assessment in November 1999. Since we have
not completed this assessment, we are unable to predict to what extent our
business may be affected if our technology or systems, third party hardware or
software on which we rely or the Internet experience a material Year 2000
failure.
12
<PAGE> 15
For a further discussion of the impact of Year 2000 on our business, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Readiness Disclosure."
INTERNET-RELATED STOCK PRICES ARE ESPECIALLY VOLATILE AND THIS VOLATILITY MAY
DEPRESS OUR STOCK PRICE.
The stock market and specifically the stock prices of internet-related
companies have been very volatile. Because we are an internet-related company,
we expect our stock price to be similarly volatile. As a result of this
volatility, the market price of our common stock could significantly decrease.
This volatility is often not related to the operating performance of the
companies and may accordingly reduce the price of our common stock without
regard to our operating performance.
A TOTAL OF 19,048,954, OR 81%, OF OUR TOTAL OUTSTANDING SHARES AFTER THE
OFFERING ARE RESTRICTED FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN
THE NEAR FUTURE. THIS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP
SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.
After this offering, we will have 23,548,954 shares of common stock
outstanding. This includes 4,500,000 shares that we are selling in the offering,
which may be resold immediately in the public market. The remaining 19,048,954
shares will become eligible for resale in the public market as shown in the
table below.
<TABLE>
<CAPTION>
NUMBER OF SHARES/
PERCENT OUTSTANDING
AFTER THE OFFERING DATE WHEN SHARES BECOME AVAILABLE FOR RESALE IN THE PUBLIC MARKET
------------------- -----------------------------------------------------------------
<S> <C>
16,236,855/68.9% 180 days after the date of this prospectus under agreements
between the stockholders and the underwriters or Digital Impact,
provided that none of these shares are released from lock-up
restrictions by Credit Suisse First Boston Corporation.
2,812,099/11.9% Between 180 and 365 days after the date of this prospectus due to
the requirements of federal securities laws.
</TABLE>
In addition, we intend to file a registration statement on Form S-8 under
the Securities Act after the date of this offering to register an aggregate of
9,995,000 shares of common stock issued or reserved for issuance under our
various stock plans.
OUR STOCK HAS NO PRIOR TRADING MARKET AND YOU MAY NOT BE ABLE TO RESELL YOUR
STOCK AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.
Before this offering, there has not been a public trading market for our
common stock, and an active trading market for our common stock may not develop
or be sustained after this offering. Further, the market price of our common
stock may decline below our initial public offering price. The initial public
offering price will be determined by negotiations between the representatives of
the underwriters and us. See "Underwriting" for a discussion of the factors to
be considered in determining the initial public offering price.
13
<PAGE> 16
YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS
BECAUSE THEY ARE INHERENTLY UNCERTAIN
You should not rely on forward-looking statements in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "expects,"
"plans," "future," "intends," "estimates," "should," "potential," "continue,"
"may," "will" and similar expressions to identify these forward-looking
statements. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this prospectus. Our actual
results could differ materially from those anticipated in these forward-looking
statements for many reasons, including the risks faced by us described above.
USE OF PROCEEDS
Our net proceeds from the sale of the 4,500,000 shares of common stock in
this offering at an initial public offering price of $15.00 per share, are
estimated to be $61.5 million, or $70.9 million if the underwriters'
over-allotment option is exercised in full and after deducting the underwriting
discounts and commissions and offering expenses.
We intend to use the net proceeds from this offering primarily for general
corporate purposes. These uses are expected to include an expansion of our sales
and marketing efforts and technical support services, capital expenditures
focusing on expanding our email delivery capability, as well as expenses
associated with our geographic expansion. We also may use a portion of the net
proceeds to acquire complementary businesses, products or technologies; however,
we currently have no commitments or agreements and are not involved in any
negotiations to do so. Pending use of the net proceeds of this offering, we
intend to invest the net proceeds in short-term, interest-bearing,
investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain all future earnings, if any, for use in the operation
and expansion of our business and do not anticipate declaring or paying cash
dividends. Our existing line of credit prohibits the payment of cash dividends.
14
<PAGE> 17
CAPITALIZATION
The following table describes our capitalization as of September 30, 1999:
- On an actual basis.
- On a pro forma basis to reflect the conversion of all outstanding shares
of convertible preferred stock into 12,292,058 shares of common stock.
- On a pro forma as adjusted basis to reflect the sale of 4,500,000 shares
of common stock at an initial public offering price of $15.00 per share
in this offering, less underwriting discounts and commissions and
estimated offering expenses payable by Digital Impact.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ------------- -------------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Capital lease obligations, less current
portion........................................ $ 713 $ 713 $ 713
Long term debt, less current portion............. 197 197 197
------- ------- -------
Long term debt................................. 910 910 910
------- ------- -------
Stockholders' equity:
Preferred stock, $0.001 par value per share,
16,000,000 shares authorized, 12,292,058
shares issued and outstanding, actual;
16,000,000 shares authorized, none issued or
outstanding, pro forma; 5,000,000 shares
authorized, none issued or outstanding, pro
forma as adjusted........................... 12 -- --
Common stock, $0.001 par value per share,
54,000,000 shares authorized, 6,756,896
shares issued and outstanding, actual;
54,000,000 shares authorized, 19,048,954
shares issued and outstanding, pro forma;
100,000,000 shares authorized, 23,548,954
shares issued and outstanding, pro forma as
adjusted.................................... 7 19 24
Additional paid-in capital..................... 32,584 32,584 94,054
Unearned stock-based compensation.............. (10,836) (10,836) (10,836)
Accumulated deficit............................ (12,142) (12,142) (12,142)
------- ------- -------
Total stockholders' equity.................. 9,625 9,625 71,100
------- ------- -------
Total capitalization................... $10,535 $10,535 $72,010
======= ======= =======
</TABLE>
This tables excludes:
- 8,795,000 shares of common stock reserved for issuance under our 1998
stock plan, of which options to purchase 3,517,715 shares were
outstanding as of September 30, 1999, at a per share weighted average
exercise price of $1.05.
- 128,000 shares of convertible preferred stock that are issuable upon the
exercise of an outstanding warrant, at a per share weighted average
exercise price of $0.72, and are convertible into 128,000 shares of
common stock immediately before completion of this offering.
- 1,200,000 shares reserved for issuance under our 1999 employee stock
purchase plan and our 1999 director option plan.
Subsequent to September 30, 1999, we granted options to purchase 489,000
shares of common stock at a per share weighted average exercise price of $6.17.
15
<PAGE> 18
DILUTION
The pro forma net tangible book value as of September 30, 1999 was $9.6
million or approximately $0.51 per share of common stock. Pro forma net tangible
book value per share represents the amount of our total tangible assets less
total liabilities, divided by the total number of shares of common stock
outstanding after giving effect to the conversion of all outstanding shares of
convertible preferred stock into 12,292,058 shares of common stock. Dilution in
pro forma net tangible book value per share represents the difference between
the amount per share paid by purchasers of shares of our common stock in this
offering and the pro forma net tangible book value per share of our common stock
immediately following this offering.
After accounting for our sale of the 4,500,000 shares of common stock
offered in this offering at an initial public offering price of $15.00 per share
and after deducting the underwriting discounts and commissions and estimated
offering expenses payable by us, our pro forma net tangible book value as of
September 30, 1999 would have been $71.1 million, or approximately $3.02 per
share. This represents an immediate increase in net tangible book value of $2.51
per share to existing stockholders and an immediate dilution in net tangible
book value of $11.98 per share to new investors. The following table illustrates
this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $15.00
Pro forma net tangible book value per share as of September
30, 1999.................................................... $0.51
Increase per share attributable to new investors.......... 2.51
Pro forma net tangible book value per share after the
offering.................................................. 3.02
------
Dilution in pro forma net tangible book value per share to
new investors............................................. $11.98
======
</TABLE>
The following table describes, on a pro forma basis as of September 30,
1999, the differences between the number of shares of common stock purchased
from us, the total price and average price per share paid by existing investors
and by new investors, before deducting the underwriting discounts and
commissions and estimated offering expenses payable by us, at an initial public
offering price of $15.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL GROSS CONSIDERATION AVERAGE
----------------------- -------------------------- PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 19,048,954 81% $17,335,000 20% $ 0.91
New investors...................... 4,500,000 19 67,500,000 80 15.00
---------- --- ----------- ----
Total.................... 23,548,954 100% $84,835,000 100%
========== === =========== ====
</TABLE>
- -------------------------
The foregoing discussion and tables are based upon the number of shares
actually issued and outstanding on September 30, 1999 and assume no exercise of
options or warrants outstanding as of September 30, 1999.
After this offering and assuming the exercise in full of all of the options
and warrants outstanding and exercisable as of September 30, our pro forma net
tangible book value as of September 30, 1999 would be $2.75 per share,
representing an immediate increase in net tangible book value of $2.25 per share
to our existing stockholders and an immediate dilution in the net tangible book
value of $12.25 per share to new investors.
16
<PAGE> 19
If the underwriters' over-allotment option is exercised in full, the
following will occur:
- The number of shares of common stock held by existing stockholders will
decrease to approximately 79% of the total number of shares of our common
stock outstanding after this offering.
- The number of shares held by new investors will increase to 5,175,000 or
approximately 21% of the total number of shares of our common stock
outstanding after this offering.
17
<PAGE> 20
SELECTED FINANCIAL DATA
The selected statement of operations data for the period from October 16,
1997 (date of inception) through March 31, 1998 and for the year ended March 31,
1999 and the selected balance sheet data as of March 31, 1998 and 1999 have been
derived from our financial statements included elsewhere in this prospectus that
have been audited by PricewaterhouseCoopers LLP independent accountants. The
selected results of operations for the six months ended September 30, 1998 and
1999 and the selected balance sheet data as of September 30, 1999 are derived
from unaudited financial statements included elsewhere in this prospectus that
have been prepared on the same basis as the audited financial statements and, in
the opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, necessary for the fair presentation of our operating
results for these periods and our financial condition as of that date. The
historical results are not necessarily indicative of results to be expected for
any future period. The data has been derived from financial statements that have
been prepared using generally accepted accounting principles and should be read
in conjunction with the financial statements and the notes to the financial
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
OCTOBER 16, 1997 SIX MONTHS ENDED
(DATE OF INCEPTION) YEAR ENDED SEPTEMBER 30,
TO MARCH 31, MARCH 31, -----------------
1998 1999 1998 1999
------------------- ---------- ------- -------
(UNAUDITED)
) (IN THOUSANDS, EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................................... $ 4 $ 1,307 $ 121 $ 3,257
Cost of revenues................................. 4 674 87 1,617
------ ------- ------- -------
Gross margin..................................... -- 633 34 1,640
------ ------- ------- -------
Operating expenses:
Research and development....................... 27 966 209 2,518
Sales and marketing............................ -- 670 134 2,544
General and administrative..................... 77 1,151 181 2,164
Stock-based compensation....................... -- 1,157 162 3,295
------ ------- ------- -------
Total operating expenses.................... 104 3,944 686 10,521
------ ------- ------- -------
Loss from operations............................. (104) (3,311) (652) (8,881)
Interest income (expense), net................... 1 71 10 82
------ ------- ------- -------
Net loss......................................... $ (103) $(3,240) $ (642) $(8,799)
====== ======= ======= =======
Net loss per common share -- basic and diluted... $(0.45) $ (2.86) $ (1.95) $ (2.94)
====== ======= ======= =======
Shares used in net loss per common share
calculation -- basic and diluted............... 231 1,133 330 2,991
====== ======= ======= =======
Pro forma net loss per share -- basic and diluted
(unaudited).................................... $ (0.39) $ (0.62)
======= =======
Shares used in pro forma net loss per share
calculation -- basic and diluted (unaudited)... 8,370 14,090
======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
---------------- AS OF
1998 1999 SEPTEMBER 30, 1999
------ ------ ------------------
(UNAUDITED)
) (IN THOUSANDS
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $1,032 $2,864 $ 7,183
Working capital.......................................... 1,013 2,395 5,384
Total assets............................................. 1,078 6,314 14,002
Capital lease obligations, less current portion.......... -- 457 713
Long term debt, less current portion..................... -- 234 197
Total stockholders' equity............................... 1,056 4,370 9,625
</TABLE>
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and
results of operations in conjunction with our financial statements and related
notes. This discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of factors including
those discussed in "Risk Factors," starting on page 6 and elsewhere in this
prospectus.
OVERVIEW
We are a leading provider of emarketing services. Our primary suite of
emarketing services, Merchant Mail, is sold as a single service and currently
consists of the following components: email campaign management, targeting and
personalization, email format optimization, campaign tracking and reporting, and
data hosting and management. We also recently introduced the Email Exchange
Network, a service which enables our clients to acquire new customers by sharing
email addresses with each other, with the consumer providing explicit consent.
We were incorporated in October 1997 and commenced sales of our services in
December 1997. During the period from inception through March 1998, we had
insignificant revenues. Operating activities during this period related
primarily to developing our services, building our corporate infrastructure and
raising capital. In April 1998, we began executing emarketing campaigns for
clients. To date, our revenues have consisted of sales of Merchant Mail. In July
1999, we established the Email Exchange Network and expect that it will
contribute to our revenues in future periods. Although our revenues have
increased each quarter since inception, we have never been profitable. We cannot
assure you that our revenues will continue to grow or that we will ever achieve
or maintain profitability. As of September 30, 1999, we had an accumulated
deficit of $12.1 million.
We generate revenues from the sale of services to businesses that enable
them to proactively communicate with their customers online. Historically, these
services have primarily consisted of the design and execution of emarketing
campaigns. For each campaign, we generally charge our clients a fixed fee for
the set up and a variable fee based on the number of emails sent to our clients'
customers. We recognize revenue for these fees when we complete an emarketing
campaign, which typically lasts less than one week.
Cost of revenues consists primarily of expenses relating to the delivery of
emarketing services, including personnel costs, primarily consisting of our
client services staff, the amortization of equipment and licensed technology,
and data center rent.
Operating expenses are categorized into research and development, sales and
marketing, general and administrative, and stock-based compensation.
Research and development expenses consist primarily of personnel and
related costs, consultants and outside contractor costs, and software and
hardware maintenance costs for our development efforts. To date, all research
and development costs have been expensed as incurred.
Sales and marketing expenses consist of personnel and related costs
primarily for our direct sales force, and marketing staff, in addition to
marketing programs which include trade shows, advertisements, promotional
activities and media events.
General and administrative expenses consist primarily of personnel and
related costs for corporate functions, including information services, finance,
accounting, human resources, facilities and legal.
19
<PAGE> 22
Stock-based compensation represents the aggregate difference, at the date
of grant, between the respective exercise price of stock options and the deemed
fair market value of the underlying stock. Stock-based compensation is amortized
over the vesting period of the underlying options based on an accelerated
vesting method, generally four years. Through September 30, 1999, we recorded
unearned stock-based compensation totaling $14.5 million. For the year ended
March 31, 1999, we recognized stock-based compensation of $543,000 for options
granted and $614,000 for shares issued as a bonus to a founder and for the six
months ended September 30, 1999, we recognized stock-based compensation of $3.3
million.
The total unamortized unearned stock-based compensation recorded for all
option grants through September 30, 1999 will be amortized as follows: $3.8
million for the remainder of the year ended March 31, 2000; $4.2 million for the
year ended March 31, 2001; $2.0 million for the year ended March 31, 2002; and
$771,000 for the year ended March 31, 2003 and the years following.
RESULTS OF OPERATIONS.
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
Revenues. Total revenues increased from approximately $121,000 for the six
months ended September 30, 1998 to approximately $3.3 million for the six months
ended September 30, 1999. The increase was primarily due to an increase in the
number of clients to whom we provide emarketing services from seven to 60, in
addition to a significant increase in the number of emails sent on behalf of our
clients from approximately 1.5 million emails to approximately 143 million
emails sent.
Cost of Revenues. Cost of revenues increased from approximately $87,000 for
the six months ended September 30, 1998 to approximately $1.6 million for the
six months ended September 30, 1999. The increase was primarily due to increased
personnel costs of approximately $954,000 associated with supporting a larger
number of clients and a higher volume of emails, allocation of shared facility
expenses of $80,000, as well as amortized costs of approximately $264,000 and
rental costs of $154,000 associated with expansion of our data center capacity.
Gross margins increased from 28% for the six months ended September 30, 1998 to
50% for the six months ended September 30, 1999. This increase was primarily the
result of higher capacity utilization as revenues increased at a greater rate
than associated costs.
Research and Development. Research and development expenses increased from
approximately $209,000 for the six months ended September 30, 1998 to
approximately $2.5 million for the six months ended September 30, 1999. The
increase was primarily due to an increase in personnel costs of approximately
$1.5 million, an increase in professional fees of approximately $529,000 to
further develop and enhance our service offerings, an increase in recruiting
costs of $97,000 and an allocation of depreciation expense of $95,000. We are
continuing to invest substantially in research and development, and we expect
costs of research and development to increase on an absolute basis in future
periods.
Sales and Marketing. Sales and marketing expenses increased from
approximately $134,000 for the six months ended September 30, 1998 to
approximately $2.5 million for the six months ended September 30, 1999. The
increase was primarily a result of growth in our direct sales force, and
marketing staffs with personnel related costs increasing by approximately $1.7
million, as well as an increase in promotional spending of approximately
$448,000 targeted at building our brand, increasing our client base and growing
sales and an increase in travel and entertainment expenses of $134,000. We
expect our sales and marketing expenses to significantly increase on an absolute
basis as we continue to grow our sales force and expand our marketing
activities.
20
<PAGE> 23
General and Administrative. General and administrative expenses increased
from $181,000 for the six months ended September 30, 1998 to approximately $2.2
million for the six months ended September 30, 1999. The increase was due
primarily to an increase in personnel related costs of approximately $894,000,
an increase in professional fees of approximately $279,000 primarily related to
our information technology infrastructure, an increase in facilities related
costs of $259,000, an increase in overhead costs of approximately $140,000
associated with the growth of our business, an increase in recruiting expenses
of $124,000, an increase in travel and entertainment expenses of $72,000, an
increase in accounting and legal fees of $72,000 and an increase in office
supply costs of $62,000.
