<PAGE> 1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 000-27787
DIGITAL IMPACT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3286913
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
177 BOVET ROAD
SAN MATEO, CALIFORNIA 94402
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE NUMBER (650) 356-3400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
As of November 6, 2000, there were approximately 26,702,000 shares of the
Registrant's Common Stock outstanding.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
DIGITAL IMPACT, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations for the
three and six months ended September 30, 2000 and 1999.... 1
Condensed Consolidated Balance Sheets as of September 30,
2000 and March 31, 2000................................... 2
Condensed Consolidated Statements of Cash Flows for the six
months ended September 30, 2000 and 1999.................. 3
Notes to Condensed Consolidated Financial Statements........ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 8
Item 3. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 16
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................... 17
Item 4. Submission of Matters to a Vote of Security Holders......... 17
Item 6. Exhibits and Reports on Form 8-K............................ 18
Signatures........................................................... 19
</TABLE>
i
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DIGITAL IMPACT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues.......................................... $ 9,371 $ 1,872 $ 17,845 $ 3,257
Cost of revenues.................................. 4,154 945 7,867 1,617
-------- ------- -------- -------
Gross margin...................................... 5,217 927 9,978 1,640
Operating expenses:
Research and development........................ 4,640 1,675 7,866 2,518
Sales and marketing............................. 3,926 1,534 8,150 2,544
General and administrative...................... 2,767 1,117 5,067 2,164
Stock-based compensation........................ 1,723 2,318 3,758 3,295
Amortization of goodwill and purchased
intangibles.................................. 1,607 -- 1,607 --
Nonrecurring charges............................ 4,563 -- 4,563 --
-------- ------- -------- -------
Total operating expenses................ 19,226 6,644 31,011 10,521
-------- ------- -------- -------
Loss from operations.............................. (14,009) (5,717) (21,033) (8,881)
Interest income, net.............................. 868 78 1,836 82
-------- ------- -------- -------
Net loss.......................................... $(13,141) $(5,639) $(19,197) $(8,799)
======== ======= ======== =======
Net loss per common share -- basic and diluted.... $ (0.55) $ (1.76) $ (0.83) $ (2.94)
======== ======= ======== =======
Shares used in net loss per common share
calculation -- basic and diluted................ 24,010 3,199 23,090 2,991
======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
1
<PAGE> 4
DIGITAL IMPACT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
2000 2000
------------- ---------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 51,940 $ 68,073
Accounts receivable, net.................................. 8,429 4,809
Prepaid expenses and other current assets................. 564 626
-------- --------
Total current assets.............................. 60,933 73,508
-------- --------
Property and equipment, net................................. 11,618 7,309
Restricted cash............................................. 1,847 108
Goodwill, net............................................... 24,813 --
Other assets................................................ 4,875 177
-------- --------
Total assets...................................... $104,086 $ 81,102
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,673 $ 3,066
Deferred revenues......................................... 1,138 256
Accrued liabilities....................................... 4,249 2,994
Current portion of long term debt......................... 2,913 530
-------- --------
Total current liabilities......................... 12,973 6,846
-------- --------
Long term debt, less current portion...................... 880 726
-------- --------
Total liabilities................................. 13,853 7,572
-------- --------
Stockholders' equity:
Common Stock.............................................. 27 24
Additional paid-in capital................................ 141,675 109,866
Accumulated other comprehensive loss...................... (34) (15)
Unearned stock-based compensation......................... (7,242) (11,349)
Accumulated deficit....................................... (44,193) (24,996)
-------- --------
Total stockholders' equity........................ 90,233 73,530
-------- --------
Total liabilities and stockholders' equity........ $104,086 $ 81,102
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
2
<PAGE> 5
DIGITAL IMPACT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- -------
<S> <C> <C>
Cash flows from operating activities
Net loss.................................................. $(19,197) $(8,799)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Charge for acquired in-process research and
development........................................... 4,432 --
Depreciation and amortization.......................... 3,438 535
Provision for bad debts................................ 600 12
Warrants issued for services........................... -- 212
Amortization of unearned stock-based compensation...... 3,758 3,083
Loss on write-off of fixed assets...................... 131 --
Unrealized loss on cash and cash equivalents........... (19) --
