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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 DECEMBER 31, 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)
DELAWARE 94-3286913
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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 February 6, 2000, there were approximately 27,157,000 shares of the
Registrant's Common Stock outstanding.
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DIGITAL IMPACT, INC.
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Statements of Operations for the
three and nine months ended December 31, 2000 and December
31, 1999.................................................... 1
Condensed Consolidated Balance Sheets as of December 31,
2000 and March 31, 2000..................................... 2
Condensed Consolidated Statements of Cash Flows for the nine
months ended December 31, 2000 and December 31, 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................... 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 17
SIGNATURES............................................................ 18
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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)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ --------------------
2000 1999 2000 1999
------- ------- -------- --------
Revenues.......................................... $12,156 $ 4,011 $ 30,001 $ 7,268
Cost of revenues.................................. 5,326 1,944 13,193 3,561
------- ------- -------- --------
Gross margin...................................... 6,830 2,067 16,808 3,707
Operating expenses:
Research and development........................ 4,934 2,140 12,800 4,658
Sales and marketing............................. 4,935 2,001 13,085 4,545
General and administrative...................... 3,111 1,576 8,178 3,740
Stock-based compensation........................ 595 3,188 4,353 6,483
Amortization of goodwill and purchased
intangibles.................................. 2,411 -- 4,018 --
Nonrecurring charges (Note 3)................... -- -- 4,563 --
------- ------- -------- --------
Total operating expenses.......................... 15,986 8,905 46,997 19,426
------- ------- -------- --------
Loss from operations.............................. (9,156) (6,838) (30,189) (15,719)
Interest income, net.............................. 664 412 2,500 494
------- ------- -------- --------
Net loss.......................................... $(8,492) $(6,426) $(27,689) $(15,225)
======= ======= ======== ========
Net loss per common share -- basic and diluted.... $ (0.34) $ (0.60) $ (1.17) $ (2.82)
======= ======= ======== ========
Shares used in net loss per common share
calculation -- basic and diluted................ 25,080 10,650 23,760 5,400
======= ======= ======== ========
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
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DIGITAL IMPACT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER 31, MARCH 31,
2000 2000
------------ ---------
(UNAUDITED)
Current assets:
Cash and cash equivalents................................. $ 42,011 $ 68,073
Accounts receivable, net.................................. 14,332 4,809
Prepaid expenses and other current assets................. 923 626
-------- --------
Total current assets.............................. 57,266 73,508
-------- --------
Property and equipment, net................................. 13,501 7,309
Restricted cash............................................. 1,847 108
Goodwill, net............................................... 22,624 --
Other assets................................................ 4,532 177
-------- --------
Total assets...................................... $ 99,770 $ 81,102
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,177 $ 3,066
Deferred revenues......................................... 1,588 256
Accrued liabilities....................................... 5,564 2,994
Current portion of long term debt......................... 2,852 530
-------- --------
Total current liabilities......................... 16,181 6,846
-------- --------
Long term debt, less current portion........................ 831 726
-------- --------
Total liabilities................................. 17,012 7,572
-------- --------
Stockholders' equity:
Common Stock.............................................. 27 24
Additional paid-in capital................................ 140,740 109,866
Accumulated other comprehensive loss...................... (34) (15)
Unearned stock-based compensation......................... (5,290) (11,349)
Accumulated deficit....................................... (52,685) (24,996)
-------- --------
Total stockholders' equity........................ 82,758 73,530
-------- --------
Total liabilities and stockholders' equity........ $ 99,770 $ 81,102
======== ========
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
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DIGITAL IMPACT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
--------------------
2000 1999
-------- --------
Cash flows from operating activities
Net loss.................................................. $(27,689) $(15,225)
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.......................... 7,262 1,043
Provision for bad debts................................ 1,100 60
Warrants issued for services........................... -- 212
Amortization of unearned stock-based compensation...... 4,353 6,271
Loss on write-off of fixed assets...................... 131 --
Unrealized loss on cash and cash equivalents........... (19) --
Changes in operating assets and liabilities:
Accounts receivable.................................. (10,508) (3,186)
Prepaid expenses and other current assets............ (231) (692)
Restricted cash...................................... (1,739) --
Other assets......................................... (130) (71)
Accounts payable..................................... 2,132 2,026
Accrued liabilities and deferred revenue............. 2,116 1,985
-------- --------
Net cash used in operating activities....................... (18,790) (7,577)
-------- --------
Cash flows from investing activities
Acquisition of property and equipment..................... (8,469) (2,952)
Cash acquired from acquisition (See Note 3)............... 264 --
-------- --------
Net cash used in investing activities....................... (8,205) (2,952)
-------- --------
Cash flows from financing activities
Principal payments on long-term debt...................... (505) (653)
Proceeds from initial public offering, net of issuance
costs.................................................. -- 70,822
Proceeds from exercise of common stock options and
warrants............................................... 1,438 128
Proceeds from issuance of convertible preferred stock, net
of issuance costs...................................... -- 10,644
Repayment of stock subscription........................... -- 1
-------- --------
Net cash provided by financing activities................... 933 80,942
-------- --------
Net increase (decrease) in cash and cash equivalents........ (26,062) 70,413
Cash and cash equivalents at beginning of period............ 68,073 2,864
-------- --------
Cash and cash equivalents at end of period.................. $ 42,011 $ 73,277
======== ========
Supplemental noncash information:
Fair value of net assets acquired (excluding transaction
costs)................................................. $ 31,145 $ --
Assets acquired under capital leases...................... $ 140 $ 943
Unearned stock-based compensation......................... $ (1,706) $ 19,388
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
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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 online direct marketing solutions for
enterprises. The Company offers comprehensive customer acquisition, retention,
and analysis solutions as either a single or bundled service. The Company
leverages several proprietary capabilities to deliver superior campaign results
and exceptional ROI, including: 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; Impact 4.0(TM), 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 online direct marketing strategies
and programs.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements of Digital Impact
at December 31, 2000 and for the three and nine 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 nine months ended December 31, 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 nine months ended December 31, 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 nine months ended December 31, 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
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):
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
=======
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):
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
=======
The following unaudited pro forma revenues, net loss, and net loss per
share data for the nine months ended December 31, 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.