Stock-based Compensation. We recorded unearned stock-based compensation of
approximately $194,000 during the six months ended September 30, 1998 and
approximately $12.7 million during the six months ended September 30, 1999,
which is being amortized over the period during which the options vest,
generally four years. Stock-based compensation recognized during the six months
ended September 30, 1998 was approximately $162,000 and during the six months
ended September 30, 1999 was approximately $3.3 million.
PERIOD FROM OCTOBER 16, 1997 (DATE OF INCEPTION) TO MARCH 31, 1998 AND YEAR
ENDED MARCH 31, 1999
Revenues. Total revenues increased from approximately $4,000 for the period
ended March 31, 1998 to approximately $1.3 million for the year ended March 31,
1999. The increase was primarily due to an increase in the number of clients
from three to 23 to whom we provide emarketing services, in addition to a
significant increase in the number of emails sent on behalf of our clients by
approximately 45 million.
Cost of Revenues. Cost of revenues increased from approximately $4,000 for
the period ended March 31, 1998 to approximately $674,000 for the year ended
March 31, 1999. The increase was primarily due to increased personnel costs of
approximately $300,000 associated with supporting a larger number of clients and
a higher volume of emails, as well as amortized costs of $141,000 associated
with expansion of our data center capacity and data center rent of approximately
$138,000. Gross margins were 48% for the year ended March 31, 1999. This
increase was primarily the result of higher capacity utilization as revenues
increased at a greater rate than associated costs.
Research and Development. Research and development expenses increased from
approximately $27,000 for the period ended March 31, 1998 to approximately
$966,000 for the year ended March 31, 1999. The increase was primarily due to an
increase in personnel related costs of approximately $555,000 and costs
associated with developing technologies which enhance the services provided to
our clients and make our operations more efficient.
Sales and Marketing. Sales and marketing expenses were not significant for
the period ended March 31, 1998 and were approximately $670,000 for the year
ended March 31, 1999. The increase was primarily a result of growth in our
direct sales and marketing staffs with personnel related costs increasing by
approximately $374,000, as well as an increase in promotional spending of
approximately $212,000, targeted at building our brand, increasing our client
base and growing sales.
General and Administrative. General and administrative expenses increased
from approximately $77,000 for the period ended March 31, 1998 to approximately
$1.2 million for the year ended March 31, 1999. The increase was due primarily
to an increase in personnel costs of approximately $400,000, outside contracts
of approximately $274,000 and an increase in overhead costs of approximately
$145,000 associated with the growth of our business.
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Stock-based compensation. During the year ended March 31, 1999, we recorded
unearned stock-based compensation of approximately $1.8 million which is being
amortized over the period during which the options vest, generally four years.
For the year ended March 31, 1999, we recognized amortization of stock-based
compensation of approximately $543,000 as a result of options granted to
employees and non-employees during the year. In addition, we recognized
additional stock-based compensation of approximately $614,000 in the year for
270,000 shares of common stock which we issued as a bonus to a founder.
Income Taxes. No provision for federal and state income taxes was recorded
as we incurred net operating losses from inception through September 30, 1999.
As of March 31, 1999 we had approximately $2.1 million of federal and state net
operating loss carryforwards which expire in varying amounts beginning in 2005.
Due to the uncertainty regarding the ultimate utilization of the net operating
loss carryforwards, we have not recorded any benefit for losses and a valuation
allowance has been recorded for the entire amount of the net deferred tax asset.
In addition, sales of our stock, including shares sold in this offering, may
further restrict our ability to utilize our net operating loss carryforwards.
QUARTERLY OPERATING RESULTS
The following table presents our historical unaudited quarterly results of
operations for our most recent six quarters. This data is unaudited and derived
from our audited annual financial statements and notes included elsewhere in
this prospectus. In the opinion of management, these quarterly financial
information has been prepared on the same basis as our annual financial
statements and includes all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial results included in the
table below. This statement of operations data should be read in conjunction
with the financial statements and related notes included in this prospectus. Our
results of operations have fluctuated and are likely to continue to fluctuate in
the future. Results of operations for any previous periods are not necessarily
comparable to future periods.
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1998 1999 1999 1999
-------- ------------- ------------ --------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................. $ 25 $ 96 $ 396 $ 790 $ 1,385 $ 1,872
Cost of revenues..................... 24 63 189 398 672 945
-------- ------- ------- ------- ------- -------
Gross margin......................... 1 33 207 392 713 927
-------- ------- ------- ------- ------- -------
Operating expenses:
Research and development........... 77 132 292 465 843 1,675
Sales and marketing................ 46 88 152 384 1,010 1,534
General and administrative......... 86 95 225 745 1,047 1,117
Stock-based compensation........... 95 67 110 885 977 2,318
-------- ------- ------- ------- ------- -------
Total operating expenses......... 304 382 779 2,479 3,877 6,644
-------- ------- ------- ------- ------- -------
Loss from operations................. (303) (349) (572) (2,087) (3,164) (5,717)
Interest income (expense), net....... 6 4 22 39 4 78
-------- ------- ------- ------- ------- -------
Net loss............................. $ (297) $ (345) $ (550) $(2,048) $(3,160) $(5,639)
======== ======= ======= ======= ======= =======
AS A PERCENTAGE OF REVENUES:
Revenues............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues..................... 96.0 65.6 47.7 50.3 48.5 50.5
-------- ------- ------- ------- ------- -------
Gross margin......................... 4.0 34.4 52.3 49.7 51.5 49.5
-------- ------- ------- ------- ------- -------
Operating expenses:
Research and development........... 308.0 137.5 73.7 58.9 61.0 89.5
Sales and marketing................ 184.0 91.7 38.4 48.6 72.9 81.9
General and administrative......... 344.0 99.0 56.8 94.3 75.6 59.7
Stock-based compensation........... 380.0 69.8 27.8 112.0 70.5 123.8
-------- ------- ------- ------- ------- -------
Total operating expenses......... 1216.0 398.0 196.7 313.8 280.0 354.9
-------- ------- ------- ------- ------- -------
Loss from operations................. (1212.0) (363.6) (144.4) (264.1) (228.5) (305.4)
Interest income (expense), net....... 24.0 4.2 5.6 4.9 0.3 4.2
-------- ------- ------- ------- ------- -------
Net loss............................. (1188.0)% (359.4)% (138.8)% (259.2)% (228.2)% (301.2)%
======== ======= ======= ======= ======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
From our inception to September 30, 1999, we funded our operations
primarily with $17.3 million raised through the private sale of our equity
securities. As of September 30, 1999, we had cash and cash equivalents of $7.2
million and availability of $900,000 under a leasing line of credit. Amounts
borrowed under this agreement of $1.1 million at September 30, 1999 bear
interest at rates of between 6.2% and 10.1% and are collateralized by the leased
assets.
Additionally, at September 30, 1999 we had $238,000 outstanding under a
loan and security agreement with a bank. The loan agreement provides for
borrowings of up to $350,000, $300,000 of which is collateralized by our
property and equipment. Under the terms of the loan agreement, some
transactions, including payment of dividends, are prohibited without the bank's
consent. The loan bears interest at the prime rate (8.25% at September 30, 1999)
plus 0.25% per annum.
Net cash used in operating activities was $96,000 for the period ended
March 31, 1998 and $2.0 million for the year ended March 31, 1999, primarily the
result of net losses of $103,000 for the period ended March 31, 1998 and $3.2
million for the year ended March 31, 1999, after adjusting for stock-based
compensation expense of $1.2 million for the year ended March 31, 1999. Net cash
used in operating activities was $4.3 million for six months ended September 30,
1999, primarily the result of net losses of $8.8 million, after adjusting for
stock-based compensation expense of $3.3 million.
Net cash used in investing activities was $31,000 for the period ended
March 31, 1998, $2.4 million for the year ended March 31, 1999 and $1.9 million
for the six months ended
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September 30, 1999. The cash used in investing activities was related to
purchases of property and equipment.
Net cash provided by financing activities was $1.2 million for the period
ended March 31, 1998 and $6.2 million for the year ended March 31, 1999. Cash
provided by financing activities was primarily from proceeds of the sale of our
preferred stock and the sale and leaseback of assets, as well as draws against
our line of credit. Net cash provided by financing activities was $10.5 million
for the three months ended September 30, 1999.
At September 30, 1999 we have rental obligations of approximately $454,000
for the remaining six months of the year ended March 31, 2000, $1,167,000 for
the year ended March 31, 2001, $1,172,000 for the year ended March 31, 2002 and
$824,000 for the year ended March 31, 2003. These leases are for approximately
29,400 square feet of office space for our headquarters in San Mateo,
California.
We believe that the net proceeds from this offering, together with our
current cash and cash equivalents and availability under our line of credit
facilities, will be sufficient to meet our anticipated cash needs for working
capital, repayment of debt and capital expenditures for at least the next twelve
months. We currently intend to spend between $3.0 million and $5.0 million on
capital expenditures over the next twelve months, with a focus on expanding our
email delivery capability. We plan to use the remaining proceeds from this
offering to fund operating activities, including sales and marketing, research
and development and general administrative services. After twelve months, we may
need additional capital. However, we may need to raise additional funds sooner
to fund additional expansion, develop new or enhanced services, respond to
competitive pressures or make acquisitions. We cannot be certain that additional
financing will be available to us on favorable terms. If adequate funds are not
available on acceptable terms, our business will be harmed.
YEAR 2000 READINESS DISCLOSURE
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish dates before and after January 1, 2000. This could result in system
failures or miscalculations causing disruption of operations for any company
using these computer programs or hardware. As a result, many companies' computer
systems may need to be upgraded or replaced in order to avoid Year 2000 issues.
We are a comparatively new enterprise, and, accordingly, the majority of
software and hardware we use to manage our business has all been purchased or
developed by us within the last 18 months. While this does not completely
protect us against Year 2000 exposure, we believe our exposure is limited
because recently-developed technology is generally Year 2000 compliant.
We are in the process of testing our technology and systems. The testing we
have completed has primarily been performed internally, and we have recently
retained a consultant to test and review our systems for Year 2000 compliance.
We currently expect that our consultant will complete its review by the end of
November. Based on the testing we have performed, we believe that our software
is Year 2000 compliant.
In addition, we rely on software and hardware developed by third parties,
which we have not independently tested to determine Year 2000 compliance. We
have reviewed certifications from our key equipment suppliers for our data
centers that their equipment is Year 2000 compliant. Additionally, we have
reviewed certifications from the providers of key software applications that
their software is Year 2000 compliant. Based on an initial evaluation of our
broader list of software and hardware providers, we believe that these providers
are in the process of reviewing and implementing
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<PAGE> 27
their own Year 2000 compliance programs. This initial evaluation consisted of
contacting each of our software and hardware vendors to determine the level of
their Year 2000 compliance. We will work with these providers, who have varying
timetables and plans for their Year 2000 compliance, to address the Year 2000
issue and continue to seek assurances from them that their products are Year
2000 compliant. Based on this initial evaluation, we believe that these
timetables and plans for Year 2000 compliance are adequate.
To date we have incurred less than $100,000 in costs associated with our
Year 2000 remediation efforts, and anticipate that any future costs will not
exceed $500,000. However, if we, or third party providers of hardware, software
and communications services fail to remedy any Year 2000 issues, the result
could be lost revenues, increased operating expenses, the loss of customers and
other business interruptions, any of which could harm our business. Moreover,
the failure to adequately address Year 2000 compliance issues in the delivery of
services to our clients could result in claims against us of misrepresentation
or breach of contract and related litigation, any of which could be costly and
time consuming to defend.
We have not developed any specific contingency plans for Year 2000 issues.
Our reasonably likely worst case scenario for Year 2000 problems would be our
inability to execute our clients' emarketing campaigns and the initiation by our
clients of associated litigation.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position 98-1, or SOP 98-1, "Software for Internal Use,"
which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. SOP 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. We believe that
the adoption of SOP 98-1 will not have a material impact on our financial
statements.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, or SOP 98-5, "Reporting on the Costs of Start-Up
Activities." This standard requires companies to expense the costs of start-up
activities and organization costs as incurred. In general, SOP 98-5 is effective
for fiscal years beginning after December 15, 1998. We believe the adoption of
SOP 98-5 will not have a material impact on our results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities. SFAS
133 requires that all derivatives be recognized at fair value in the statement
of financial position, and that the corresponding gains or losses be reported
either in the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exists. SFAS 133 will be
effective for fiscal years beginning after June 15, 2000. We do not currently
hold derivative instruments or engage in hedging activities.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We provide our services to clients primarily in the U.S. As a result, it is
unlikely that our financial results could be directly affected by factors such
as changes in foreign currency exchange rates or weak economic conditions in
foreign markets. All of our sales are currently denominated in U.S. dollars.
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the
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<PAGE> 28
increase or decrease in the amount of interest expense we must pay on our
outstanding debt instruments. The risk associated with fluctuating interest
expense is limited, however, to the exposure related to those debt instruments
and credit facilities which are tied to market rates. We do not plan to use
derivative financial instruments in our investment portfolio. We plan to ensure
the safety and preservation of our invested principal funds by limiting default
risk, market risk and reinvestment risk. We plan to mitigate default risk by
investing in high-credit quality securities.
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<PAGE> 29
BUSINESS
OVERVIEW
We offer internet direct marketing, or emarketing, services to businesses
that wish to communicate more effectively with their customers online through
email. We combine proprietary technologies, rigorous business processes and
expertise developed over thousands of email campaigns to provide a
comprehensive, outsourced emarketing solution. The services we provide are
designed to maximize our clients' return on their marketing investment.
Our core set of services includes campaign management, targeting and
personalization, email format optimization, campaign tracking and reporting, and
database hosting and management. We sell these services under the name Merchant
Mail. In addition, we recently introduced the Email Exchange Network, an online
marketing network that provides our clients with a new method to acquire
additional online customers.
INDUSTRY BACKGROUND
THE GROWTH OF INTERNET COMMERCE AND EMAIL
The explosive growth of the internet as a tool for global communications
and commerce has prompted a wide variety of businesses to develop strategies to
sell products and services online. International Data Corporation, or IDC,
estimates that worldwide commerce over the internet will increase from
approximately $50 billion in 1998 to $1.3 trillion in 2003. To attract and
retain a broader range of customers and increase ecommerce revenues, businesses
are seeking ways to more effectively communicate with their customers online.
Email is the most widely used application on the internet today and its
proliferation has been critical to the growth of ecommerce. Businesses use email
as the primary means to proactively communicate with their customers online. For
example, email is often used to confirm electronic transactions and to notify
customers of important new developments or product offerings. IDC estimates that
the number of electronic mailboxes worldwide will grow from approximately 240
million in 1998 to over 590 million by 2003, and that the number of emails sent
annually worldwide will grow from 809 billion to 4.8 trillion during the same
period.
THE EMERGENCE OF INTERNET DIRECT MARKETING
Businesses and other marketing organizations spent an estimated $285
billion on general advertising in 1998, of which $160 billion was spent on
direct marketing, according to the Direct Marketing Association. An increasing
percentage of this spending is expected to move into online forms of advertising
and direct marketing as businesses seek to grow their ecommerce revenues. Since
direct marketing expenditures have traditionally been larger than expenditures
for advertising, spending on internet direct marketing, or emarketing, is
expected to soon outpace internet advertising spending as a means to drive
ecommerce. Forrester Research projects total internet advertising expenditures
in the U.S. to increase from $1.3 billion in 1998 to over $10 billion in 2002.
Forrester also estimates that internet direct marketing will account for 60%, or
$6.2 billion, of these expenditures in 2002, up from 15% in 1998.
Emarketing allows businesses to cost-effectively target online customers
through customized email marketing campaigns. Initially, email did not gain wide
acceptance as an emarketing tool because of concerns regarding privacy and
unsolicited communication. With the recent advent of permission-based email,
where individuals sign up to receive information from specific sources on
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<PAGE> 30
topics of interest to them, email has become an increasingly important direct
marketing tool. Email, or emarketing campaigns offer significant advantages over
paper-based communications, including more rapid delivery, reduced cost and a
greater degree of personalization. Emarketing campaigns generate response rates
that are three to ten times higher than response rates for traditional direct
mail campaigns, based on information reported by Jupiter Communications.
CHALLENGES IN IMPLEMENTING EMARKETING PROGRAMS
Companies face significant challenges in effectively implementing
emarketing programs internally. These challenges include the difficulties and
costs associated with:
- Assembling and delivering high volumes of personalized email messages.
- Determining the most effective layout, copy and graphical email format
for each recipient.
- Tracking and analyzing large volumes of individual customer response
data.
- Hiring and retaining a team of specialized emarketing and technology
experts.
- Building and maintaining the necessary hardware and software
infrastructure.
- Rapidly setting-up, designing and executing successful emarketing
campaigns.
A company's failure to adequately address any of these challenges can
result in lost business opportunities and substantial damage to its brand. As a
result, we believe companies are seeking an outsourced solution that will enable
them to fully realize their emarketing objectives while maintaining a focus on
their core competencies.
THE DIGITAL IMPACT SOLUTION
We offer a comprehensive suite of emarketing services designed to maximize
our clients' return on their marketing investment. Our emarketing services
currently include direct email marketing services, customer acquisition tools,
customer data analysis and strategic consulting services and client support
services. We combine proprietary technologies, a rigorous process methodology
and the domain expertise of our client services professionals to create
emarketing campaigns for our clients. We provide our clients with a high quality
emarketing solution featuring accurate and timely delivery of email messages
with limited client oversight requirements. The benefits of our solution
include:
Targeted, relevant content. Through our proprietary technologies and
processes, we can dynamically assemble and deliver millions of personalized
emails based on recipient profiles. Each recipient's profile can include
demographic information, past response and purchase behavior and customizable
business rules. We continually update each individual profile with response data
that is typically captured in less than one second.
Personalized email formatting. Our email sensor technology enables us to
ensure that each recipient receives an email that fully utilizes the graphical
capabilities of that recipient's email software. This technology allows us to
deliver a particular email in one of several formats, including basic text,
America Online format, and hypertext markup language, or HTML, depending on the
recipient's email capabilities. Our use of rich graphical formats can
significantly increase the likelihood of a customer response.
Real-time performance tracking and campaign analysis. Using our campaign
management tools, we can track and analyze large volumes of customer response
data in real-time. By real-time we mean interactive communications or data
exchanges in less than one second. This capability allows our clients to quickly
execute test campaigns, gain valuable market research data, and evaluate the
effectiveness of alternative emarketing strategies. Clients can then launch
full-scale campaigns based on these test results, all within a short period of
time.