Changes in operating assets and liabilities
Accounts receivable.................................. (4,105) (916)
Prepaid expenses and other current assets............ 128 20
Restricted cash...................................... (1,739) --
Other assets......................................... (317) (611)
Accounts payable..................................... 628 993
Accrued liabilities.................................. 351 1,156
-------- -------
Net cash used in operating activities............. (11,911) (4,315)
-------- -------
Cash flows from investing activities
Acquisition of property and equipment..................... (5,107) (1,896)
Cash acquired from acquisition (See note 3)............... 264 --
-------- -------
Net cash used in investing activities....................... (4,843) (1,896)
-------- -------
Cash flows from financing activities
Principal payments on long-term debt...................... (395) (229)
Proceeds from exercise of common stock options and
warrants............................................... 1,016 114
Proceeds from issuance of convertible preferred stock, net
of issuance costs...................................... -- 10,644
Repayment of stock subscription........................... -- 1
-------- -------
Net cash provided by financing activities................... 621 10,530
-------- -------
Net increase (decrease) in cash and cash equivalents........ (16,133) 4,319
Cash and cash equivalents at beginning of year.............. 68,073 2,864
-------- -------
Cash and cash equivalents at end of period.................. $ 51,940 $ 7,183
======== =======
Supplemental noncash information:
Fair value of net assets acquired (excluding transaction
costs)................................................. $ 31,145 $ --
Assets acquired under capital leases...................... $ 140 $ 513
Unearned stock-based compensation......................... $ (349) $12,692
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
<PAGE> 6
DIGITAL IMPACT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
Digital Impact, Inc. ("Digital Impact" or the "Company"), a Delaware
corporation, is a leading provider of eMarketing solutions. The Company sells
comprehensive customer acquisition, retention, and analysis eMarketing solutions
either as single or bundled services which leverage the following proprietary
capabilities: Mass Personalization Engine(TM), the Company's messaging platform
which assembles and delivers personalized content over various digital media
such as email and set-top box; eMarketing Dashboard, the Company's web-based
campaign management and reporting system; and Adaptive Intelligent
Marketing(TM), the Company's consulting and data management methodology for
developing and implementing eMarketing strategies and programs.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements of Digital Impact
at September 30, 2000 and for the three and six month periods then ended reflect
all adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in these interim statements under the rules and regulations of the
Securities and Exchange Commission ("SEC"). The condensed consolidated financial
statements should be read in conjunction with the audited financial statements
and the notes thereto included in Digital Impact's annual report on Form 10-K
for the fiscal year ended March 31, 2000. The results of operations for the
three and six months ended September 30, 2000 are not necessarily indicative of
the results for the entire fiscal year ending March 31, 2001.
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. Other comprehensive loss, a component of stockholders'
equity, recorded by the Company for the three and six months ended September 30,
2000 was attributable to unrealized loss on cash equivalents. The Company did
not have any additional transactions that were required to be reported in other
comprehensive income during the three and six months ended September 30, 2000.
NOTE 3. BUSINESS COMBINATION
On July 31, 2000, the Company acquired MineShare, Inc. ("MineShare"), a
customer intelligence and analysis company based in Santa Monica, California, in
exchange for approximately 1,855,700 shares of the Company's common stock.
Additionally, the Company assumed MineShare's outstanding stock options and
warrants and reserved approximately 132,700 shares of the Company's common stock
for issuance upon exercise of these options and warrants. The acquisition was
effected by means of a merger pursuant to which a wholly owned subsidiary of the
Company was merged with and into MineShare, with MineShare as the surviving
corporation. The acquisition has been accounted for as a purchase.
4
<PAGE> 7
DIGITAL IMPACT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The allocation of the $31.9 million purchase price is summarized as follows
(amounts in thousands):
<TABLE>
<S> <C>
Net assets at the date of acquisition...................... $(3,368)
Goodwill................................................... 26,273
In-process technology...................................... 4,432
Developed technology....................................... 1,930
Other intangibles.......................................... 2,660
-------
Net assets acquired...................................... $31,927
=======
</TABLE>
The amounts allocated to goodwill and other intangible assets will be
amortized over a three-year period. The amount allocated to the purchased
in-process technology and other items was determined based on an appraisal
completed by an independent third party using established valuation techniques.
The in-process technology was expensed upon acquisition, because technological
feasibility had not been established and no future alternative uses existed.
The estimated purchase price was approximately $31.9 million, measured as
the average fair market value of Digital Impact's closing stock price from July
12, 2000 to July 26, 2000, five trading days before and after the merger
agreement was announced, plus the fair value of the vested options and warrants
calculated using the Black Scholes option pricing model of MineShare assumed by
Digital Impact in the merger, and other costs directly related to the merger as
follows (in thousands):
<TABLE>
<S> <C>
Fair market value of Digital Impact's common stock......... $30,304
Fair value of options and warrants assumed................. 841
Acquisition-related costs.................................. 782
-------
Total............................................ $31,927
=======
</TABLE>
The following unaudited pro forma revenues, net loss, and net loss per
share data for the six months ended September 30, 2000 and 1999 are based on the
respective historical financial statements of the Company and MineShare. The pro
forma data reflects the consolidated results of operations as if the merger with
MineShare had occurred at the beginning of each of the periods indicated and
includes the amortization of the resulting goodwill and other intangible assets.
The pro forma financial data presented are not necessarily indicative of the
Company's results of operations that might have occurred had the transaction
been completed at the beginning of the periods specified, and do not purport to
represent what the Company's consolidated results of operations might be for any
future period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
----------- -----------
(UNAUDITED PRO FORMA)
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Revenues............................................... $ 18,107 $ 4,359
Net loss............................................... $(21,589) $(21,588)
Net loss per common share -- basic and diluted......... $ (0.87) $ (4.45)
</TABLE>
NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") 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.
5
<PAGE> 8
DIGITAL IMPACT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," or SAB 101, which provides
guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. The Company adopted the provisions of
SAB 101 during the third quarter of the fiscal year ended March 31, 2000, and
believes that its adoption has not had a material effect on its financial
position or results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25" ("FIN 44"). This
Interpretation clarifies the definition of employee for the purposes of applying
Accounting Practice Board Opinion No. 25, Accounting for Stock Issued to
Employees, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequences of various modifications to
the terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. This
Interpretation is effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. The Company applied FIN 44 in accounting for the options
granted to MineShare option holders in the acquisition of MineShare. As a
result, the Company recorded $841,000 of deferred compensation relating to the
unvested portion of these options at the acquisition date.
NOTE 5. NET LOSS PER SHARE
Basic net loss per share is calculated by dividing net loss by the weighted
average number of vested common shares outstanding for the period. Diluted net
loss per share is calculated giving effect to all dilutive potential common
shares, including options, warrants and preferred stock. Options, warrants, and
preferred stock were not included in the calculation of diluted net loss per
share for the three and six month periods ended September 30, 2000 and September
30, 1999 because the effect would be antidilutive. A reconciliation of the
numerators and denominators used in the basic and diluted net loss per share
amounts follows (in thousands except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Numerator:
Net loss.......................................... $(13,141) $(5,639) $(19,197) $(8,799)
-------- ------- -------- -------
Denominator:
Weighted average common shares outstanding...... 26,030 6,541 25,330 6,333
Weighted average unvested common shares subject
to repurchase................................ (2,020) (3,342) (2,240) (3,342)
-------- ------- -------- -------
Denominator for basic and diluted calculation..... 24,010 3,199 23,090 2,991
======== ======= ======== =======
Net loss per common share -- basic and diluted.... $ (0.55) $ (1.76) $ (0.83) $ (2.94)
======== ======= ======== =======
</TABLE>
All convertible preferred stock, warrants, outstanding stock options, and
shares subject to repurchase by the Company have been excluded from the
calculation of diluted net loss per common share because all such securities are
antidilutive for all periods presented. As of September 30, 1999, 11,178,000
shares of convertible preferred stock have not been included in the calculation
of diluted net loss per share. Warrants to purchase 38,000 and 140,000 shares at
a weighted average exercise price of $0.21 and $0.68 have been excluded from the
computation of diluted net loss per share at September 30, 2000 and 1999,
respectively. Options to purchase 3,447,000 and 2,369,000 shares of common stock
at a weighted average exercise price of $12.45 and
6
<PAGE> 9
DIGITAL IMPACT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$1.68 have been excluded from the calculation of diluted net loss per share at
September 30, 2000 and 1999, respectively.