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Domain expertise. Our experience gained from designing and managing
thousands of email campaigns has allowed us to develop an emarketing process
built on best practices, a term we use to describe our accumulated knowledge of
effective emarketing strategies and techniques. This institutionalized process
provides us with a methodology to reliably execute each phase of a campaign,
from initial setup to results analysis and allows us to consistently deliver
valuable emarketing services to our clients.
Robust and scalable infrastructure. Our ongoing investments in hardware and
software enable us to reliably assemble and deliver large volumes of client
emails on a timely basis. We delivered over 29 million emails in September 1999
and have the capacity to deliver up to 180 million emails per month with our
existing hardware infrastructure. We have designed our systems and
infrastructure so that we can readily expand our capabilities in a
cost-efficient manner, which we refer to as scalable.
Significantly improved time to market. By leveraging our investment in
infrastructure and technology, combined with our institutionalized processes and
experience, our clients are able to deploy their emarketing campaigns rapidly
and reliably. This approach allows our clients to remain focused on their core
business competencies and enhance their competitive positions.
STRATEGY
Our objective is to be the leader in emarketing services. The following are
the key elements of our strategy:
Expand our service offerings. We intend to leverage our emarketing and
technology expertise to develop new tools, functionalities and features that
will enable us to maximize our clients' return on their marketing investment. By
working closely with our network of clients, we continually refine our
emarketing expertise to increase the value of each of our services.
Exploit new market opportunities. We believe there are significant
opportunities to introduce our services into new markets. The majority of our
emarketing clients to date have been traditional and online retailers. We intend
to expand our presence among clients in other consumer markets, in markets where
the customers are businesses rather than consumers, and in international
markets.
Leverage our database of consumer profiles. We intend to leverage our
database of consumer profiles to implement new services in a permission-based
environment. We believe that the increasing scope and depth of this database
will create opportunities for the sharing of information among our clients. This
will enable our network of clients to obtain broader and more meaningful
information about consumers than any single client would otherwise obtain on its
own.
Establish the Email Exchange Network as a leading service for client
acquisition. We recently began offering our clients the opportunity to
participate in the Email Exchange Network, a cooperative marketing network that
allows our clients to collectively acquire new customer information and share
email addresses in an opt-in, permission-based program. We believe that the
Email Exchange Network will provide us with an additional means to attract and
retain clients.
Build brand awareness and strategic alliances. To increase our brand
awareness, we are promoting our services to online marketers and advertising
agencies through the use of our web site, trade advertisements and selected
media events. We are also promoting our client success stories through the use
of case studies, technical papers and regular briefings with industry analysts.
We intend to build alliances with leading internet technology and service
providers to leverage their sales, marketing and engineering capabilities, and
to enhance awareness of our brand.
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SERVICES
We provide comprehensive services for executing personalized emarketing
campaigns designed to enable our clients to acquire and retain online customers.
Our primary suite of emarketing services, Merchant Mail, is sold as a single
service and currently consists of the following components:
- Email campaign management.
- Targeting and personalization.
- Media optimization.
- Tracking and reporting.
- Data hosting and management.
We also provide the Email Exchange Network, a service which enables our
clients to acquire new customers by sharing email addresses with each other,
with the consumer providing explicit consent.
EMAIL CAMPAIGN MANAGEMENT
We assign each client a client services manager, an emarketing specialist
who applies our extensive domain expertise and methodologies, to manage that
client's email campaigns. The campaign management process includes:
- Establishing rules for email personalization based upon each recipient's
profile and email software environment.
- Checking the quality of each email across over 30 email software
packages.
- Applying our accumulated knowledge base to analyze the results of each
campaign.
- Managing and ensuring the integrity of data transfers with our clients.
TARGETING AND PERSONALIZATION
We create targeted email messages for each customer based on our clients'
emarketing objectives. Our targeting and personalization capabilities include:
- Matching a particular email offer to the appropriate group of recipients
based on a pre-defined set of marketing parameters determined by our
clients. For example, in a recent campaign we emailed different offers to
multiple customer groups based on the timing of their last purchase from
that client. In another instance, we created and delivered emails
containing gardening advice tailored to each recipient's geographic
region.
- Automatically sending an email based on a pre-determined event or
schedule. For example, currently we help one of our clients sell
additional products by sending order confirmation emails containing
offers for related products to online purchasers. Although we do not
receive explicit consent for these order confirmation emails, we believe
that the purchase of a product constitutes consent for offers of this
type as long as the recipient is provided the opportunity to request not
to receive further emails. In each case, we provide the recipient the
opportunity to request not to receive further emails.
- Dynamically assembling unique emails using sophisticated algorithms and
statistical models to predict the content most relevant to each
recipient. For example, we recently assembled and
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delivered 35,000 unique emails, each featuring six different products
from a pool of 3,000 possible choices. The six products and the order in
which they were presented to each customer were determined on the basis
of the customer's purchase behavior, self-reported preferences and
demographic profile.
EMAIL FORMAT OPTIMIZATION
We use our email sensor technology to determine the optimal graphical
format for each recipient's email software environment. This technology enables
us to deliver email at the highest level of graphics and interaction currently
available to the recipient, including:
- Plain text emails with universal resource locator, or URL, links.
- Plain text emails with hyperlinked words that are blue and underlined.
- Emails tailored for subscribers of America Online with hyperlinked words
and font formatting.
- Hypertext markup language, or HTML, emails with advanced graphical
elements.
- Dynamic HTML and Java-based email with interactive capabilities greater
than HTML.
CAMPAIGN TRACKING AND REPORTING
We monitor and report the performance of our clients' email campaigns. The
data is collected at the individual customer level and includes the number and
percentage of:
- Emails successfully delivered.
- Emails rejected by email servers.
- HTML and dynamic HTML emails opened.
- Click throughs per campaign, per recipient and per specific offer.
- Email replies from customers.
DATA HOSTING AND MANAGEMENT
We collect, warehouse and manage key marketing elements of our clients'
customer information. In total, we manage over 20 million consumer profiles. Our
data hosting and management services include:
- Maintaining the integrity of our clients' email lists by purging
undeliverable addresses, correcting invalid addresses and eliminating
duplicate records.
- Developing and hosting web pages that transparently integrate with a
client's web site and that allow consumers to enter and update their
profile and subscription information.
- Capturing and processing real-time campaign response data at the
individual recipient level, including the recipient's email software
environment, whether the email was successfully delivered and opened and
which items were clicked on within the email.
- Automatically handling campaign email replies, including unsubscribe
requests, vacation notices, undeliverable messages, and forwarding of
customer service requests.
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THE EMAIL EXCHANGE NETWORK
We have created an online cooperative marketing network, the Email Exchange
Network, which provides our clients with a new customer acquisition model. Our
Email Exchange Network operates as follows:
- Clients select other participating clients with whom they would like to
share customer profiles.
- Clients include links to the Email Exchange Network web site in their
emails or on their web sites.
- Consumers click on these links to access the Email Exchange Network.
- Consumers choose the participating clients from whom they would like to
receive information, and complete an optional profile form.
- Each consumer's email address and optional profile information is
automatically added to the customer profile database of the selected
clients.
- Clients pay us for every consumer profile added and are credited when one
of their customers joins another participant's list.
CLIENTS
We began providing services in March 1998 and, as of September 30, 1999,
had 60 clients. Our clients consist of a diverse group of companies operating in
many industries throughout the United States, ranging from Fortune 100 to small
private companies. For the year ended March 31, 1999 Preview Travel, ONSALE and
The Gap accounted for 26.8%, 11.5% and 10.9% of our revenues. For the six months
ended September 30, 1999, ONSALE, Garden.com, Preview Travel and The Gap
accounted for 9.7%, 8.4%, 8.4% and 8.2% of revenues. During the six months ended
September 30, 1999, we completed a campaign for each of the following clients:
Agency.com
Another Universe
BMG Direct
Barnes and Noble
Cooking.com
Digital Work
Doughnet
eBay
Financial Engines
Flooz.com
Fogdog Sports
Furniture.com
The Gap
Garden.com
Harte-Hanks
Hewlett-Packard
iGo (formerly 1-800-Batteries)
iTurf (formerly Delias)
Knight-Ridder New Media
Macy's
Mastercard
Medscape
Netcentives
Nextag
Omaha Steaks
ONSALE
Peet's Coffee and Tea
Pets.com
Reel.com
Service Merchandise
Sharper Image
Smarter Kids
Sprint
Tavolo (formerly Digital Chef)
Tektronix
Tower Records
Universal Studios
Wine.com
(formerly Virtual Vineyards)
yourPharmacy.com
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SELECTED CLIENT CASE STUDIES
The following case studies illustrate different components of the
emarketing services we perform for our clients. The clients described in these
case studies are current clients, and they did not, in the aggregate, constitute
more than 15% of our revenues for the quarter ended September 30, 1999.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
SERVICE
CLIENT COMPONENT SUMMARY OF CASE STUDY
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
The Sharper Image Email Campaign The Sharper Image, a specialty gifts retailer tested
Management and validated new emarketing strategies with the aid of
our campaign management system. Over the course of
several months, we measured the effectiveness of
promotions and email layouts based on the
characteristics of different customer groups. Using the
results of these tests, The Sharper Image refined their
emarketing strategy to increase the frequency and size
of customer orders. We began working with The Sharper
Image in May 1998.
- -----------------------------------------------------------------------------------------------------
ONSALE Targeting and ONSALE, an online auction retailer, used our services
Personalization to target and deliver personalized email offers to
their customers. We adapted our data modeling system to
assemble personalized emails containing offers for
selected ONSALE customers based on their bid and buy
behavior in previous auctions. This model utilized
daily customer response data to improve the
effectiveness of the campaigns over time. We began
working with ONSALE in November 1998.
- -----------------------------------------------------------------------------------------------------
Peet's Coffee & Tea Media Optimization Peet's Coffee and Tea, a gourmet beverage retailer,
used our email sensor technology to determine the
graphical capabilities of each recipient's email. We
then delivered a New Yorker cartoon to those customers
who could view graphics in their email. All other
customers received an email containing a hyperlink to
the Peet's web site where the cartoon was displayed. We
began working with Peet's in April 1999.
- -----------------------------------------------------------------------------------------------------
Tower Records Tracking and Tower Records, a leading music retailer, used our
Reporting services to track and report their customers' music
interests. We provided them with comprehensive
reporting on those customers who responded to each
emarketing campaign, the timing of that response, and
the revenue and return on investment per campaign.
Using our services, Tower Records was able to gauge
customer reaction to its outbound emarketing campaigns
and gain insight into online customer behavior. We
began working with Tower Records in March 1998.
- -----------------------------------------------------------------------------------------------------
</TABLE>
SALES AND MARKETING
We sell our services primarily through direct sales representatives located
in San Mateo, California and New York City. We focus our sales efforts on the
senior marketing and business executives of our prospective clients. Our sales
personnel tailor their demonstrations and proposals to address each client's
particular needs.
We complement our direct sales force by entering into arrangements with
leading companies in the direct marketing and advertising industries. We have an
agreement with Harte-Hanks, a large direct marketing company, under which we are
the exclusive provider of emarketing services sold by Harte-Hanks' over 200
national and international sales representatives. In addition, we recently
launched a marketing program to enable advertising agencies to offer our
services to their clients.
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<PAGE> 36
Our marketing strategy is to build and promote our brand and to generate
qualified leads for our sales team. We focus our marketing efforts on dedicated
Internet companies as well as traditional companies seeking to take advantage of
the commercial opportunities presented by ecommerce. We rely on a range of
marketing activities to pursue our objectives, including trade shows, trade
advertisements, selected media events and our own web site. We publish
additional marketing materials to support the sales process, including company
brochures, feature descriptions, technology research papers and client case
studies.
CLIENT SERVICES
Our client services group is responsible for the ongoing support of our
clients. Based on the specific requirements of their emarketing campaigns, each
client is assigned a team that typically consists of the following personnel:
- A client services manager, responsible for the overall relationship and
coordination of activities to effectively serve our client.
- A production specialist, responsible for integration of content and
offers to be sent in our client's email campaigns.
- A graphic designer, responsible for the creation of the graphic design
elements for the campaigns.
- A marketing analyst, responsible for testing services and for providing
insight into the results of campaigns.
For clients that require additional services, the client services manager
has access to a staff of marketing statisticians and engineers capable of
creating complex statistical models, developing extensions to our core services,
and identifying and analyzing relationships and trends in our clients' marketing
data, which we refer to as data mining.
TECHNOLOGY
Our technology organization is responsible for research and development,
systems integration quality assurance and network operations. We have designed
an architecture based in part on proprietary technologies and in part on
licensed technologies.
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<PAGE> 37
ARCHITECTURE
Our scalable, distributed architecture is based on a publish-and-subscribe
model and parallel computing technology. The key components of our architecture
are illustrated in the chart below:
[GRAPHIC]
[Graphical diagram consisting of a set of labeled boxes and stylized
illustrations, connected to each other by arrows. In the center of the diagram
is a box labeled 'Data Warehouse,' which is connected by bi-directional arrows
to three other boxes positioned to the left, right, and above the 'Data
Warehouse' box. These three boxes are labeled 'Client Information,' Assembly and
Delivery Engine,' and 'Campaign Management.'
The 'Campaign Management' box contains three smaller boxes, labeled from left to
right 'Data Mining,' 'Campaign Configuration,' and 'Reporting.'
The box labeled 'Assembly and Delivery Engine' has three outbound arrows which
are connected to three identical stylized envelopes, each labeled 'email.' Each
of these stylized envelopes has an outbound arrow connecting it to a stylized
drawing of a person, and from there to a box labeled 'Response Handler.' This
box is connected using an outbound arrow to the box labeled 'Data Warehouse.']
Client Information. We use proprietary software tools to import a client's
customer profile information and email content elements, and convert them into a
format compatible with our data warehouse.
Data Warehouse. Our data warehouse currently stores over 20 million
customer profiles, each of which may include consumer preferences, demographics,
transaction histories and emarketing response data. The data warehouse also
contains the assembly instructions for our clients' emarketing campaigns.
Information in our data warehouse is organized by use of a proprietary set of
tables and relationships to optimize the performance and scalability of the
other system components.
Campaign Management. We use a variety of campaign management tools that
enable our client services managers to implement emarketing campaigns. These
tools consist of the following:
- Data mining. We employ various technologies to review and analyze
customer response data, transaction histories, web site tracking data and
customer-reported preference data to identify patterns of behavior and
predict subsequent purchase behavior.
- Campaign configuration. Our campaign configuration system is a
proprietary software application used to configure the content,
targeting, formatting and delivery timing of our clients' emarketing
campaigns.
- Reporting. We provide immediate reporting of campaign results to our
clients. We deliver these reports to our clients as spreadsheet
attachments to an email, through their internet browser or as raw data
files.
Assembly and Delivery Engine. Our email assembly and delivery engine is
designed to construct, format and deliver large volumes of personalized email on
behalf of our clients. The modules of this
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<PAGE> 38
engine are optimized for specific tasks, including dynamic email assembly, high
volume email delivery, graphical content serving and load management.
Response Handler. We use proprietary web-based software to track the
delivery of our email transmissions and each recipient's response to those
emails. We track emails delivered, emails opened, emails rejected, unsubscribe
requests and recipients' responses to our clients' offers. We also use our
proprietary email sensor to automatically detect a recipient's ability to
display emails in media formats other than plain text, such as HTML, dynamic
HTML and Java-based content.
NETWORK OPERATIONS AND SYSTEM SECURITY
Our servers are located at Exodus Communications in Santa Clara,
California. Exodus provides uninterrupted internet access with an aggregate
network capacity of over 17 gigabits per second. Additionally, Exodus provides
power, climate control and monitoring services 24 hours per day, seven days per
week. We plan to add a similar facility in the eastern United States within the
next 12 months. Our internal network operations are managed by experienced
systems architects and security experts who provide around the clock operations
and database administration support.
Our data center consists of over 100 Sun Microsystems and Intel-based
servers. These servers are connected to a high speed network backbone. Our
production and internal networks are protected by a fault-tolerant firewall
system that filters all network communications. We have also implemented a
secure link with our corporate office facility that allows direct and secure
access to our data center systems, enabling timely campaign administration.
CORE TECHNOLOGIES
We utilize a number of industry-standard technologies to support our
architecture. Our software is written primarily in the Java programming
language, enabling us to build reusable components and designs. We also use the
extensible markup language, or XML, to facilitate the dynamic assembly of
emails. We use Sun Solaris, Linux and Microsoft Windows NT operating systems
running on Sun Microsystems and Intel-based servers.
We also license technologies from a number of third parties. Our data
warehouse is managed using Oracle 8.0 database software. The performance of our
email assembly and delivery engine is monitored using software licensed from
TIBCO, which also allows us to easily install additional servers to increase
capacity without service interruptions. Campaign results are reported on the
internet to clients using software we license from Actuate.
COMPETITION
The market for emarketing services is intensely competitive, rapidly
evolving and experiences rapid technological change. We expect competition to
increase significantly in the future because of the attention the internet has
received as a means of advertising and direct marketing and because there are no
significant barriers to entry into our market.
We believe that the factors on which we compete include:
- Credibility of clients and their willingness to act as references.
- Quality and features of emarketing services.
- Quality of customer service.
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<PAGE> 39
- Sophistication and reliability of core technology.
- Speed of implementation of emarketing campaigns.
- Cost-effectiveness of a given solution.
Although we believe that our solution currently competes favorably as to
each of these factors, our market is relatively new and is evolving rapidly. We
may not be able to maintain our competitive position against current and
potential competitors.
Our principal competitors include providers of emarketing services such as
@Once, Acxiom and its affiliate Bigfoot, Exactis.com, Kana Communications,
L-Soft, Media Synergy, Message Media, Net Creations, Responsys.com and
Yesmail.com. We also compete with the information technology departments of
current and prospective clients.
We may experience additional competition from internet service providers,
advertising and direct marketing agencies and other large established businesses
such as America Online, DoubleClick, Microsoft, IBM, AT&T, Yahoo!, ADVO and the
Interpublic Group of Companies. Each of these companies possess large, existing
customer bases, substantial financial resources and established distribution
channels and could develop, market or resell a number of emarketing services.
These potential competitors may also choose to enter the market for emarketing
services by acquiring one of our existing competitors or by forming strategic
alliances with these competitors. Any of these occurrences could harm our
ability to compete effectively.
Many of our current and potential competitors have longer operating
histories, greater name recognition, larger customer bases, more diversified
lines of products and services and significantly greater resources than we have.
These competitors may be able to devote significant resources to sales and
marketing, adopt more aggressive pricing policies and deliver superior
solutions. In addition, many of our current or potential competitors have broad
distribution channels that may be used to bundle competing products or services.
If such competitors bundle competing products or services, the demand for our
services could substantially decline. As a result, we cannot assure you that we
will compete effectively with our current or future competitors or that
competitive pressures will not harm our business.
INTELLECTUAL PROPERTY RIGHTS
Our success and ability to compete are substantially dependent upon our
technology and intellectual property. While we rely on copyright, trade secret
and trademark law to protect our technology and intellectual property, we
believe that factors such as the technological and creative skills of our
personnel, new service developments and frequent service enhancements are more
essential to establishing and maintaining an intellectual property leadership
position. We have two U.S. patent applications pending and two U.S. trademark
applications pending.
We generally enter into confidentiality agreements with our employees and
consultants. Our confidentiality agreements generally require our employees and
consultants to hold in confidence and not disclose any of our proprietary
information. Despite our efforts to protect our proprietary information,
unauthorized parties may attempt to obtain and use our proprietary information.
Policing unauthorized use of our proprietary information is difficult, and the
steps we have taken might not prevent misappropriation, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as do
the laws of the United States.
We have filed for trademark protection for the mark Digital Impact in the
European Community, which includes the following member countries: Austria,
Belgium, Denmark, Finland,
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<PAGE> 40
France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal,
Spain, Sweden and the United Kingdom. We have also filed for trademark
protection for the mark Digital Impact in Japan. Other than these actions, we
have not taken substantial additional steps to protect our intellectual property
in jurisdictions other than the United States.
We collect and use data derived from our clients. This creates the
potential for claims to be made against us, either directly or through
contractual indemnification provisions with customers, including copyright or
trademark infringement, invasion of privacy or other legal theories. Although we
carry general liability insurance, our insurance may not cover potential claims
of this type or may not be adequate to indemnify us for all liability that may
be imposed.
Substantial litigation regarding intellectual property rights exists in the
technology industry. From time to time, third parties have asserted and may
assert exclusive patent, copyright, trademark and other intellectual property
rights to technologies and related standards that are important to us. We expect
that we may increasingly face infringement claims as the number of competitors
in our industry segments grows and the functionality of products and services in
different industry segments overlaps. In addition, we believe that many of our
competitors have filed or intend to file patent applications covering aspects of
their technology that they may claim our intellectual property infringes.
Although we have not been party to any litigation asserting claims that allege
infringement of intellectual property rights, we cannot assure you that we will
not be a party to litigation in the future. Any third party claims, with or
without merit, could be time-consuming to defend, result in costly litigation,
divert management's attention and resources or require us to enter into royalty
or licensing agreements. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to us, if at all. A successful claim of
infringement against us could harm our business.
GOVERNMENT REGULATION
Legislation has recently been enacted in several states restricting the
sending of unsolicited commercial email. The federal government and several
other states are considering, or have considered, similar legislation. Although
the provisions of these current and contemplated laws vary, they generally limit
or prohibit both the transmission of unsolicited commercial emails and the use
of forged or fraudulent routing and header information. Some states, including
California, require that unsolicited emails include opt-out instructions and
that senders of such emails honor any opt-out requests. We believe that our
current suite of services will not be affected by such legislation because we do
not send unsolicited commercial email. We cannot assure you that future
legislation or the application of existing legislation will not harm our
business.
There is a growing body of laws and regulations applicable to access to or
commerce on the internet. Due to the increasing popularity and use of the
internet, it is likely that a growing number of laws and regulations will be
adopted at the international, federal, state and local level relating to the
internet or emarketing services covering issues such as user privacy, pricing,
content, copyrights, distribution, antitrust and characteristics and quality of
services. Further, the growth and development of the market for emarketing may
prompt calls for more stringent consumer protection laws that may impose
additional burdens on those companies conducting business online. The adoption
of any additional laws or regulations may impair the growth of the internet or
emarketing, which could, in turn, decrease the demand for our services and
increase our cost of doing business. Moreover, the applicability to the internet
of existing laws in various jurisdictions governing issues such as property
ownership, sales and other taxes, libel and personal privacy is uncertain and
may take years to resolve. Any such new legislation or regulation, the
application of laws and regulations from jurisdictions whose laws do not
currently apply to our business or the application of existing laws and
regulations to the internet could harm our business.
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EMPLOYEES
As of September 30, 1999, we had a total of 127 employees, all of whom were
full-time employees. Of the total number of employees, 50 were engaged in
research and development, 24 in sales, marketing and business development, 36 in
professional services and technical support and 17 in finance, administration
and operations. Our future performance depends in significant part upon the
continued service of our key technical, sales and senior management personnel.
Our future success also depends on our continuing ability to attract, train and
retain highly qualified technical, sales and managerial personnel. Competition
for such personnel is intense, and we may not be able to retain our key
personnel in the future. None of our employees is represented by a labor union.
We have not experienced any work stoppages and consider our relations with our
employees to be good.
FACILITIES
Our principal executive offices are located in San Mateo, California, where
we lease approximately 29,400 square feet under two leases that expire in 2002
and 2003.
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<PAGE> 42
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The following table provides information regarding our executive officers,
key employees and directors as of September 30, 1999:
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS AND DIRECTORS AGE POSITION(S)
-------------------------------- --- -----------
<S> <C> <C>
William Park................................ 32 Chief Executive Officer and Chairman of the
Board of Directors
Gerardo Capiel.............................. 31 Chief Technology Officer and Director
David Oppenheimer........................... 42 Vice President, Finance, Chief Financial
Officer, Treasurer and Secretary
Ronald Rasmussen............................ 36 Vice President, Engineering and Operations
Raymond Kaupp............................... 47 Vice President, Marketing and Business
Development
Alan Flohr.................................. 34 Vice President, Sales and Client Services
Ruthann Quindlen............................ 45 Director
Warren Packard.............................. 31 Director
Michael Brown............................... 40 Director
</TABLE>
<TABLE>
<CAPTION>
KEY EMPLOYEES
-------------
<S> <C> <C>
Harry Drake................................. 32 Vice President, Client Services Engineering
Brian Platter............................... 34 Vice President, Product Management
</TABLE>
William Park has served as our Chief Executive Officer since July 1999 and
serves as Chairman of our board of directors, a position he has held since he
co-founded Digital Impact in October 1997. From October 1997 through June 1999,
Mr. Park served as our President. From July 1996 until November 1996, Mr. Park
was Director of Profile Marketing for NetAngels, an Internet company focused on
web personalization technologies. From 1989 to 1994, Mr. Park held a variety of
marketing positions at ZAI*NET Software, Inc., an enterprise software company,
where he became Vice President of Marketing in 1993. Mr. Park holds a B.A. from
the University of Pennsylvania and an M.B.A. from Stanford University.
Gerardo Capiel has served as our Chief Technology Officer and as a member
of our board of directors, a position he has held since he co-founded Digital
Impact in October 1997. From August 1996 to August 1997, Mr. Capiel was Director
of Internet/Internet Solutions for Altro Solutions, an information technology
and business process consulting firm. From June 1995 to September 1995, Mr.
Capiel was a marketing analyst at Broadvision, an Internet applications software
company. Prior to that, Mr. Capiel held various positions at Altro Solutions.
Mr. Capiel holds a B.S. in engineering systems and computation from the
Massachusetts Institute of Technology and an M.B.A. from Stanford University.
David Oppenheimer has served as our Vice President, Finance and Chief
Financial Officer since July 1999. From November 1997 to July 1999, Mr.
Oppenheimer was Vice President, Finance for Autodesk, Inc., a supplier of design
and visual effect software. From January 1995 to November 1997, Mr. Oppenheimer
held several positions with AlliedSignal, Inc., an advanced technology and
manufacturing company, including Chief Financial Officer of AlliedSignal
Electronic Materials, Vice President of Finance for AlliedSignal Aerospace
Services and Controller of AlliedSignal Engines. From August 1985 to January
1995, Mr. Oppenheimer was employed by
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<PAGE> 43
United Airlines, a commercial air transportation company, most recently as
Division Controller. Mr. Oppenheimer holds a B.S. in mechanical engineering from
State University of New York, Buffalo and an M.B.A. from the University of
California, Berkeley.
Ronald Rasmussen has served as our Vice President, Engineering and
Operations since October 1999. From September 1997 to October 1999, Mr.
Rasmussen served as Vice President, Engineering and Product Development of The
Santa Cruz Operation Inc., a business systems software company. From 1993 to
September 1997, Mr. Rasmussen served as Director of Engineering of The Santa
Cruz Operation Inc. Prior to that, Mr. Rasmussen served in a variety of senior
software engineering positions for Hewlett-Packard. Mr. Rasmussen holds a B.A.
in economics and a B.A. computer science from the University of California,
Santa Cruz.
Raymond Kaupp has served as our Vice President, Marketing and Business
Development since April 1998. From July 1993 to March 1998, Mr. Kaupp served as
President of UGC, a catalog retailer. From January 1988 to July 1993, Mr. Kaupp
held a variety of marketing management positions at Apple Computer, a computer
manufacturer. Prior to that, Mr. Kaupp served as a marketing manager at Metaphor
Computer Systems, a decision support systems company. Mr. Kaupp holds a B.S. in
business administration from San Diego State University and an M.B.A. from the
University of California, Berkeley.
Alan Flohr has served as our Vice President, Sales and Client Services
since August 1999. From April 1999 to August 1999, Mr. Flohr served as Vice
President, Sales. From May 1995 to April 1999, Mr. Flohr was employed by Advo
Incorporated, a direct mail marketing company, as Vice President of Strategic
Account Development, Vice President of Field Marketing and Director of Marketing
Planning. From December 1992 to April 1995, Mr. Flohr co-founded and served as
principal of New Paradigm Ventures, a marketing consulting and venture capital
company. Mr. Flohr holds a B.S. in industrial engineering from State University
of New York, Buffalo and an M.B.A. from The Amos Tuck School of Business
Administration at Dartmouth College.
Ruthann Quindlen has served as a member of our board of directors since
November 1998. Since June 1994, Ms. Quindlen has been a general partner of
Institutional Venture Partners, a venture capital investment firm. Ms. Quindlen
serves on the board of directors of Mpath Inc., an Internet media company, and
on the board of directors of several private companies. Ms. Quindlen holds a
B.S. in economics from Georgetown University and an M.B.A. from the Wharton
School of the University of Pennsylvania.
Warren Packard has served as a member of our board of directors since March
1998. Mr. Packard is a partner of Draper Fisher Jurvetson, a position he has
held since June 1997. From January 1996 to June 1997, Mr. Packard founded and
served as the Vice President of Business Development of Angara Database Systems.
From June 1996 to January 1997 Mr. Packard was an associate at Institutional
Venture Partners. Mr. Packard also serves on the board of directors of several
private companies. Mr. Packard holds a B.S. and M.S. in mechanical engineering
and an M.B.A. from Stanford University.
Michael Brown has served as a member of our board of directors since
September 1999. Mr. Brown also serves as Chief Executive Officer of Quantum
Corporation, a data storage company, a position he has held since September
1995. In May 1998, he was also appointed Chairman of the Board of Quantum. Prior
to September 1995, Mr. Brown held several other positions at Quantum. Mr. Brown
holds a B.A. in economics from Harvard University and an M.B.A. from Stanford
University.
Harry Drake has served as our Vice President, Client Services Engineering
since July 1999. Mr. Drake joined Digital Impact in February 1999 as Director,
Client Services Engineering. From
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March 1994 until February 1999, Mr. Drake was a Director for Altro Systems, an
information technology and business process consulting firm. Mr. Drake holds a
B.A. in economics from the University of California, Berkeley.
Brian Platter has served as our Vice President, Product Management since
May 1999. Mr. Platter joined Digital Impact in April 1998 and served as
Director, Client Services through April 1999. From July 1997 to January 1998,
Mr. Platter worked for Fujitsu Computer Products of America, an information
technology company. From June 1994 until July 1997, Mr. Platter served as a
Senior Consultant for Gemini Management Consulting, a management consulting
firm. Mr. Platter holds a B.S. in mechanical engineering from the University of
Colorado and an M.B.A. from Stanford University.
BOARD COMPOSITION
Our certificate of incorporation provides for a classified board of
directors consisting of three classes of directors, each serving staggered
three-year terms. As a result, a portion of the board of directors will be
elected each year. To implement the classified structure, prior to the
consummation of the offering, two of the nominees to the board will be elected
to a one-year term, one will be elected to a two-year term and two will be
elected to three-year terms. Subsequently, directors will be elected for
three-year terms. Mr. Capiel and Mr. Packard have been designated Class I
directors whose term expires at the 2000 annual meeting of stockholders. Ms.
Quindlen has been designated a Class II director whose term expires at the 2001
annual meeting of stockholders. Mr. Brown and Mr. Park have been designated
Class III directors whose term expires at the 2002 annual meeting of
stockholders. There are no family relationships among any of our directors,
officers or key employees.
BOARD COMMITTEES
We established an audit committee in September 1999 and a compensation
committee in July 1999.
Our audit committee consists of Ms. Quindlen and Mr. Packard. The audit
committee reviews internal accounting procedures and consults with and reviews
the services provided by our independent accountants.
Our compensation committee consists of Ms. Quindlen and Mr. Brown. The
compensation committee establishes salaries, incentives and other forms of
compensation for officers and other employees. This committee also administers
our incentive compensation and benefit plans.
DIRECTOR COMPENSATION
Directors do not currently receive any cash compensation from us for their
service as members of the board of directors. Directors who are employees of
Digital Impact are eligible to participate in our 1998 stock plan and our 1999
employee stock purchase plan. Directors who are not employees of Digital Impact
are eligible to participate in our 1999 director option plan. Our 1999 director
option plan generally provides for an automatic initial grant of an option to
purchase 20,000 shares of our common stock to each non-employee director on the
later to occur of the effective date of the plan or the date on which a person
first becomes a non-employee director. After the initial grant, a non-employee
director will be granted a subsequent option to purchase 5,000 shares of our
common stock each year on the date of our annual meeting of stockholders, if on
such date he or she has served as a director for at least six months. These
grants have a term of ten years. Each initial option grant will vest as to 25%
of the shares issuable under the option on each anniversary of its date of grant
and each subsequent option grant will vest as to 100% of the shares issuable
under the option on each
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<PAGE> 45
anniversary of its date of grant. The exercise price of all options will be 100%
of the fair market value per share of our common stock on the date of grant. For
an additional description of these option plans, please refer to our discussion
under "-- Compensation Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of our compensation committee is an officer or employee
of Digital Impact. No interlocking relationship exists between our board of
directors or compensation committee and the board of directors or compensation
committee of any other company, nor has such an interlocking relationship
existed in the past. Ms. Quindlen, a member of our compensation committee, is a
general partner of Institutional Venture Partners, a stockholder of our company.
For more information on this relationship, please refer to "Related Party
Transactions."
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
Mr. Oppenheimer is party to an employment agreement, dated July 29, 1999,
effective as of August 2, 1999. Under the agreement, we agreed to pay Mr.
Oppenheimer an annual salary of $225,000, and granted him an option to purchase
275,000 shares of our common stock. The shares issuable under this option will
vest over a four year period, with 6.25% of these shares vesting at the end of
the first three months of employment and the remaining shares will vest monthly.
If Mr. Oppenheimer is terminated without cause, he will be entitled to receive
continued payment of his base salary for three months as severance. If within
twelve months of a change in control, Mr. Oppenheimer's employment is terminated
without cause or he terminates his employment as a result of a reduction in his
compensation, a change in his responsibilities or refusal of the successor
company to assume our responsibilities under the employment agreement, 50% of
his unvested shares shall have their vesting accelerated in full as of the date
of termination. A change of control is defined as a merger or reorganization in
which we are not the surviving corporation, our transfer of all or substantially
all of our assets, our liquidation or dissolution, or if any person becomes the
beneficial owner of 50% or more of our voting stock.
Mr. Flohr is party to an employment agreement, dated March 12, 1999,
effective as of April 1, 1999. Under this agreement, we agreed to pay Mr. Flohr
an annual salary of $165,000, and granted him an option to purchase 300,000
shares of our common stock. Mr. Flohr is also eligible to receive a sales
commission of $85,000 upon achieving his sales quota. The shares issuable under
this option will vest over a four year period, with 12.5% of these shares
vesting at the end of six months and the remaining shares will vest monthly. If
Mr. Flohr is terminated without cause, he will be entitled to receive continued
payment of his base salary for six months as severance.
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EXECUTIVE COMPENSATION
The following table includes the compensation earned for services rendered
to us in all capacities for the fiscal year ended March 31, 1999 by our Chief
Executive Officer and our other most highly compensated executive officer who
earned more than aggregate cash compensation of $100,000 during the fiscal year
ended March 31, 1999. These executives are referred to as the named executive
officers in this prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL ------------
COMPENSATION SECURITIES
-------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS
--------------------------- --------- -------- ------------
<S> <C> <C> <C>
William Park............................................ $ 83,333 $ -- --
Chief Executive Officer
Raymond Kaupp........................................... 131,969 7,875 260,820
Vice President, Marketing and Business Development
</TABLE>
Mr. Park has served as our Chief Executive Officer since July 1999. Prior
to that time, we did not have a Chief Executive Officer. Mr. Park, as our
President, acted in a capacity similar to Chief Executive Officer during that
period. Mr. Park, Mr. Capiel and Mr. Kaupp are currently compensated at annual
rates of $200,000, $175,000 and $175,000, respectively. Messrs. Oppenheimer,
Flohr and Rasmussen were hired as executive officers subsequent to March 31,
1999 and are compensated at annual rates of $225,000, $200,000 and $175,000,
respectively.
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows information regarding stock options granted to
each of the named executive officers in the fiscal year ended March 31, 1999,
including the potential realizable value over the term of the options which may
be five to ten years, based on assumed rates of stock appreciation of 5% and
10%, compounded annually. These assumed rates of appreciation comply with the
rules of the Securities and Exchange Commission and do not represent our
estimate of future stock price. Actual gains, if any, on stock option exercises
will be dependent on the future performance of our common stock.