NOTE 6. STOCK-BASED COMPENSATION
During the six months ended September 30, 2000, the Company reduced
unearned stock-based compensation, a component of stockholders' equity, by $4.1
million. This reduction was the result of stock-based compensation of $3.8
million, a reduction of $1.1 million related primarily to stock option
cancellations and the revaluation of options granted to consultants, offset by
the recording of $0.8 million of deferred compensation relation to unvested
options assumed in the MineShare acquisition. Unearned stock-based compensation
is amortized to expense over the period during which the options vest, generally
four years in accordance with FASB Interpretation No. 28.
7
<PAGE> 10
ITEM 2. 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 "Certain Factors Which May Impact Future Operating Results,"
starting on page 12, as well as factors set forth in Digital Impact's annual
report on Form 10-K for the fiscal year ended March 31, 2000. Any
forward-looking statements speak only as of the date such statements are made.
OVERVIEW
Digital Impact, Inc., a Delaware corporation, is a leading provider of
eMarketing solutions. We sell comprehensive customer acquisition, retention, and
analysis eMarketing solutions either as single or bundled services which
leverage the following proprietary capabilities: Mass Personalization
Engine(TM), our messaging platform which assembles and delivers personalized
content over various digital media such as email and set-top box; eMarketing
Dashboard, our web-based campaign management and reporting system; and Adaptive
Intelligent Marketing(TM), our consulting and data management methodology for
developing and implementing eMarketing strategies and programs.
On July 31, 2000, we acquired MineShare, Inc. ("MineShare"), a customer
intelligence and analysis company based in Santa Monica, California, in exchange
for approximately 1,855,700 shares of our common stock. Additionally, we assumed
MineShare's outstanding stock options and warrants and reserved approximately
132,700 shares of our common stock for issuance upon exercise of these options
and warrants. The acquisition was effected by means of a merger pursuant to
which a wholly owned subsidiary of Digital Impact was merged with and into
MineShare, with MineShare as the surviving corporation. The acquisition has been
accounted for as a purchase.
Of the $31.9 million purchase price, $4.4 million represented the value of
in-process research and development that had not yet reached technological
feasibility and had no alternative future use, and as such, was expensed during
the quarter ended September 30, 2000. Of the remaining purchase price, $26.3
million, $1.9 million, and $2.7 million were allocated to goodwill, developed
technology, and other intangible assets, respectively.
Digital Impact generates 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. In accordance with Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements," revenue is recognized as
these eMarketing campaigns are delivered, provided that there are no remaining
significant obligations and collection of the resulting receivable is reasonably
assured.
Cost of revenues consists primarily of expenses relating to the delivery of
eMarketing services, including personnel costs, primarily consisting of our
production services staff, the amortization of equipment and licensed
technology, and data center expenses.
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.
8
<PAGE> 11
Stock-based compensation related to stock options granted to employees
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 related to stock options granted
to consultants is revalued at each reporting date using the Black-Scholes option
pricing model. Stock-based compensation is amortized based on an accelerated
vesting method over the vesting period of the underlying options, generally four
years.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 and September 30, 1999
Revenues. Revenues increased to $9.4 million for the three months ended
September 30, 2000 from $1.9 million for the three months ended September 30,
1999, an increase of $7.5 million or 401%. The increase was primarily due to the
addition of new clients from September 1999 through September 2000 as well as
increased volume from continuing clients.
Cost of Revenues. Cost of revenues increased from $945,000 during the
quarter ended September 30, 1999 to $4.2 million during the quarter ended
September 30, 2000. The increase was primarily due to higher costs of campaign
creation and delivery associated with supporting a larger number of clients and
a higher volume of emails. Gross margins improved from 50% for the quarter ended
September 30, 1999 to 56% for the quarter ended September 30, 2000, largely due
to the continued scaling of our operations as volumes increase.
Research and Development. Research and development expenses increased from
$1.7 million for the quarter ended September 30, 1999 to $4.6 million for the
quarter ended September 30, 2000. The increase is largely a result of an
increase in personnel costs of approximately $2.0 million, largely related to
the increase in our engineering staff associated with our MineShare acquisition,
and an increase in professional fees of $560,000 as we continued to invest in
technological capabilities that will differentiate our products going forward
and increase our operating efficiency. We expect to continue to make investments
in research and development and anticipate that research and development
expenses will continue to increase in absolute dollars in future periods, but
will decrease as a percentage of total revenues.
Sales and Marketing. Sales and marketing expenses increased from $1.5
million for the three months ended September 30, 1999 to $3.9 million for the
three months ended September 30, 2000. The increase was primarily due to an
increase in marketing costs of $673,000 related to expanded advertising and
promotional activities and increased personnel costs of $645,000 associated with
the growth of our sales force and marketing staff. We expect our sales and
marketing expenses to increase in future periods as we increase our marketing
efforts to promote our brand and hire additional personnel.
General and Administrative. General and administrative expenses increased
from $1.1 million for the three months ended September 30, 1999 to $2.8 million
for the three months ended September 30, 2000. The increase was due primarily to
an increase in insurance costs of $401,000 largely related to the addition of
our directors and officers' insurance during the current fiscal year, and an
increase in personnel related expenses of $503,000 associated with the expansion
of our finance, administration, and information technology departments. We
anticipate that general and administrative expenses will increase in absolute
dollars in future periods as we incur additional costs related to the expected
growth of our business and operations. However, we anticipate that these
expenses will decrease as a percentage of revenues in future periods.
Stock-based Compensation. Stock-based compensation recognized during the
three months ended September 30, 2000 and 1999 was $1.7 million and $2.3 million
respectively. These amounts are recognized over the period during which the
underlying stock options vest, generally four years.
Amortization of Goodwill and Purchased Intangibles. During the quarter
ended September 30, 2000, we recorded amortization of goodwill and purchased
intangibles of $1.6 million. These amounts relate to the July 31, 2000
acquisition of MineShare and are being amortized over three years.
Nonrecurring Charges. Nonrecurring charges recorded during the quarter
ended September 30, 2000 ($4.6 million) consisted primarily of the write-off of
purchased in-process research and development
9
<PAGE> 12
associated with the acquisition of MineShare. See note 3 to the attached
condensed consolidated financial statements for further information.
Interest Income, Net. Interest income increased from $78,000 for the three
months ended September 30, 1999 to $868,000 for the three months ended September
30, 2000. The increase is largely due to higher average cash and cash
equivalents balances resulting from the $70.8 million in net proceeds raised
during the Company's initial public offering in November 1999.
Six Months Ended September 30, 2000 and September 30, 1999
Revenues. Total revenues increased from $3.3 million for the six months
ended September 30, 1999 to $17.8 million for the six months ended September 30,
2000. The increase was largely due to an increase in the number of clients to
whom we provide services along with a significant increase in the number of
emails sent on behalf of our clients.
Cost of Revenues. Cost of revenues increased from $1.6 million for the six
months ended September 30, 1999 to $7.9 million for the six months ended
September 30, 2000. The increase was primarily due to supporting a larger number
of clients and a higher volume of emails. Gross margins improved from 50% for
the six months ended September 30, 1999 to 56% for the six months ended
September 30, 2000. This increase was primarily the result of higher capacity
utilization.
Research and Development. Research and development expenses increased from
$2.5 million for the six months ended September 30, 1999 to $7.9 million for the
six months ended September 30, 2000. The increase was primarily due to increased
personnel costs of $3.6 million and an increase in professional fees of $1.0
million.
Sales and Marketing. Sales and marketing expenses increased from $2.5
million for the six months ended September 30, 1999 to $8.2 million for the six
months ended September 30, 2000. The increase was largely due to growth in our
direct sales and marketing staff with personnel related costs increasing by $1.7
million and an increase in promotional spending of $2.1 million, targeted at
building our brand, increasing our client base and growing sales.
General and administrative. General and administrative expenses increased
from $2.2 million for the six months ended September 30, 1999 to $5.1 million
for the six months ended September 30, 2000. The increase was due primarily to
increased personnel costs of $1.1 million and increased insurance costs of
$698,000.
Stock-based Compensation. Stock-based compensation recognized during the
six months ended September 30, 2000 and 1999 was $3.8 million and $3.3 million,
respectively. These amounts are recognized over the period during which the
underlying stock options vest, generally four years.
Amortization of Goodwill and Purchased Intangibles. During the six months
ended September 30, 2000, we recorded amortization of goodwill and purchased
intangibles of $1.6 million. These amounts relate to the July 31, 2000
acquisition of MineShare.
Nonrecurring Charges. Nonrecurring charges recorded during the six months
ended September 30, 2000 ($4.6 million) consisted primarily of the write-off of
purchased in-process research and development associated with the acquisition of
MineShare. See note 3 to the attached condensed consolidated financial
statements for further information.