The percentages below are based on a total of 1,964,804 shares issuable
under options granted by us during the year ended March 31, 1999 to employees,
directors and consultants. All options were granted under our 1998 stock plan at
exercise prices at the fair market value of our common stock on the date of
grant, as determined in good faith by the board of directors. All options listed
below are immediately exercisable upon grant; however, any unvested shares may
be repurchased by us at their cost if the optionee's service with us terminates.
All option shares listed in the table below vest over four years, with 25% of
the option shares vesting one year after the option grant date, and the
remaining option shares vesting ratably each month thereafter.
The potential realizable values below assume that the initial public
offering price of $15.00 per share was the fair market value of the common stock
on the date of grant and that the price of the applicable stock increases from
the date of grant until the end of the ten year option term at the annual rates
specified. There is no assurance provided to any holder of our securities that
the actual
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<PAGE> 47
stock price appreciation over the ten year option term will be at the assured 5%
and 10% levels or at any other defined level.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SHARES PERCENTAGE OF PRICE APPRECIATION FOR
UNDERLYING TOTAL OPTIONS EXERCISE OPTION TERM
OPTIONS GRANTED TO PRICE EXPIRATION -------------------------
NAME GRANTED EMPLOYEES PER SHARE DATE 5% 10%
---- ---------- ------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
William Park................ -- --% $ -- -- $ -- $ --
Raymond Kaupp............... 260,820 13.3 0.02 4/29/08 6,367,508 10,142,282
</TABLE>
FISCAL YEAR-END OPTION VALUES
The following table provides summary information concerning the shares of
common stock represented by outstanding stock options held by each of the named
executive officers as of March 31, 1999. No options were exercised by the named
executive officers during the year ended March 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
MARCH 31, 1999 MARCH 31, 1999
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William Park........................ -- -- $ -- --
Raymond Kaupp....................... 260,820 -- 663,787 --
</TABLE>
These values are based on the deemed fair market value as of March 31,
1999, minus the exercise price, multiplied by the number of shares underlying
the option.
In April 1999, we granted to Mr. Flohr options to purchase 300,000 shares
of common stock at an exercise price of $0.25 per share. In July 1999, we
granted to Mr. Oppenheimer options to purchase 275,000 shares of common stock at
an exercise price of $2.50 per share. In August 1999, we granted to Mr. Flohr
options to purchase 100,000 shares of common stock at an exercise price of $2.50
per share. In September 1999, we granted to Mr. Kaupp options to purchase 50,000
shares of common stock at an exercise price of $2.50 per share. In October 1999,
we granted to Mr. Rasmussen options to purchase 202,500 shares of common stock
at an exercise price of $5.00 per share. These options vest over a four year
period.
COMPENSATION PLANS
AMENDED AND RESTATED 1998 STOCK PLAN
Our amended and restated 1998 stock plan provides for the grant of
incentive stock options to employees, including officers and employee directors,
and for the grant of nonstatutory stock options and stock purchase rights to
employees, directors and consultants. The 1998 stock plan was originally adopted
by our board of directors and approved by the stockholders in March 1998, and
was amended and restated by our board of directors in September 1999 and
approved by the stockholders in October 1999. Unless terminated sooner, the 1998
stock plan will terminate automatically ten years from the date of obtaining
stockholder approval.
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<PAGE> 48
A total of 8,795,000 shares of our common stock has been reserved for
issuance under this plan. In addition, annual increases will be added to the
1998 stock plan, beginning on January 1, 2001, equal to the lesser of 1,500,000
shares, 4% of the outstanding shares or an amount determined by our board of
directors. As of September 30, 1999, options to purchase 3,517,715 shares of
common stock were outstanding under the 1998 stock plan and 4,521,000 were
available for further issuance.
The administrator of our 1998 stock plan has the power to determine, among
other things:
- the terms of the options or stock purchase rights granted, including the
exercise price of the option or stock purchase right;
- the number of shares issuable under each option or stock purchase right;
- the exercisability of each option or stock purchase right; and
- the form of consideration payable upon the exercise of each option or
stock purchase right.
In addition, the administrator has the authority to amend, suspend or
terminate the 1998 stock plan, so long as no such action affects any shares of
common stock previously issued and sold or any option previously granted under
the 1998 stock plan. During any fiscal year, each optionee may be granted
options to purchase a maximum of 1,000,000 shares. In addition, in connection
with an optionee's initial employment with us, such optionee may be granted an
option covering an additional 1,000,000 shares.
Options and stock purchase rights granted under our 1998 stock plan are
generally not transferable by the optionee, and each option and stock purchase
right is exercisable during the lifetime of the optionee only by such optionee.
Options granted under the 1998 stock plan must generally be exercised within
three months after the end of optionee's status as an employee, director or
consultant of Digital Impact, or within twelve months after such optionee's
termination by death or disability, but in no event later than the expiration of
the option's term.
In the case of stock purchase rights, unless the administrator determines
otherwise, the restricted stock purchase agreement grants us a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
employment or consulting relationship with us for any reason, including death or
disability. The purchase price for shares repurchased under the restricted stock
purchase agreement must be the original price paid by the purchaser and may be
paid by cancellation of any indebtedness of the purchaser to us. The repurchase
option lapses at a rate determined by the administrator.
The exercise price of all incentive stock options granted under the 1998
stock plan must be at least equal to the fair market value of the common stock
on the date of grant. The exercise price of nonstatutory stock options and stock
purchase rights granted under the 1998 stock plan is determined by the
administrator, but for nonstatutory stock options intended to qualify as
"performance-based compensation" under Section 162(m) of the Internal Revenue
Code, the exercise price must be at least equal to the fair market value of our
common stock on the date of grant. For any participant who owns stock possessing
more than 10% of the voting power of all classes of our outstanding capital
stock, the exercise price of any incentive stock option granted must be at least
equal to 110% of the fair market value on the grant date and the term of such
incentive stock option must not exceed five years. The term of all other options
granted under the 1998 stock plan may not exceed ten years.
The 1998 stock plan provides that if we merge with or into another
corporation, or sell substantially all of our assets, each option and stock
purchase right shall be assumed or an equivalent option substituted for by the
successor corporation. If the outstanding options and stock purchase rights are
not assumed or substituted for by the successor corporation, the optionees will
become fully
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<PAGE> 49
vested in and have the right to exercise such options or stock purchase rights.
If an option or stock purchase right becomes fully vested and exercisable upon a
merger or sale of assets, the administrator must notify the optionee that the
option or stock purchase right is fully exercisable for a period of 15 days from
the date of the notice, and the option or stock purchase right will terminate
upon the expiration of the 15 day period.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our 1999 employee stock purchase plan was adopted by our board of directors
in September 1999 and approved by our stockholders in October 1999. A total of
700,000 shares of our common stock has been reserved for issuance under the 1999
employee stock purchase plan, plus annual increases beginning on January 1, 2001
equal to the lesser of 700,000 shares, 2% of the outstanding shares on such date
or an amount determined by our board of directors. As of the date of this
prospectus, no shares have been issued under the 1999 employee stock purchase
plan.
The 1999 employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, contains consecutive, overlapping,
twelve month offering periods. Each offering period includes two six-month
purchase periods. The offering periods generally start on the first trading day
on or after June 1 and December 1 of each year, except for the first such
offering period which commences on the first trading day on or after the
effective date of this offering and ends on the last trading day on or before
November 30, 2000.
Employees are eligible to participate if they are customarily employed by
us or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, employees may not be granted an
option to purchase stock under the 1999 employee stock purchase plan if they
either:
- immediately after grant, own stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or
- hold rights to purchase stock under our employee stock purchase plans
which accrue at a rate which exceeds $25,000 worth of stock for each
calendar year.
The 1999 employee stock purchase plan permits participants to purchase our
common stock through payroll deductions of up to 15% of the participant's
"compensation." Compensation is defined as the participant's base straight time
gross earnings and commissions but exclusive of payments for overtime, profit
sharing payments, shift premium payments, incentive compensation, incentive
payments and bonuses. The maximum number of shares a participant may purchase
during a single purchase period is 5,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each purchase period. The price of stock
purchased under the 1999 purchase plan is generally 85% of the lower of the fair
market value of the common stock either:
- at the beginning of the offering period; or
- at the end of the purchase period.
If the fair market value at the end of a purchase period is less than the
fair market value at the beginning of the offering period, the participants will
be withdrawn from the current offering period following exercise and
automatically re-enrolled in a new offering period. The new offering period will
use the lower fair market value as of the first date of the new offering period
to determine the purchase price for future purchase periods. Participants may
end their participation at any time
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<PAGE> 50
during an offering period, and they will be paid their payroll deductions to
date. Participation ends automatically upon termination of employment with
Digital Impact.
Rights granted under the 1999 employee stock purchase plan are not
transferable by a participant other than by will, the laws of descent and
distribution, or as otherwise provided under the 1999 employee stock purchase
plan. The 1999 employee stock purchase plan provides that, if we merge with or
into another corporation or there is a sale of substantially all of our assets,
each outstanding option may be assumed or substituted for by the successor
corporation. If the successor corporation refuses to assume or substitute for
the outstanding options, the offering period then in progress will be shortened
and a new exercise date will be set.
The 1999 employee stock purchase plan will terminate in 2009. Our board of
directors has the authority to amend or terminate the 1999 employee stock
purchase plan, except that no such action may adversely affect any outstanding
rights to purchase stock under the 1999 employee stock purchase plan.
1999 DIRECTOR OPTION PLAN
Non-employee directors are entitled to participate in our 1999 director
option plan. The 1999 director option plan was adopted by our board of directors
in September 1999 and approved by our stockholders in October 1999. The 1999
director option plan has a term of ten years, unless terminated sooner by our
board of directors. A total of 500,000 shares of our common stock have been
reserved for issuance under the 1999 director option plan. In addition, annual
increases will be added to this plan, beginning on January 1, 2001, equal to the
lesser of 250,000 shares, or an amount determined by our board of directors.
The 1999 director option plan generally provides for an automatic initial
grant of an option to purchase 20,000 shares of our common stock to each
non-employee director on the date which the later of the following events occur:
- the effective date of the 1999 director option plan; or
- the date when a person first becomes a non-employee director.
After the initial grant, a non-employee director will be granted a
subsequent option to purchase 5,000 shares of our common stock each year on the
date of our annual meeting of stockholders, if on such date he or she has served
on our board of directors for at least six months. Each initial option grant and
each subsequent option grant shall have a term of 10 years. Each initial option
grant will vest as to 25% of the shares issuable under the option on each
anniversary of its date of grant and each subsequent option grant will vest as
to 100% of the shares issuable under the option on each anniversary of its date
of grant. The exercise price of all options will be 100% of the fair market
value per share of our common stock on the date of grant.
The 1999 director option plan provides that if we merge with or into
another corporation, or sell substantially all of our assets, the successor
corporation shall assume each option or substitute an equivalent option. If
following such assumption or substitution, the optionee's status as a director
is terminated other than upon voluntary resignation, each option will become
fully vested and exercisable generally for a period of three months from the
date of termination. If outstanding options are not assumed or substituted for
by the successor corporation, each option will become fully vested and
exercisable for a period of thirty days from the date our board of directors
notifies the optionee of the option's full exercisability, after which period
the option shall terminate. Options granted under the 1999 director option plan
must be exercised within three months of the end of the optionee's tenure as our
director, or within twelve months after such director's termination by death or
disability, but in no event later than the expiration of the option's ten year
term. No option granted under the
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<PAGE> 51
1999 director option plan is transferable by the optionee other than by will or
the laws of descent and distribution, and each option is exercisable, during the
lifetime of the optionee, only by the optionee.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Section 145 of the Delaware General
Corporation Law provides that directors of a corporation will not be personally
liable for monetary damages for breach of their fiduciary duties as directors,
except liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we shall indemnify
our directors and executive officers and may indemnify other officers and
employees and our agents to the fullest extent permitted by law. We believe that
indemnification under our bylaws covers at least negligence and gross negligence
on the part of indemnified parties. Our bylaws also permit us to secure
insurance on behalf of any officer, director, employee or other agent for any
liability arising out of his or her actions in such capacity, regardless of
whether the bylaws would permit indemnification. We maintain directors' and
officers' liability insurance.
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<PAGE> 52
RELATED PARTY TRANSACTIONS
PREFERRED STOCK SALES
SERIES A CONVERTIBLE PREFERRED STOCK
In March 1998, we sold shares of our series A preferred stock convertible
into an aggregate of 5,592,000 shares of common stock at a price of
approximately $0.21 per share, to raise capital to finance our operations. The
following 5% stockholders purchased shares in the financing:
<TABLE>
<CAPTION>
NUMBER OF
COMMON EQUIVALENT AGGREGATE
PURCHASER SHARES CONSIDERATION
--------- ----------------- -------------
<S> <C> <C>
Draper Fisher Associates Fund IV, L.P. ........... 3,124,800 $ 651,000
Draper Fisher Partners IV, L.L.C. ................ 235,200 49,000
Draper Richards L.P. ............................. 1,440,000 300,000
</TABLE>
The share numbers and price per share above reflect the three-for-one stock
split of our capital stock effected in November 1998 and the two-for-one stock
split of our capital stock effected in August 1999. The holders of our series A
preferred stock were allotted one seat on our board of directors, currently
filled by Mr. Packard, in connection with their investment. This right expires
upon closing of this offering.
SERIES B CONVERTIBLE PREFERRED STOCK
In November 1998, we sold shares of our series B preferred stock
convertible into an aggregate of 4,448,264 shares of common stock at a price of
approximately $1.21 per share, to raise capital to finance our operations. The
following 5% stockholders purchased shares in the financing:
<TABLE>
<CAPTION>
NUMBER OF
COMMON EQUIVALENT AGGREGATE
PURCHASER SHARES CONSIDERATION
--------- ----------------- -------------
<S> <C> <C>
Institutional Venture Partners VIII, L.P. ........ 3,429,312 $ 4,143,809
IVM Investment Fund VIII, LLC..................... 36,930 44,624
IVM Investment Fund VIII-A, LLC................... 15,828 19,125
IVP Founders Fund I, L.P. ........................ 35,172 42,500
Draper Fisher Associates Fund IV, L.P. ........... 747,654 903,428
Draper Fisher Partners IV, L.L.C. ................ 56,276 68,001
Draper Richards L.P. ............................. 82,758 100,000
</TABLE>
The share numbers and price per share above reflect the two-for-one stock
split of our capital stock effected in August 1999. The holders of our series B
preferred stock were allotted one seat on our board of directors, currently
filled by Ms. Quindlen, in connection with their investment. This right expires
upon closing of this offering.
SERIES C CONVERTIBLE PREFERRED STOCK
In July 1999, we sold shares of our series C preferred stock convertible
into an aggregate of 2,227,294 shares of common stock at a price of
approximately $4.78 per share, to raise capital to finance our operations. The
following 5% stockholders purchased shares in the financing:
<TABLE>
<CAPTION>
NUMBER OF
COMMON EQUIVALENT AGGREGATE
PURCHASER SHARES CONSIDERATION
--------- ----------------- -------------
<S> <C> <C>
Institutional Venture Partners VIII, L.P. ........ 1,230,720 $ 5,888,995
IVM Investment Fund VIII, LLC..................... 23,198 111,002
Draper Fisher Associates Fund IV, L.P. ........... 429,530 2,055,300
Draper Fisher Partners IV, L.L.C. ................ 32,330 154,700
Draper Richards L.P. ............................. 52,247 250,000
</TABLE>
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<PAGE> 53
The share numbers and price per share above reflect the two-for-one stock
split of our capital stock effected in August 1999.
OTHER TRANSACTIONS
In connection with the above transactions, we entered into an agreement
with the investors providing registration rights for these shares. For more
information regarding this agreement, see "Description of Capital
Stock -- Registration Rights."
For information regarding agreements between us and some of our executive
officers, please see "Management -- Employment Contracts and Change of Control
Arrangements."
COMMON STOCK ISSUANCE
In February 1999, William Park, our Chief Executive Officer, contributed to
our capital 270,000 shares of our common stock, without consideration.
Contemporaneously, we issued to Gerardo Capiel, our Chief Technology Officer, an
aggregate of 270,000 shares of our common stock as a bonus.
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<PAGE> 54
PRINCIPAL STOCKHOLDERS
The following table shows information regarding the beneficial ownership of
our common stock as of September 30, 1999 by the following individuals or
groups:
- each person or entity who is known by us to own beneficially more than 5%
of our outstanding stock.
- each of the named executive officers and directors.
- all directors and executive officers as a group.
Unless otherwise indicated, and except for any rights these persons'
spouses may have, the persons listed below have sole voting and investment power
for shares of our common stock shown as beneficially owned by them. Beneficial
ownership is determined under the rules of the Securities and Exchange
Commission and generally includes voting or investment power for the shares.
Percentage of beneficial ownership prior to the offering is based on 19,048,954
shares of common stock outstanding as of September 30, 1999. Each beneficial
owner's percentage ownership assumes the exercise or conversion of all options,
warrants and other convertible securities held by such person and that are
exercisable or convertible 60 days after September 30, 1999. Each beneficial
owner's percentage ownership does not include any shares of common stock that
such owner may purchase in the offering. Except as otherwise noted, the address
of each person listed is c/o Digital Impact, Inc., 177 Bovet Road, Suite 200,
San Mateo, California 94402.
<TABLE>
<CAPTION>
PERCENTAGE OPTIONS
OF SHARES EXERCISABLE
OUTSTANDING WITHIN 60
------------------- DAYS AFTER
NUMBER OF SHARES PRIOR TO AFTER SEPTEMBER 30,
NAME AND ADDRESS BENEFICIALLY OWNED OFFERING OFFERING 1999
---------------- ------------------ -------- -------- -------------
<S> <C> <C> <C> <C>
Entities affiliated with Institutional
Venture Partners............................ 4,771,160 25.0% 20.2% --
3000 Sand Hill Road
Building 2, Suite 290
Menlo Park, California 94025
Entities affiliated with Draper Fisher
Jurvetson................................. 4,625,790 24.3 19.6 --
400 Seaport Court, Suite 250
Redwood City, California 94063
Draper Richards L.P......................... 1,575,004 8.3 6.7 --
50 California Street, Suite 2925
San Francisco, California 94111
William Park................................ 3,600,000 18.9 15.3 --
Gerardo Capiel.............................. 2,070,000 10.9 8.8 --
David Oppenheimer........................... 275,000 1.4 1.1 275,000
Ronald Rasmussen............................ 202,500 1.1 * 202,500
Raymond Kaupp............................... 260,820 1.4 1.1 260,820
Alan Flohr.................................. 400,000 2.1 1.7 400,000
Ruthann Quindlen............................ 4,771,160 25.0 20.2 --
Warren Packard.............................. 4,625,790 24.3 19.6 --
Michael Brown............................... 30,000 * * 30,000
All executive officers and directors as a
group (9 persons)......................... 16,235,270 85.2 68.9 1,168,320
</TABLE>
- -------------------------
* Less than 1% of the outstanding shares of common stock.
The shares listed above for entities affiliated with Institutional Venture
Partners consist of 4,660,032 shares held by Institutional Venture Partners
VIII, L.P., 60,128 shares held by IVM Investment Fund VIII, LLC, 15,828 shares
held by IVM Investment Fund VIII-A, LLC and
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<PAGE> 55
35,172 shares held by IVP Founders Fund I, L.P. Ruthann Quindlen, a member of
our board of directors, is a general partner of Institutional Venture Partners.
The shares listed above for Draper Fisher Jurvetson consist of 4,301,984
shares held by Draper Fisher Associates Fund IV, L.P., and 323,806 shares held
by Draper Fisher Partners IV, L.L.C. Warren Packard, a member of our board of
directors, is a general partner of Draper Fisher Jurvetson.
The shares listed above for William Park consist of 3,600,000 restricted
shares which may be repurchased by us. Our repurchase option lapses over a four
year period.
The shares listed above for Gerardo Capiel consist of 270,000 shares of
common stock and 1,800,000 restricted shares which may be repurchased by us. Our
repurchase option lapses over a four year period.
The shares listed above for Warren Packard and Ruthann Quindlen include all
shares beneficially owned by entities affiliated with Draper Fisher Jurvetson
and entities affiliated with Institutional Venture Partners, respectively, but
Mr. Packard and Ms. Quindlen disclaim beneficial ownership of the shares held by
these entities except to the extent of their pecuniary interest in these
entities.
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<PAGE> 56
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of this offering, we will be authorized to issue
100,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
undesignated preferred stock, $0.001 par value.
COMMON STOCK
As of September 30, 1999, there were 19,048,954 shares of common stock
outstanding, assuming the conversion of all outstanding shares of convertible
preferred stock, which were held of record by 73 stockholders. There will be
23,548,954 shares outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise or conversion of outstanding options after
September 30, 1999, effective upon the closing of this offering.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Limited by preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably any dividends that may be declared from time to time
by the board of directors out of funds legally available for that purpose. See
"Dividend Policy." Upon liquidation, dissolution or winding up, the holders of
common stock are entitled to share ratably in all assets remaining after payment
of liabilities, limited by prior distribution rights of preferred stock, if any,
then outstanding. The holders of common stock have no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are fully paid and nonassessable, and the shares of common stock to be
issued upon the closing of this offering will be fully paid and nonassessable.
PREFERRED STOCK
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, any or all
of which may be greater than the rights of the common stock. It is not possible
to state the actual effect of the issuance of any shares of preferred stock upon
the rights of holders of the common stock until the board of directors
determines the specific rights of the holders of such preferred stock. However,
the effects might include restricting dividends on the common stock, diluting
the voting power of the common stock, impairing the liquidation rights of the
common stock and delaying or preventing a change in control without further
action by the stockholders. Immediately prior to the closing, no shares of
preferred stock will be outstanding. We have no present plans to issue any
shares of preferred stock.
REGISTRATION RIGHTS
As of September 30, 1999, the holders of 18,066,058 shares of our common
stock are entitled to require us to register their shares under the Securities
Act. These rights are provided under the terms of our agreement with the holders
of registrable securities. Holders of these registrable shares have unlimited
rights to request that these shares be included in any Digital Impact-initiated
underwritten public offering of our securities. The underwriters may reduce the
registrable shares to be included on the registration statement for marketing
reasons. In addition, at any time the earlier of July 7, 2002 or one year after
the effective date of this prospectus, holders of at least two-thirds of the
registrable shares may demand that we register their shares up to two times.
Also, after we become eligible to use Form S-3, holders of registrable shares
may request that we effect a registration of these shares on a shelf
registration statement up to two times in any twelve month period. We will bear
all
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<PAGE> 57
expenses incurred in connection with these registrations, other than
underwriters' and brokers' discounts and commissions.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Provisions of Delaware law and our certificate of incorporation and bylaws
summarized below could make more difficult our acquisition by means of a tender
offer, a proxy contest or otherwise and the removal of incumbent officers and
directors. These provisions are expected to discourage coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control to first negotiate with us. We believe that the benefits of
increased protection of our potential ability to negotiate with the proponent of
an unfriendly or unsolicited proposal to acquire or restructure us outweighs the
disadvantages of discouraging such proposals because negotiation of these
proposals could result in an improvement of their terms.
STOCKHOLDER MEETINGS
Under our restated certificate of incorporation and restated bylaws, the
board of directors, the chairman of the board and the president may call special
meetings of stockholders but the stockholders may not call a special meeting. In
addition, our restated certificate of incorporation and restated bylaws do not
provide for the right of stockholders to act by written consent without a
meeting or for cumulative voting in the election of directors.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND PROPOSALS
Our restated bylaws establish advance notice procedures for proposals and
the nomination of candidates for election as directors, other than nominations
made by or at the direction of the board of directors or a board committee.
CLASSIFIED BOARD
Our amended and restated certificate of incorporation provides that the
board of directors will be divided into three classes, each serving staggered
three-year terms. For more information concerning our classified board of
directors, see "Management -- Board Composition."
DELAWARE ANTI-TAKEOVER LAW
We must comply with Section 203 of the Delaware General Corporation Law. In
general, Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years following the date the person became an interested
stockholder, unless the "business combination" or the transaction in which the
person became an interested stockholder is approved in a manner provided for by
Delaware law. Generally, a "business combination" includes a merger, asset or
stock sale, or other transaction resulting in a financial benefit to the
interested stockholder. Generally, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years prior to
the determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision would be expected to
have an anti-takeover effect on transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
UNDESIGNATED PREFERRED STOCK
The authorization of undesignated preferred stock makes it possible for our
board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any
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<PAGE> 58
attempt to change control of Digital Impact. These and other provisions may have
the effect of deferring hostile takeovers or delaying changes in control or
management.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Harris Trust of
California.
NASDAQ NATIONAL MARKET LISTING
Our common stock has been approved for listing on The Nasdaq National
Market under the trading symbol "DIGI."
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<PAGE> 59
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. If our stockholders sell substantial amounts of our common stock
(including shares issued upon the exercise of outstanding options) in the public
market following this offering, the market price of our common stock could fall
dramatically. These sales also might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate.
The number of shares of common stock available for sale in the public
market is limited by restrictions under federal securities law and by "lock-up"
agreements that our stockholders have entered into with the underwriters. For a
description of these "lock-up" agreements, please see "Underwriting."
Upon completion of this offering, we will have 23,548,954 outstanding
shares of common stock (based on shares outstanding as of September 30, 1999,
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options after September 30, 1999). Of these shares, the 4,500,000
shares to be sold in this offering (5,175,000 shares if the underwriters' over-
allotment option is exercised in full) will be freely tradable in the public
market without restriction under the Securities Act, unless the shares are held
by "affiliates" of Digital Impact, as that term is defined in Rule 144 under the
Securities Act.
The remaining 19,048,954 shares outstanding upon completion of this
offering will be "restricted securities" as that term is defined under Rule 144.
Restricted securities may be sold in the public market only if they are
registered or if they qualify for an exemption from registration under Rule 144
or Rule 701 under the Securities Act, which are summarized below.
All of the executive officers, directors and stockholders of Digital
Impact, who collectively hold an aggregate of 19,048,954 of these restricted
securities, have entered into "lock-up" agreements in which they have agreed not
to offer, sell, contract to sell, grant any option to purchase or otherwise
dispose of any of these shares for a period of 180 days from the date of this
prospectus. We also have entered into an agreement with the underwriters that we
will not offer, sell or otherwise dispose of common stock for a period of 180
days from the date of this prospectus. However, Credit Suisse First Boston
Corporation may in its sole discretion, at any time without notice, release all
or any portion of the shares restricted by lock-up agreements.
Taking into account the lock-up agreements and assuming Credit Suisse First
Boston Corporation does not release stockholders from these agreements, the
following shares will be eligible for sale in the public market at the following
times:
- beginning on the effective date of this prospectus, only the shares sold
in the offering will be immediately available for sale in the public
market;
- beginning 180 days after the effective date of this prospectus,
approximately 16,236,855 shares will be eligible for sale under Rules 144
and 701 of the Securities Act;
- an additional 2,812,099 shares will be eligible for sale under Rule 144
upon the expiration of various one-year holding periods after the
expiration of the lock-up period;
Any common stock that has been purchased or may be purchased in this
offering by our "affiliates," as defined in Rule 144 of the Securities Act, will
be subject to the volume and other selling limitations under Rule 144 of the
Securities Act. All of the shares eligible for sale at the 180th day after the
date of this prospectus or afterward will be subject initially to certain volume
and other limitations under Rule 144 of the Securities Act.
In addition, we intend to file, after the effective date of this offering,
a registration statement on Form S-8 under the Securities Act covering all
shares of common stock reserved for issuance under
57
<PAGE> 60
our 1998 stock plan, 1999 employee stock purchase plan and 1999 director option
plan. The registration statement will become effective automatically upon
filing. Shares registered under this registration statement would be available
for sale in the open market in the future unless these shares have vesting
restrictions with Digital Impact or the contractual restrictions described
above. For more information on shares eligible for resale, our stock plans and
registration rights, see "Risk Factors -- A total of 19,048,954 shares, or 81%,
of our total outstanding shares after the offering are restricted from immediate
resale but may be sold into the market in the near future. This could cause the
market price of our common stock to drop significantly, even if our business is
doing well," "Management -- Compensation Plans," and "Description of Capital
Stock -- Registration Rights."
58
<PAGE> 61
UNDERWRITING
Under the terms of and the conditions contained in an underwriting
agreement dated November 22, 1999, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Hambrecht & Quist
LLC, Donaldson, Lufkin & Jenrette Securities Corporation and U.S. Bancorp Piper
Jaffray Inc. are acting as representatives, the following respective numbers of
shares of common stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation...................... 1,773,000
Hambrecht & Quist LLC....................................... 886,500
Donaldson, Lufkin & Jenrette Securities Corporation......... 886,500
U.S. Bancorp Piper Jaffray Inc.............................. 394,000
Bear, Stearns & Co. Inc..................................... 80,000
E*OFFERING Corp............................................. 80,000
Invemed Associates LLC...................................... 80,000
Legg Mason Wood Walker, Incorporated........................ 80,000
Charles Schwab & Co., Inc................................... 80,000
SG Cowen Securities Corporation............................. 80,000
C.E. Unterberg, Towbin...................................... 80,000
---------
Total..................................................... 4,500,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a thirty-day option to purchase on a
pro rata basis up to 675,000 additional shares from us at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $0.63 per share. The
underwriters and selling group members may allow a discount of $0.10 per share
on sales to other brokers/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions payable by us......... $1.05 $1.05 $4,725,000 $5,433,750
Expenses payable by us.............. $0.29 $0.25 $1,300,000 $1,300,000
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We, our officers and directors and substantially all of our other
stockholders, have agreed that we and they will not offer, sell, contract to
sell, announce an intention to sell, pledge or directly or indirectly dispose
of, or file with the Commission a registration statement under the Securities
Act
59
<PAGE> 62
relating to, any additional shares of common stock or securities convertible
into or exchangeable or exercisable for any shares of common stock without the
prior written consent of Credit Suisse First Boston Corporation for a period of
180 days after the date of this prospectus. These restrictions do not prohibit
us from issuing employee stock options and common stock issuable upon exercise
of employee stock options outstanding on the date of this prospectus, or filing
a registration statement on Form S-8 covering all shares of common stock
reserved for issuance under our compensation plans.
The underwriters have reserved for sale, at the initial public offering
price, up to 225,000 shares of the common stock for our customers and business
partners. At the discretion of our management, other parties, including friends
and family of key employees of Digital Impact, may participate in the directed
share program. The number of shares available for sale to the general public in
the offering will be reduced to the extent such persons purchase directed
shares. Any directed shares not so purchased will be offered by the underwriters
to the general public on the same terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act or contribute to payments which the underwriters may be required
to make.
Our common stock has been approved for listing on The Nasdaq National
Market under the symbol "DIGI."
Before this offering, there has been no public market for the common stock.
The initial public offering price will be determined by negotiation between us
and the underwriters. The principal factors to be considered in determining the
public offering price include:
- the information included in this prospectus and otherwise available to
the underwriters;
- the history and the prospects for the industry in which we will compete;
- the ability of our management;
- the prospects for our future earnings;
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids under Regulation M under the
Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified number.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed to cover
syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would be in
the absence of these transactions. These transactions may be effected on The
Nasdaq National Market or otherwise, and, if commenced, may be discontinued at
any time.
60
<PAGE> 63
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario Securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
61
<PAGE> 64
LEGAL MATTERS
The validity of our common stock offered by this prospectus will be passed
upon for Digital Impact by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California, and for the underwriters by Shearman &
Sterling, Menlo Park, California. Persons associated with Wilson Sonsini
Goodrich & Rosati are the holders of options to acquire an aggregate of 20,000
shares of our common stock. Based on the difference between the exercise price
of the options, $2.50 per share, and the price per share in this offering, the
value of the options is approximately $250,000.