Interest Income, Net. Interest income increased from $82,000 for the six
months ended September 30, 1999 to $1.8 million for the six months ended
September 30, 2000. The increase is largely due to higher average cash and cash
equivalents balances resulting from the $70.8 million raised in net proceeds
raised during the Company's initial public offering completed November 1999.
Income Taxes. No provision for federal and state income taxes was recorded
as we incurred net operating losses from inception through September 30, 2000.
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,
10
<PAGE> 13
including shares sold in the initial public offering, may further restrict our
ability to utilize our net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $11.9 million for the six months
ended September 30, 2000, which was due primarily to a net loss of $19.2 million
and an increase in accounts receivable of $4.1 million related to higher sales
during the period. This was partially offset by noncash charges including the
write-off of in-process research and development associated with the MineShare
acquisition of $4.4 million, amortization of stock-based compensation of $3.8
million, and depreciation and amortization of $3.4 million. Net cash used in
operating activities for the six months ended September 30, 1999 was $4.3
million.
Our investing activities used $4.8 million during the six months ended
September 30, 2000 related primarily to the acquisition of property and
equipment as we made significant investments in our data center capacity and
purchased new office furniture and equipment for our increased staff. Cash used
in investing activities for the six months ended September 30, 1999 was $1.9
million.
Financing activities generated $621,000 during the six months ended
September 30, 2000, consisting primarily of the proceeds from the exercise of
stock options and the purchase of shares through our employee stock purchase
plan. This was slightly offset by principal payments on our long-term debt.
During the six months ended September 30, 1999, cash provided by financing
activities was $10.5 million.
At September 30, 2000, we had $51.9 million in cash and cash equivalents.
We had $987,000 outstanding at September 30, 2000 under capital lease agreements
which bear interest at rates of between 6.2% and 18.8%. We have $50,000
outstanding under a $50,000 revolving line of credit, which is guaranteed by a
shareholder and bears interest at prime plus 3 percent (12.5 percent as of
September 30, 2000). We also have equipment loan facilities which originally had
a maximum borrowing limit of $1.8 million through April 13, 2000, which are
secured by the equipment of our MineShare subsidiary and bear interest at 10
percent. As of September 30, 2000, $710,000 was outstanding under these
facilities. At September 30, 2000, we also had $2.0 million outstanding under
various promissory notes which bear interest at rates between 9% and 12.7%.
These promissory notes mature in February 2001.
Our other principal commitments at September 30, 2000 consist of
obligations under operating leases for facilities. We believe that our existing
cash and cash equivalents will be sufficient to satisfy both our currently
anticipated cash requirements for the next twelve months and our currently
anticipated longer-term cash requirements. Longer-term cash requirements are
anticipated for the continued investment in the development of our current and
future eMarketing services, the expansion of our sales and marketing activities,
investment in our infrastructure, and the acquisition or investment in
complementary products, businesses, or technologies.
YEAR 2000 READINESS DISCLOSURE
Before January 1, 2000, we completed our testing of systems for Year 2000
readiness. To date, we have not experienced any major disruptions to our
business nor are we aware of any significant Year 2000-related disruptions
impacting the providers of our key software applications and our key data center
equipment suppliers. We will continue to monitor our critical systems over the
next several months but do not anticipate any significant future impacts due to
Year 2000 exposures.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") 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
11
<PAGE> 14
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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," or
SAB 101, which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. We adopted the
provisions of SAB 101 during the third quarter of fiscal year 2000, and we
believe that its adoption has not had a material effect on our financial
position or results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25" ("FIN 44"). This
Interpretation clarifies the definition of employee for the purposes of applying
Accounting Practice Board Opinion No. 25, Accounting for Stock Issued to
Employees, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequences of various modifications to
the terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. This
Interpretation is effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. We applied FIN 44 in accounting for the options granted to
MineShare option holders in the acquisition of MineShare. As a result, we
recorded $841,000 of deferred compensation relating to the unvested portion of
these options at the acquisition date.
CERTAIN FACTORS WHICH MAY IMPACT FUTURE OPERATING RESULTS
Our future operating results may vary substantially from period to period
due to a number of factors, many of which are beyond our control. The following
discussion highlights some of these factors and the possible impact of these
factors on future results of operations. You should carefully consider these
factors before making an investment decision. If any of the following factors
actually occur, our business, financial condition or results of operations could
be harmed. In that case, the price of our common stock could decline, and you
could experience losses on your investment.