EXPERTS
The financial statements as of March 31, 1998 and 1999, and for the period
from October 16, 1997 (date of inception) to March 31, 1998 and for the year
ended March 31, 1999 included in this Prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND OTHER DIGITAL IMPACT INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act relating to the common stock
offered by this prospectus. This prospectus, which constitutes a part of the
registration statement, does not contain all of the information included in the
registration statement and the exhibits filed as a part of the registration
statement, certain parts of which are omitted under the rules and regulations of
the SEC. For further information about us and our common stock, reference is
made to the registration statement and to the exhibits filed as a part of the
registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete and are qualified in their entirety by reference to each
such contract, agreement or other document which is filed as an exhibit to the
registration statement. The registration statement, including the exhibits and
schedules to the registration statement, may be inspected without charge at the
principal office of the SEC at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, or at the Regional Offices of the SEC at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, Suite 1300, New York, New York 10048. Our SEC filings are also available
to the public from the SEC's web site at http://www.sec.gov. In addition, such
material will be available for inspection at the offices of The Nasdaq Stock
Market, Inc., at 1735 K Street, N.W., Washington D.C. 20006. Copies of such
material may be obtained by mail from the Public Reference Branch of the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
62
<PAGE> 65
DIGITAL IMPACT, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statement of Stockholders' Equity........................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 66
REPORT OF INDEPENDENT ACCOUNTANTS
To the board of directors and stockholders of
Digital Impact, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Digital Impact, Inc. at March 31,
1998 and 1999, and the results of its operations and its cash flows for the
period from October 16, 1997 (date of inception) to March 31, 1998 and for the
year ended March 31, 1999, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
June 16, 1999, except for Note 10, as to which
the date is November 3, 1999
F-2
<PAGE> 67
DIGITAL IMPACT, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
MARCH 31, EQUITY
---------------- SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1999 1999
------ ------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $1,032 $ 2,864 $ 7,183
Accounts receivable, net of allowance for
doubtful accounts of $0, $10 and $40 at March
31, 1998, 1999 and September 30, 1999,
respectively................................. -- 668 1,572
Prepaid and other current assets................ 3 116 96
------ ------- -------
Total current assets......................... 1,035 3,648 8,851
Property and equipment, net....................... 28 2,494 4,368
Restricted cash................................... -- 108 108
Other assets...................................... 15 64 675
------ ------- -------
Total assets................................. $1,078 $ 6,314 $14,002
====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 21 $ 591 $ 1,584
Accrued liabilities............................. 1 221 1,377
Current portion of capital lease obligations.... -- 207 312
Current portion of long term debt............... -- 234 194
------ ------- -------
Total current liabilities.................... 22 1,253 3,467
------ ------- -------
Capital lease obligations, less current
portion...................................... -- 457 713
Long term debt, less current portion............ -- 234 197
------ ------- -------
Total liabilities............................ 22 1,944 4,377
------ ------- -------
Commitments (Note 5)
Stockholders' equity:
Convertible preferred stock, $0.001 par value
Authorized: 16,000 shares;
Issued and outstanding: 5,592, 10,040 and
12,292 shares at March 31, 1998, 1999 and
September 30, 1999, respectively; and none
pro forma.................................. 6 10 12 $ --
(Liquidation preference: $6,540)
Common stock, $0.001 par value
Authorized: 54,000 shares;
Issued and outstanding: 6,000, 6,022 and
6,757 shares at March 31, 1998, 1999 and
September 30, 1999, respectively; and
19,049 pro forma........................... 6 6 7 19
Additional paid-in capital...................... 1,147 8,925 32,584 32,584
Unearned stock-based compensation............... -- (1,227) (10,836) (10,836)
Stock subscription receivable................... -- (1) -- --
Accumulated deficit............................. (103) (3,343) (12,142) (12,142)
------ ------- ------- -------
Total stockholders' equity................... 1,056 4,370 9,625 $ 9,625
------ ------- ------- =======
Total liabilities and stockholders' equity... $1,078 $ 6,314 $14,002
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 68
DIGITAL IMPACT, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 16, 1997
(DATE OF INCEPTION) SIX MONTHS ENDED
TO YEAR ENDED SEPTEMBER 30,
MARCH 31, MARCH 31, -----------------
1998 1999 1998 1999
------------------- ---------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................................. $ 4 $ 1,307 $ 121 $ 3,257
Cost of revenues......................... 4 674 87 1,617
------ ------- ------ -------
Gross margin............................. -- 633 34 1,640
------ ------- ------ -------
Operating expenses:
Research and development............... 27 966 209 2,518
Sales and marketing.................... -- 670 134 2,544
General and administrative............. 77 1,151 181 2,164
Stock-based compensation............... -- 1,157 162 3,295
------ ------- ------ -------
Total operating expenses............ 104 3,944 686 10,521
------ ------- ------ -------
Loss from operations..................... (104) (3,311) (652) (8,881)
Interest income, net..................... 1 71 10 82
------ ------- ------ -------
Net loss................................. $ (103) $(3,240) $ (642) $(8,799)
====== ======= ====== =======
Net loss per common share -- basic and
diluted................................ $(0.45) $ (2.86) $(1.95) $ (2.94)
====== ======= ====== =======
Shares used in net loss per common share
calculation -- basic and diluted....... 231 1,133 330 2,991
====== ======= ====== =======
Pro forma net loss per share -- basic and
diluted (unaudited).................... $ (0.39) $ (0.62)
======= =======
Shares used in pro forma net loss per
share calculation -- basic and diluted
(unaudited)............................ 8,370 14,090
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 69
DIGITAL IMPACT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM OCTOBER 16, 1997 (DATE OF INCEPTION) TO SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL UNEARNED STOCK
--------------- --------------- PAID-IN STOCK-BASED SUBSCRIPTION ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION RECEIVABLE DEFICIT TOTAL
------ ------ ------ ------ ---------- ------------ ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
founders................. -- $-- 6,000 $16 $ -- $ -- $-- $ -- $ 6
Issuance of Series A
convertible preferred
stock, net of issuance
costs of $19............... 5,592 6 -- -- 1,147 -- -- -- 1,153
Net loss................... -- -- -- -- -- -- -- (103) (103)
------ -- ----- -- ------- -------- -- -------- -------
Balances, March 31, 1998... 5,592 6 6,000 6 1,147 -- -- (103) 1,056
Issuance of Series B
convertible preferred
stock, net of issuance
costs of $30............. 4,448 4 -- -- 5,341 -- -- -- 5,345
Issuance of Series B
convertible preferred
stock warrant............ -- -- -- -- 52 -- -- -- 52
Exercise of stock
options.................. -- -- 22 -- 1 -- (1) -- --
Issuance of common stock
options for services..... -- -- -- -- 1 -- -- -- 1
Unearned stock-based
compensation............. -- -- -- -- 1,769 (1,769) -- -- --
Amortization of unearned
stock-based
compensation............. -- -- -- -- -- 542 -- -- 542
Contribution of shares from
a founder................ -- -- (270) -- -- -- -- -- --
Issuance of shares as bonus
to a founder............. -- -- 270 -- 614 -- -- -- 614
Net loss................... -- -- -- -- -- -- -- (3,240) (3,240)
------ -- ----- -- ------- -------- -- -------- -------
Balances, March 31, 1999... 10,040 10 6,022 6 8,925 (1,227) (1) (3,343) 4,370
Issuance of Series C
convertible preferred
stock, net of issuance
costs of $24............. 2,228 2 -- -- 10,636 -- -- -- 10,638
Exercise of convertible
preferred stock warrant.. 24 -- -- -- 6 -- -- -- 6
Exercise of stock
options.................. -- -- 735 1 113 -- -- -- 114
Issuance of common stock
options for services..... -- -- -- -- 212 -- -- -- 212
Unearned stock-based
compensation............. -- -- -- -- 12,692 (12,692) -- -- --
Amortization of unearned
stock-based
compensation............. -- -- -- -- -- 3,083 -- -- 3,083
Repayment on stock
subscription............. -- -- -- -- -- -- 1 -- 1
Net loss................... -- -- -- -- -- -- -- (8,799) (8,799)
------ -- ----- -- ------- -------- -- -------- -------
Balances, September 30,
1999 (unaudited)......... 12,292 $12 6,757 $7 $32,584 $(10,836) $-- $(12,142) $ 9,625
====== == ===== == ======= ======== == ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 70
DIGITAL IMPACT, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 16, 1997 SIX MONTHS
(DATE OF INCEPTION) YEAR ENDED ENDED SEPTEMBER 30,
TO MARCH 31, MARCH 31, --------------------
1998 1999 1998 1999
------------------- ---------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operations:
Net loss............................................. $ (103) $(3,240) $(642) $(8,799)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 3 250 16 535
Provision for bad debts.......................... -- 10 -- 12
Stock-based compensation expense for shares
issued to founder............................. -- 614 -- --
Warrants issued for services..................... -- -- -- 212
Amortization of unearned stock-based
compensation.................................. -- 543 162 3,083
Change in assets and liabilities:
Accounts receivable......................... -- (678) (84) (916)
Prepaid expenses and other current assets... (3) (113) (5) 20
Restricted cash............................. -- (108) -- --
Other assets................................ (15) (49) 1 (611)
Accounts payable............................ 21 570 84 993
Accrued liabilities......................... 1 220 (1) 1,156
------ ------- ----- -------
Net cash used in operating activities....... (96) (1,981) (469) (4,315)
------ ------- ----- -------
Cash flows from investing activities:
Acquisition of property and equipment.............. (31) (2,423) (175) (1,896)
------ ------- ----- -------
Net cash used in investing activities....... (31) (2,423) (175) (1,896)
------ ------- ----- -------
Cash flows from financing activities:
Proceeds from long-term debt....................... -- 350 68 --
Principal payments on long-term debt............... -- (173) -- (229)
Proceeds from bridge loan.......................... -- -- -- --
Proceeds from sale of assets, subject to
lease-back....................................... -- 714 -- --
Proceeds from issuance of common stock............. 6 -- -- 114
Proceeds from issuance of convertible preferred
stock, net....................................... 1,153 5,345 -- 10,644
Repayment of stock subscription.................... -- -- -- 1
------ ------- ----- -------
Net cash provided by financing activities... 1,159 6,236 68 10,530
------ ------- ----- -------
Net increase (decrease) in cash and cash
equivalents........................................ 1,032 1,832 (576) 4,319
Cash and cash equivalents at beginning of period..... -- 1,032 1,032 2,864
------ ------- ----- -------
Cash and cash equivalents at end of period........... $1,032 $ 2,864 $ 456 $ 7,183
====== ======= ===== =======
Supplemental disclosure of cash flow information:
Cash paid for interest............................. $ 1 $ 18 $ 1 $ 117
Supplemental disclosure of noncash financing
activities:
Acquisition of software license in exchange for
note............................................. $ -- $ 291 $ -- $ --
Contribution of technology in exchange for Common
Stock............................................ $ 1 $ -- $ -- $ --
Warrant issued for preferred stock................. $ -- $ 52 $ -- $ --
Assets acquired under capital leases............... $ -- $ 714 $ -- $ 513
Unearned stock-based compensation.................. $ -- $ 1,769 $ 194 $12,692
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 71
DIGITAL IMPACT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY:
Digital Impact, Inc. (the "Company") was incorporated in the state of
California on October 16, 1997. The Company is a leading provider of e-marketing
services. The Company's (primary suite) of e-marketing services, Merchant Mail,
is sold as a single service and currently consists of the following components:
email campaign management, targeting and personalization, media optimization,
tracking and reporting, and data hosting and management. In connection with the
organization of the Company, the founders transferred some proprietary
technology and other intangible assets to the Company in exchange for 6,000,000
shares of common stock. For accounting purposes, a nominal value was assigned to
this transaction as there was no predecessor basis in the technology and other
intangible assets.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
UNAUDITED INTERIM RESULTS
The accompanying balance sheet as of September 30, 1999, the statements of
operations and of cash flows for the six months ended September 30, 1998 and
1999 and the statement of stockholders' equity for the six months ended
September 30, 1999 are unaudited. The unaudited interim financial statements
have been prepared on the same basis as the annual financial statements and, in
the opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the Company's financial
position and its results of operations and its cash flows for the six months
ended September 30, 1998 and 1999. The financial data and other information
disclosed in these notes to financial statements related to these periods are
unaudited. The results for the six months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the year ending March
31, 2000.
USE OF ESTIMATES
Preparation of the accompanying financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company generates revenues from the sale of services such as design and
execution of Internet direct marketing or e-marketing campaigns. For each
campaign, the Company charges their clients a fixed fee for the set up and a
variable fee based on the number of emails sent to the customers of the
Company's clients. The Company also enters into contractual arrangements to
provide a minimum number of email campaigns for a monthly fee. Revenue is
recognized upon the completion of campaigns provided that there are no remaining
significant obligations and collection of the resulting receivable is probable.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less at the time of purchase to be cash equivalents.
At March 31, 1999, approximately $108,000 of cash was pledged as collateral for
an outstanding letter of credit (see Note 5).
F-7
<PAGE> 72
DIGITAL IMPACT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATION OF CREDIT RISK AND OTHER RISKS AND UNCERTAINTIES
The Company's cash and cash equivalents are maintained at a major U.S.
financial institution. Deposits in this institution may exceed the amount of
insurance provided on such deposits.
During the year ended March 31, 1999, three clients accounted for 26.8%,
11.5% and 10.9% of the Company's revenue and as of March 31, 1999, these same
three clients accounted for 22.1%, 12.5% and 13.6% of accounts receivables. For
the six months ended September 30, 1999, four of the Company's clients accounted
for 9.7%, 8.4%, 8.4% and 8.2% of revenues for that period.
FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, including cash
and cash equivalents, restricted cash, accounts receivable, accounts payable and
accrued liabilities approximate their fair value due to their relatively short
maturities.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed as incurred.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization is
computed using the straight-line method over the shorter of the estimated useful
lives of the assets, generally three to five years, or the lease term, if
applicable. Gains and losses upon asset disposal are taken into income in the
year of disposition. Maintenance and repairs are charged to operations as
incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company continually monitors its long-lived assets to determine whether
any impairment of these assets has occurred. In making such determination, the
Company evaluates the performance of the underlying products and product lines.
The Company recognizes impairment of long-lived assets in the event the net book
value of such assets exceeds the future undiscounted cash flows attributable to
such assets. No material impairments have been experienced to date.
SEGMENTS
The Company follows Statement of Financial Accounting Standards No. 131, or
SFAS 131, "Disclosures about Segments of an Enterprise and Related Information."
The Company operates in one segment, using one measurement of profitability to
manage its business. All long-lived assets are maintained in the United States.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the differences
between financial reporting and tax basis of assets and liabilities, measured at
tax rates that will be in effect when the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
F-8
<PAGE> 73
DIGITAL IMPACT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock issued to Employees" ("APB No. 25") and Financial
Accounting Standards Board Interpretation No. 28, "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans" ("FIN 28")
and complies with the disclosure provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
Under APB No. 25, compensation expense is based on the difference, if any,
on the date of the grant, between the fair value of the Company's stock and the
exercise price. SFAS No. 123 defines a "fair value" based method of accounting
for an employee stock option or similar equity investment. The pro forma
disclosures of the difference between compensation expense included in net loss
and the related cost measured by the fair value method are presented in Note 6.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 123 and Emerging Issues Task Force Issue
No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services."
COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. Through March 31, 1999, the Company has not had any
transactions that are required to be reported in other comprehensive income.
NET LOSS PER COMMON SHARE
Basic net loss per share is computed by dividing net loss available to
common stockholders by the weighted average number of vested common shares
outstanding for the period. Diluted net loss per share is computed giving effect
to all dilutive potential common shares, including options, warrants and
preferred stock. Options, warrants and preferred stock were not included in the
computation of diluted net loss per share for the period ended March 31, 1998,
for the year ended March 31, 1999 and for the six months ended September 30,
1998 and September 30, 1999 because the effect would be antidilutive. A
reconciliation of the numerator and denominator used in the
F-9
<PAGE> 74
DIGITAL IMPACT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
calculation of historical basic and diluted net loss per share follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 16, 1997, SIX MONTHS
(DATE OF INCEPTION) YEAR ENDED ENDED SEPTEMBER 30,
TO MARCH 31, MARCH 31, --------------------
1998 1999 1998 1999
------------------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Numerator:
Net loss................................ $ (103) $(3,240) $ (642) $(8,799)
======= ======= ======= =======
Denominator:
Weighted average common shares
outstanding...................... 4,771 6,002 6,000 6,333
Weighted average unvested common
shares subject to repurchase..... (4,540) (4,869) (5,670) (3,342)
------- ------- ------- -------
Denominator for basic and diluted
calculation........................... 231 1,133 330 2,991
======= ======= ======= =======
Net loss per common share -- basic and
diluted............................... $ (0.45) $ (2.86) $ (1.95) $ (2.94)
======= ======= ======= =======
</TABLE>
ANTIDILUTIVE SECURITIES
Warrants to purchase 86,000 shares of Series A convertible preferred stock
at an exercise price of $0.2083 per share have not been included in the
computation of diluted net loss per share for the period from October 16, 1997
(date of inception) to March 31, 1998. Options to purchase 1,887,000 shares of
common stock at a weighted average exercise price of $0.084 per share and
warrants to purchase 152,000 shares of Series A and B convertible preferred
stock at a weighted average exercise price of $0.643 per share have not been
included in the computation of diluted net loss per share for the year ended
March 31, 1999. Options to purchase 3,518,000 shares of common stock at a
weighted average exercise price of $1.05 per share and warrants to purchase
128,000 shares of Series A and B convertible preferred stock at a weighted
average exercise price of $0.72 per share have not been included in the
computation of diluted net loss per share for the six months ended September 30,
1999.
Additionally, all shares of convertible preferred stock have not been
included in the computation of diluted net loss per share for all periods
presented as they are anti-dilutive (see Note 9).
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position No. 98-1, or SOP 98-1, "Software for Internal Use,"
which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. SOP 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. The Company does
not expect that the adoption of SOP 98-1 will have a material impact on its
financial statements.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, or SOP 98-5, "Reporting on the Costs of Start-Up
Activities." This standard requires
F-10
<PAGE> 75
DIGITAL IMPACT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
companies to expense the costs of start-up activities and organization costs as
incurred. In general, SOP 98-5 is effective for fiscal years beginning after
December 15, 1998. The Company believes the adoption of SOP 98-5 will not have a
material impact on its results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities. SFAS
133 requires that all derivatives be recognized at fair value in the statement
of financial position, and that the corresponding gains or losses be reported
either in the statement of operations or as a component of comprehensive income,
depending on the type of hedging relationship that exists. SFAS 133 will be
effective for fiscal years beginning after June 15, 2000. The Company does not
currently hold derivative instruments or engage in hedging activities.
\ NOTE 3 -- BALANCE SHEET COMPONENTS
PROPERTY AND EQUIPMENT, NET (IN THOUSANDS):
<TABLE>
<CAPTION>
MARCH 31,
--------------
1998 1999
---- ------
<S> <C> <C>
Furniture and office equipment.............................. $ 3 $ 201
Computer equipment and software............................. 28 2,544
--- ------
Total cost.................................................. 31 2,745
Less accumulated depreciation............................... (3) (251)
--- ------
$28 $2,494
=== ======
</TABLE>
Depreciation and amortization expense was $3,000 and $248,000 for the
period ended March 31, 1998 and for the year ended March 31, 1999, respectively.
During the year ended March 31, 1999, the Company sold to a financial
institution computer equipment and software at cost and leased-back the assets,
which were classified as capital leases. The cost of the assets acquired under
capital leases was $714,000 at March 31, 1999. The accumulated depreciation on
these assets was $11,000 at March 31, 1999.
ACCRUED LIABILITIES (IN THOUSANDS):
<TABLE>
<CAPTION>
MARCH 31,
------------
1998 1999
---- ----
<S> <C> <C>
Payroll and related......................................... $ -- $185
Other....................................................... 1 36
---- ----
$ 1 $221
==== ====
</TABLE>
NOTE 4 -- BORROWINGS:
The Company had $312,000 outstanding for equipment purchases under a loan
and security agreement with a bank at March 31, 1999. The loan agreement
provides for borrowings of up to $350,000, $300,000 of which is collateralized
by the Company's property and equipment. Under the terms of the loan agreement,
certain transactions, including payment of dividends, are prohibited without the
bank's consent. The loan bears interest at the prime rate (8.25% at March 31,
1999) plus
F-11
<PAGE> 76
DIGITAL IMPACT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
0.25% per annum. The Company is required to make monthly repayments on this loan
through December 2000. Principal payments under the loan are $200,000 in the
year ending March 31, 2000 and $112,000 in the year ending March 31, 2001.
In November 1998, the Company acquired a software license in exchange for a
promissory note for $291,000. The note bears interest at 12.7% per annum. This
note is collateralized by the software license purchased. Remaining principal
payments due under the note are $34,000 in the year ending March 31, 2000 and
$122,000 in the year ending March 31, 2001.
On February 12, 1999, the Company signed an agreement with a leasing
company for a leasing line of credit of $2.0 million. Amounts borrowed under
this agreement bear interest at rates of between 6.2 and 10.1% and are
collateralized by the leased assets. At March 31, 1999, the Company had used
$714,000 of this leasing line of credit. In conjunction with this agreement, the
Company issued a warrant to the leasing company for 66,000 shares of Series B
convertible preferred stock at an exercise price of $1.20875 per share (see Note
6).
NOTE 5 -- COMMITMENTS:
OPERATING LEASES
The Company leases its facility under an operating lease which expires in
2002. Rent expense for the period from October 16, 1997 (date of inception) to
March 31, 1998 and for the year ended March 31, 1999 was $7,000 and $122,000
respectively. Rent expense for the six months ended September 30, 1999 was
$387,000.
Future minimum lease payments under noncancelable capital and operating
leases, including lease commitments entered into as of March 31, 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
MARCH 31, LEASES LEASES
----------- ------- ---------
<S> <C> <C>
2000........................................................ $267 $ 423
2001........................................................ 267 435
2002........................................................ 173 353
2003........................................................ 40 --
---- ------
Total minimum lease payments................................ 747 $1,211
---- ======
Less: Discount due to warrants.............................. (50)
Less: Amount representing interest.......................... (33)
----
Present value of capital lease obligations.................. 664
Less: Current portion....................................... 207
----
Long-term portion of capital lease obligations.............. $457
====
</TABLE>
LETTER OF CREDIT
The Company obtained a letter of credit from a financial institution
totaling $108,000 in lieu of a security deposit for leased office space. No
amounts have been drawn against the letter of credit at March 31, 1999.