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 in California and reincorporated in
Delaware in October 1999. 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.
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
12
<PAGE> 15
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.
The loss of a major client could result in lower than expected revenues.
The loss of a major client could harm our business. While no single
customer accounted for more than 10 percent of Digital Impact's revenues for the
six months ended September 30, 2000, the loss of a major client could have a
material adverse effect on our business and results of operations. Additionally,
some internet-based businesses ("dot-coms") have recently been experiencing
financial problems. While the majority of our clients are not dot-coms, the loss
of a number of these clients could have a material adverse effect on our
business and results of operations.
The eMarketing industry is highly competitive, and if we are unable to compete
effectively, the demand for, or the prices of, our services may decline.
The market for eMarketing is highly 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 24/7 Media Inc. (through its acquisition of
Exactis.com), Kana Communications, Inc. Kana Connect product, FloNetwork
(formerly Media Synergy), MessageMedia, Responsys.com, Netcentives Inc. (through
its acquisition of Post Communications, Inc.), and Annuncio Software, Inc., as
well as 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, E.piphany, Inc., Yahoo!, ADVO, CMGI, Inc.
and the Interpublic Group of Companies. Each of these companies possesses large,
existing customer bases, substantial financial resources and established
distribution channels and could develop, market or 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.
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. We face
greater difficulty attracting these personnel with equity incentives as a public
company than we did as a private company.
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 President, 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
13
<PAGE> 16
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.
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.
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 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 clients' 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
14
<PAGE> 17
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.
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.
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 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, several U.S. states, and foreign governments 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 commercial 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.
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
15
<PAGE> 18
related to the operating performance of the companies and may accordingly reduce
the price of our common stock without regard to our operating performance.
Our acquisition of MineShare may result in disruptions to our business and
management due to difficulties in assimilating personnel and operations.
In July 2000, we completed our acquisition of Mineshare. We may not be able
to successfully assimilate MineShare's personnel, operations, acquired
technology and products into our existing business. Key personnel from Mineshare
may decide in the future that they want to leave our employment. Additionally,
MineShare products will have to be integrated into our existing products, and
this may not be easily accomplished. These difficulties could disrupt our
ongoing business or distract management and other key personnel. We may also
face unexpected costs which could lead to higher than expected expenses, which
may adversely affect our future operating results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the period from our inception through September 30, 2000, we provided
our services to clients primarily in the United States. As a result, our
financial results have not been 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. During the first
quarter of fiscal year 2001, we set up a subsidiary in the United Kingdom which
has had minimal operations to date. As the operations of this subsidiary expand,
our future operating results could be directly impacted by changes in foreign
currency exchange rates or economic conditions in this region.
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 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.
16
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 23, 1999, we completed our initial public offering of 5,175,000
shares of our common stock, which includes 675,000 shares in connection with the
exercise of the underwriters' overallotment option, at $15 per share. The
managing underwriters in the offering were Credit Suisse First Boston, Hambrecht
& Quist, Donaldson, Lufkin & Jenrette, and U.S. Bancorp Piper Jaffray. The
shares of common stock sold in the offering were registered under the Securities
Act of 1933, as amended, on a Registration Statement on Form S-1 (Reg. No.
333-87299) that was declared effective by the SEC on November 22, 1999. The
aggregate offering amount including the overallotment exercise was approximately
$77.6 million. We incurred expenses of approximately $6.8 million, of which
approximately $5.4 million represented underwriting discounts and commissions
and approximately $1.4 million represented other expenses related to the
offering.
Currently, we have placed the net proceeds from the offering in short-term,
interest bearing, investment grade securities. During the six months ended
September 30, 2000, we used a portion of the net proceeds to fund our general
operations, to purchase new data center equipment and office furniture and
equipment, and to begin the integration of the operations of our newly acquired
MineShare subsidiary. We expect to use the remaining offering net proceeds for
working capital and general corporate purposes, including continued investment
in the development of our current and future eMarketing services, the expansion
of our sales and marketing activities, and investment in our infrastructure.
Additionally, we may use a portion of the net proceeds to acquire or invest in
complementary products, technologies, or businesses.
On July 31, 2000, we acquired MineShare, Inc. In connection with the
acquisition, we issued approximately 1,855,700 shares of our common stock to the
shareholders of MineShare in exchange for all of the issued and outstanding
capital stock of MineShare. The shares were issued pursuant to exemptions by
reason of Section 4(2) of the Securities Act of 1933 and/or Regulation D
promulgated under such Act. These sales were made in private transactions
without general solicitation or advertising. Also in connection with the
acquisition, we assumed options and warrants to purchase 132,700 shares of our
common stock. We filed a Registration Statement on Form S-8 with respect to the
shares of our common stock issuable upon exercise of all such options.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders ("Annual Meeting") held on
July 21, 2000, the following individuals were re-elected to the Board of
Directors as Class I directors for a term of three years:
<TABLE>
<CAPTION>
VOTES FOR VOTES WITHHELD
---------- --------------
<S> <C> <C>
Gerardo Capiel.................................... 20,778,237 3,025
Warren Packard.................................... 20,772,612 8,650
</TABLE>
William Park, Ruthann Quindlen, and Michael Brown continue as either Class
II or Class III directors of the Company.
Additionally, at the Company's Annual Meeting, the following proposals were
adopted by the margins indicated:
1. To amend the Company's 1998 Stock Plan (the "Plan") to (i) increase
the number of shares reserved for issuance under the Plan by 2,500,000
shares to 11,295,000 shares and (ii) adjust the rate of the Plan's annual
stock replenishment from 4% to 5% of the Company's outstanding shares. The
votes cast for and against this action were 17,105,329 and 614,881,
respectively, with 22,830 abstaining and 3,038,222 broker non-votes.
2. To ratify the appointment of PricewaterhouseCoopers LLP as our
independent accountants for the fiscal year ending March 31, 2001. The
votes cast for and against this action were 20,775,838 and 3,619,
respectively, with 1,805 abstaining.
17
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
<TABLE>
<S> <C>
2.1(1) Agreement and Plan of Reorganization dated as of July 19,
2000, by and among the Registrant, Candlestick Acquisition
Corp., MineShare, Inc., David Mariani, as the Founding
Shareholder, David Mariani, as Shareholder Representative,
and Computershare Investor Services, as Exchange Agent
2.2(1) Agreement and Plan of Merger among MineShare, Inc. and
Candlestick Acquisition Corp. dated as of July 31, 2000
3.1(2) Form of Amended and Restated Certificate of Incorporation of
the Registrant
3.2(2) Bylaws of the Registrant
4.1(2) Amended and Restated Investor Rights Agreement
27.1 Financial Data Schedule
</TABLE>
---------------
(1) Incorporated by reference to Digital Impact's current Report on Form 8-K,
originally filed with the Commission on August 14, 2000, as subsequently
amended.
(2) Incorporated by reference to Digital Impact's registration statement on Form
S-1, File No. 333-87299, originally filed with the Commission on September
17, 1999, as subsequently amended.
Reports on Form 8-K
On July 26, 2000, the Company filed a report on Form 8-K describing that a
definitive agreement had been signed to acquire MineShare.
On August 14, 2000 the Company filed a report on Form 8-K describing the
consummation of the acquisition of MineShare.
18
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 10, 2000
DIGITAL IMPACT, INC.
(Registrant)
/s/ WILLIAM PARK
--------------------------------------
William Park
President, Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
/s/ DAVID OPPENHEIMER
--------------------------------------
David Oppenheimer
Senior Vice President and Chief
Financial Officer,
Treasurer and Secretary
(Principal Financial and Accounting
Officer)
19
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1(1) Agreement and Plan of Reorganization dated as of July 19,
2000, by and among the Registrant, Candlestick Acquisition
Corp., MineShare, Inc., David Mariani, as the Founding
Shareholder, David Mariani, as Shareholder Representative,
and Computershare Investor Services, as Exchange Agent
2.2(1) Agreement and Plan of Merger among MineShare, Inc. and
Candlestick Acquisition Corp. dated as of July 31, 2000
3.1(2) Form of Amended and Restated Certificate of Incorporation of
the Registrant
3.2(2) Bylaws of the Registrant
4.1(2) Amended and Restated Investor Rights Agreement
27.1 Financial Data Schedule
</TABLE>
---------------
(1) Incorporated by reference to Digital Impact's current Report on Form 8-K,
originally filed with the Commission on August 14, 2000, as subsequently
amended.
(2) Incorporated by reference to Digital Impact's registration statement on Form
S-1, File No. 333-87299, originally filed with the Commission on September
17, 1999, as subsequently amended.