F-12
<PAGE> 77
DIGITAL IMPACT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- STOCKHOLDERS' EQUITY:
CONVERTIBLE PREFERRED STOCK
Convertible preferred stock at March 31, 1999 consists of the following (in
thousands):
<TABLE>
<CAPTION>
PROCEEDS
SHARES NET OF
------------------------ LIQUIDATION ISSUANCE
SERIES AUTHORIZED OUTSTANDING AMOUNT COSTS
------ ---------- ----------- ----------- --------
<S> <C> <C> <C> <C>
A.............................................. 6,000 5,592 $1,165 $1,153
B.............................................. 6,000 4,448 5,375 5,345
C.............................................. 4,000 -- -- --
------- ------ ------ ------
16,000 10,040 $6,540 $6,498
======= ====== ====== ======
</TABLE>
The holders of convertible preferred stock have various rights and
preferences as follows:
DIVIDENDS
The holders of Series A and Series B convertible preferred stock are
entitled to receive dividends of $0.0167 and $0.0967 per share per annum,
respectively. Such dividends, which are in preference to any common stock
dividends, are payable whenever funds are legally available and when declared by
the board of directors. The right of the holders of the preferred stock to
receive dividends is not cumulative. At March 31, 1999 no dividends have been
declared.
LIQUIDATION
In the event of any liquidation, dissolution or winding up of the Company,
the holders of convertible preferred stock are entitled to receive, prior and in
preference to any distribution of any of the assets of the Company to the
holders of common stock, an amount per share equal to the sum of $0.2083 and
$1.2085 for each outstanding share of Series A and Series B convertible
preferred stock, respectively, plus any declared and unpaid dividends. If the
funds available for distribution are insufficient to cover the liquidation
preference, then the entire assets and funds of the Company legally available
for distribution are to be distributed ratably among the holders of preferred
stock.
After payment of the full liquidation preference of the preferred
stockholders, any remaining assets of the Company legally available are to be
distributed ratably to the holders of common stock.
CONVERSION
Each share of preferred stock, at the option of the holder, is convertible
into a number of fully paid shares of common stock as determined by dividing the
respective preferred stock issue price by the conversion price in effect at the
time. The initial conversion prices of Series A and Series B convertible
preferred stock are $0.2083 and $1.2085, respectively, subject to adjustments in
accordance with antidilution provisions contained in the Company's Certificate
of Incorporation. Conversion is automatic immediately upon the closing of a firm
commitment underwritten public offering in which the per share price values the
Company on a fully-diluted basis to be at least $125 million, and the gross
proceeds raised exceed $10,000,000.
F-13
<PAGE> 78
DIGITAL IMPACT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
VOTING RIGHTS
As long as at least 4,140,000 shares of preferred stock remain outstanding,
the Company must obtain approval from a majority of the holders of preferred
stock to declare or pay any dividend on common stock; redeem, purchase or
otherwise acquire any common stock other than shares subject to right of
repurchase by the Company; cause the acquisition, reorganization, merger or
consolidation of the Company that results in a transfer of 50% or more of the
voting control of the Company; authorize or issue another equity security having
a preference over, or being on parity with, the Series A and Series B
convertible preferred stock; increase the number of directors of the Company; or
alter the Certificate of Incorporation as it relates to the preferred stock or
change the authorized number of shares of preferred stock.
WARRANTS FOR CONVERTIBLE PREFERRED STOCK
In March 1998, the Company granted a fully exercisable warrant to purchase
86,000 shares of Series A convertible preferred stock for $0.2083 per share in
connection with the issuance of Series A convertible preferred stock. Such
warrants are outstanding at March 31, 1999 and expire five years after issuance.
Using the Black-Scholes pricing model, the Company determined that the fair
value of the warrants was $12,000.
In November 1998, the Company granted a fully exercisable warrant to
purchase 66,000 shares of Series B convertible preferred for $1.2085 per share
in connection with a capital lease agreement. Such warrants were outstanding at
March 31, 1999 and expire five years after issuance. Using the Black Scholes
pricing model, the Company determined that the fair value of these warrants was
$52,000. The warrants were recorded as a discount on the debt and will be
amortized over the life of the underlying borrowings. The amortization recorded
in the year ended March 31, 1999 was $2,000.
COMMON STOCK
Share information for all periods has been retroactively adjusted to
reflect a 10-for-1 common stock split effected in March 1998 and a 3-for-1
preferred and common stock split effected in November 1998.
The Company has issued 6,000,000 shares of its common stock to the founders
of the Company under stock purchase agreements. Each share of common stock has
the right to one vote. The holders of common stock are also entitled to receive
dividends whenever funds are legally available and when declared by the Board of
Directors, subject to the prior rights of holders of all classes of stock
outstanding having priority rights as to dividends. No dividends have been
declared or paid through March 31, 1999.
All of the 6,000,000 shares of common stock issued thus far have been
issued under restrictive stock purchase agreements, under which the Company has
the option to repurchase issued shares of common stock. Generally, 25% of the
Company's repurchase rights lapse within one year, with the remaining rights
lapsing at a rate of 2.083% per month until all shares have been released. At
March 31, 1998 and 1999, 5,670,000 and 3,609,000 outstanding common shares were
subject to repurchase, respectively.
FAIR VALUE OF COMMON STOCK
In the absence of a public trading market for the Company's common stock,
alternative means for determining the fair value were used by the Board of
Directors. Factors considered included the
F-14
<PAGE> 79
DIGITAL IMPACT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
consideration received from third parties for the issuance of the Series A, B
and C preferred stock of the Company, the significant liquidation, participation
and other preferences of the holders of these preferred stocks, the financial
condition of the Company, including milestones in the development of the
Company's business and the market conditions.
STOCK OPTION PLAN
In 1998, the Company adopted the 1998 Stock Plan (the "Plan") under which
3,795,000 shares of the Company's common stock were reserved for issuance to
employees, directors and consultants. Options granted under the Plan may be
incentive stock options or non-statutory stock options. Incentive stock options
may only be granted to employees. The board of directors determines the period
over which options become exercisable, however, options shall become exercisable
at a rate of no less than 20% per year over five years from the date the options
are granted. The exercise price of incentive stock options and non-statutory
stock options shall be no less than 100% and 85%, respectively, of the fair
market value per share of the Company's common stock on the grant date. The term
of the options granted under the Plan may range from four to ten years.
Activity under this Plan is as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------------
SHARES WEIGHTED
AVAILABLE NUMBER OF PRICE PER AVERAGE AGGREGATE
FOR GRANT SHARES SHARE EXERCISE PRICE PROCEEDS
--------- --------- ------------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Options reserved at Plan
inception....................... 1,695 -- -- -- --
------
Balances, March 31, 1998.......... 1,695 -- -- -- --
Additional shares reserved........ 2,101 -- -- -- --
Options granted................... (1,965) 1,965 $0.02-$0.25 $0.08 $ 160
Options exercised................. -- (22) $ 0.02 $0.02 $ 0
Options cancelled................. 56 (56) $0.02-$0.25 $0.03 $ (2)
------ ----- ------
Balances, March 31, 1999.......... 1,887 1,887 $0.02-$0.25 $0.08 $ 158
Additional shares reserved........ 5,000
Options granted................... (2,492) 2,492 $0.25-$7.00 $1.46 $3,644
Options exercised................. -- (735) $0.02-$0.25 $0.16 $ (114)
Options cancelled................. 126 (126) $0.02-$0.25 $0.06 $ (8)
------ ----- ------
Balances, September 30, 1999
(unaudited)..................... 4,521 3,518 $0.02-$7.00 $1.05 $3,680
======
</TABLE>
F-15
<PAGE> 80
DIGITAL IMPACT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Had compensation cost been determined based on
the fair value at the grant date for the awards for the period ended March 31,
1999 and the six months ended September 30, 1999 consistent with the provisions
of SFAS No. 123, the Company's net loss for the year ended March 31, 1999 and
for the six months ended September 30, 1999, respectively, would have been as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
MARCH 31, SEPTEMBER 30,
1999 1999
---------- -------------
(UNAUDITED)
<S> <C> <C>
Net loss attributable to common stockholders -- as
reported.................................................. $(3,240) $(8,799)
Net loss attributable to common stockholders -- pro forma... $(3,252) $(8,964)
Net loss per common share -- basic and diluted as
reported.................................................. $ (2.86) $ (2.94)
Net loss per common share -- basic and diluted pro forma.... $ (2.87) $ (3.00)
</TABLE>
Such pro forma disclosures may not be representative of future compensation
cost because options vest over several years and additional grants are made each
year. The fair value of each option grant is estimated on the date of grant
using the minimum value method with the following assumptions used for grants:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
MARCH 31, SEPTEMBER 30,
1999 1999
---------- -------------
(UNAUDITED)
<S> <C> <C>
Expected volatility.................................... 0% 0%
Weighted average risk-free interest rate............... 5.18% 5.56%
Expected life (from vesting date)...................... 5 years 5 years
Expected dividends..................................... 0% 0%
</TABLE>
MINIMUM VALUE OF OPTION
Based on the above assumptions, the weighted average minimum values per
share of options granted were $0.02 and $0.36 for the year ended March 31, 1999
and the six months ended September 30, 1999, respectively.
F-16
<PAGE> 81
DIGITAL IMPACT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The options outstanding and currently exercisable by exercise price at
March 31, 1999 are as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
----------- ------------- -------- ----------- --------
<S> <C> <C> <C> <C>
1,376 9.2 $0.03 64 $0.02
511 9.8 $0.25 3 $0.25
----- --
1,887 9.4 67
===== ==
</TABLE>
The options outstanding and currently exercisable by exercise price at
September 30, 1999 (unaudited) are as follows (in thousands except per share
amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
----------- ------------- -------- ----------- --------
<S> <C> <C> <C> <C>
996 8.7 $0.03 335 $0.02
1,243 9.5 $0.25 22 $0.25
1,279 9.9 $2.61 26 $2.50
----- ---
3,518 9.4 383
===== ===
</TABLE>
During the year ended March 31, 1999 the Company recorded unearned
stock-based compensation totalling $1,769,000 which is being amortized to
expense over the period during which the options vest, generally four years
using the method set out in Example 2 of FASB Interpretation No. 28 ("FIN 28").
Under the FIN 28 method, each vested tranche of options is accounted for as a
separate option grant awarded for past services. Accordingly, the compensation
expense is recognized over the period during which the services have been
provided. This method results in a front-loading of the compensation expense.
For the year ended March 31, 1999, the Company recorded stock-based compensation
of $543,000 in respect of options granted to employees and non-employees during
the year. In addition, the Company recognized additional stock-based
compensation of $614,000 in the year for 270,000 shares of common stock which
the Company bonused to a founder. (See Note 8). Based on the above assumptions,
the weighted average fair values per share of options granted were $0.98 and
$6.41 for the year ended March 31, 1999 and the six months ended September 30,
1999 respectively.
NOTE 7 -- INCOME TAXES:
At March 31, 1999, the Company had federal and state net operating loss
carryforwards of approximately $2,107,000 available to offset future regular and
alternative minimum taxable income. The Company's federal and state net
operating loss carryforwards expire in 2005 through 2019.
F-17
<PAGE> 82
DIGITAL IMPACT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At March 31, 1999, the Company had federal and state research and
development and other credits of approximately $34,000 and $26,000,
respectively. The research and development credit carryforwards expire in 2019,
if not utilized.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforward in certain situations where changes occur in the stock
ownership of a company. If the Company should have an ownership change, as
defined for tax purposes, utilization of the carryforwards could be restricted.
Temporary differences which give rise to significant portions of deferred
tax assets and liabilities at March 31, 1998 and 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31,
-------------
1998 1999
---- -----
<S> <C> <C>
Net operating loss carryforwards............................ $ 12 $ 839
Research and development credit carryover................... -- 51
Capitalized start-up and other.............................. 28 37
---- -----
Total deferred tax assets................................... 40 927
Less valuation allowance.................................... (40) (927)
---- -----
Net deferred tax asset...................................... $ -- $ --
==== =====
</TABLE>
The Company has established a 100% valuation allowance at March 31, 1999 as
it appears more likely than not that no benefit will be realized for its
deferred tax assets.
NOTE 8 -- RELATED PARTY TRANSACTION:
On February 11, 1999, the Board of Directors approved the contribution of
270,000 shares of common stock from one of the founders to the Company. The
Company then issued these shares to another founder as a bonus. The fair value
of the shares on February 11, 1999 was determined to be $2.27 per share. The
Company recognized $614,000 in stock-based compensation in connection with this
transaction for the year ended March 31, 1999 based on the methodology described
in Note 6 under the heading "Fair Value of Common Stock."
NOTE 9 -- UNAUDITED PRO FORMA NET LOSS PER COMMON SHARE AND PRO FORMA
STOCKHOLDERS' EQUITY:
Upon the closing of the Company's initial public offering, all outstanding
Series A, Series B and Series C convertible preferred stock (See Note 10) will
be converted automatically into common stock. The pro forma effect of this
conversion has been presented as a separate column in the Company's balance
sheet, assuming, that the Series C convertible preferred stock had been issued
and this conversion had occurred as of September 30, 1999.
Pro forma basic and diluted net loss per common share have been computed to
give effect to common equivalent shares from preferred stock that will
automatically convert upon the closing of the Company's initial public offering
(using the as-if-converted method) for the years ended March 31, 1999 and the
six months ended September 30, 1999.
F-18
<PAGE> 83
DIGITAL IMPACT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the numerator and denominator used in the calculation
of pro forma basic and fully diluted net loss per common share follows (in
thousands except per share data):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
MARCH 31, SEPTEMBER 30,
1999 1999
----------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Numerator
Net loss.................................................. $(3,240) $(8,799)
------- -------
Denominator:
Shares used in computing basic and diluted net loss per
share................................................ 1,133 2,991
Adjusted to reflect the effect of the assumed conversion
of convertible preferred stock from the date of
issuance:
Series A convertible preferred stock................. 5,592 5,616
Series B convertible preferred stock................. 1,645 4,448
Series C convertible preferred stock................. -- 1,035
------- -------
Weighted average shares used in computing pro forma basic
and diluted net loss per share.......................... 8,370 14,090
------- -------
Pro forma basic and diluted net loss per share............ $ (0.39) $ (0.62)
======= =======
</TABLE>
NOTE 10 -- SUBSEQUENT EVENTS:
OFFICE LEASE
On May 28, 1999, the Company entered into a lease agreement to lease
additional office space. The Company is required to make monthly payments for
each fiscal year in total as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31,
-----------
<S> <C>
2000.................................................... $ 332
2001.................................................. 732
2002.................................................. 819
2003.................................................. 824
------
$2,707
======
</TABLE>
1998 STOCK OPTION PLAN
On July 1, 1999, the board of directors authorized an increase in the
number of shares reserved under the 1998 stock option plan of 1,000,000 shares
of common stock.
SERIES C FINANCING
On June 30, 1999, the Company received a $500,000 bridge loan from one of
its existing investors. On July 7, 1999, the Company issued 2,228,000 shares of
Series C convertible preferred stock for $4.785 per share for total cash
proceeds of $10,160,000 and the conversion of the $500,000 bridge loan. The
holders of Series C convertible preferred stock are entitled to receive
dividends of
F-19
<PAGE> 84
DIGITAL IMPACT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
$0.3825 per share per annum when declared by the board of directors and $4.785
per share upon liquidation. Each share of Series C convertible preferred stock
converts automatically into one share of common stock upon the closing of a firm
commitment underwritten public offering.
STOCK SPLIT AND AMENDMENT TO ARTICLES OF INCORPORATION
On July 8, 1999, the board of directors approved a 2-for-1 forward split of
its preferred and common stock. All common stock data and common stock option
plan information in this report has been restated to reflect the split. In
addition, the conversion prices of the Company's Series A, Series B and Series C
convertible preferred stock have also been adjusted to reflect the effect of the
split.
Additionally, on August 16, 1999 the board of directors amended the
Articles of Incorporation to increase the number of common shares authorized to
54,000,000 and the number of preferred shares authorized to 16,000,000.
REINCORPORATION
On September 16, 1999, the Company authorized the reincorporation of the
Company in the State of Delaware.
Following the reincorporation, the Company will be authorized to issue
54,000,000 shares of $0.001 par value common stock and 16,000,000 shares of
$0.001 par value preferred stock. The board of directors has the authority to
issue the undesignated preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof.
AMENDED AND RESTATED 1998 STOCK PLAN
On September 16, 1999, the board of directors amended the 1998 stock option
plan, which provides for the grant of incentive stock options to employees and
non-statutory stock options to employees, non-employees, directors and
consultants. A total of 8,795,000 shares of common stock has been reserved under
the plan.
1999 DIRECTOR OPTION PLAN
On September 16, 1999, the Company adopted the 1999 director option plan
under which 500,000 shares have been reserved for issuance of common stock.
EMPLOYEE STOCK PURCHASE PLAN
On September 16, 1999, the board of directors adopted the employee stock
purchase plan under which 700,000 shares have been reserved for issuance and
approved for issuance. The 1999 employee stock purchase plan contains successive
six-month offering periods and the price of stock purchased under the plan is
85% of the lower of the fair value of the common stock either at the beginning
of the period or at the end.
STOCK-BASED COMPENSATION
In connection with certain stock option grants to employees and
non-employees during the six months ended September 30, 1999, the Company
recorded unearned stock-based compensation totalling $12,692,000, which is being
amortized over the vesting periods of the related options which
F-20
<PAGE> 85
DIGITAL IMPACT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
is generally four years. Stock-based compensation expense recognized during the
six months ended September 30, 1999 totalled approximately $3,295,000.
The total unamortized unearned stock-based compensation recorded for all
option grants through September 30, 1999 will be amortized as follows: $3.8
million for the remainder of the year ending March 31, 2000; $4.2 million for
the year ending March 31, 2001; $2.0 million for the year ending March 31, 2002;
$771,000 for the year ending March 31, 2003 and thereafter.
INITIAL PUBLIC OFFERING
On September 16, 1999, the board of directors approved the filing of a
registration statement for an underwritten public offering of the Company's
common stock whereupon the authorized number of shares of common stock will be
increased to 100,000,000 and the authorized number of shares of undesignated
preferred stock will be reduced to 5,000,000.
F-21
<PAGE> 86
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