(UNAUDITED PRO FORMA)
NINE MONTHS ENDED
DECEMBER 31,
--------------------------
2000 1999
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Revenues.................................................... $ 30,263 $ 8,779
Net loss.................................................... $(30,242) $(33,455)
Net loss per common share -- basic and diluted.............. $ (1.18) $ (4.61)
5
8
DIGITAL IMPACT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 the Company's
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 nine month periods ended December 31, 2000 and December
31, 1999 because the effect would be antidilutive. A reconciliation
6
9
DIGITAL IMPACT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of the numerators and denominators used in the basic and diluted net loss per
share amounts follows (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ --------------------
2000 1999 2000 1999
------- ------- -------- --------
Numerator:
Net loss................................ $(8,492) $(6,426) $(27,689) $(15,225)
------- ------- -------- --------
Denominator:
Weighted average common shares
outstanding.......................... 26,790 14,010 25,810 8,920
Weighted average unvested common shares
subject to repurchase................ (1,710) (3,360) (2,050) (3,520)
------- ------- -------- --------
Denominator for basic and diluted
calculation............................. 25,080 10,650 23,760 5,400
======= ======= ======== ========
Net loss per common share -- basic and
diluted................................. $ (0.34) $ (0.60) $ (1.17) $ (2.82)
======= ======= ======== ========
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 December 31, 1999, 7,215,000
shares of convertible preferred stock have not been included in the calculation
of diluted net loss per share. Warrants to purchase 3,000 shares and 104,000
shares at a weighted average exercise price of $0.21 and $0.85 have been
excluded from the computation of diluted net loss per share at December 31, 2000
and 1999, respectively. Options to purchase 5,095,000 shares and 4,299,000
shares of common stock at a weighted average exercise price of $9.66 and $2.37
have been excluded from the calculation of diluted net loss per share at
December 31, 2000 and 1999, respectively.
NOTE 6. STOCK-BASED COMPENSATION
During the nine months ended December 31, 2000, the Company reduced
unearned stock-based compensation, a component of stockholders' equity, by $6.1
million. This reduction was the result of stock-based compensation of $4.4
million, a reduction of $2.4 million related primarily to stock option
cancellations and the revaluation of options granted to consultants, offset by
the recording of $0.7 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
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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
online direct marketing solutions. Optimized for email, our strategic
consulting, data management, market analytics and campaign management offerings
yield superior results for corporations seeking to acquire, retain, and
understand customers. Our service offerings leverage proprietary capabilities,
including: Mass Personalization Engine(TM), our messaging platform which
assembles and delivers personalized content over various digital media such as
email and set-top box; Impact 4.0(TM), our web-based campaign management and
reporting system; and Adaptive Intelligent Marketing(TM), our consulting and
data management methodology for developing and implementing online direct
marketing 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 both current and prospective
customers online. Historically, these services have primarily consisted of the
design and execution of online direct marketing 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. Revenue is also generated from
our acquisition solutions group, which assists clients in growing their email
lists through the use of third party list rentals. The cost of renting the lists
is passed through to our clients and hence is offset against the corresponding
revenue.
Cost of revenues consists primarily of expenses relating to the delivery of
online direct marketing 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.
8
11
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.
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 DECEMBER 31, 2000 AND DECEMBER 31, 1999
Revenues. Revenues increased to $12.2 million for the three months ended
December 31, 2000 from $4.0 million for the three months ended December 31,
1999, an increase of $8.2 million or 203%. The increase was primarily due to the
addition of new clients from December 1999 through December 2000, increased
volume from continuing clients, and expansion of our core service offerings.
Cost of Revenues. Cost of revenues increased from $1.9 million during the
quarter ended December 31, 1999 to $5.3 million during the quarter ended
December 31, 2000. The increase was primarily due to higher costs of campaign
creation and delivery associated with supporting our growing client base, a
higher volume of campaigns, and the expansion of our data center infrastructure.
Gross margins improved from 52% for the quarter ended December 31, 1999 to 56%
for the quarter ended December 31, 2000, largely due to increased productivity,
the continued scaling of our operations as volumes increase, and an increase in
the number of clients using our professional services.
Research and Development. Research and development expenses increased from
$2.1 million for the quarter ended December 31, 1999 to $4.9 million for the
quarter ended December 31, 2000. The increase is largely a result of an increase
in personnel costs of approximately $1.2 million, largely related to the
increase in engineering staff associated with our MineShare acquisition, and an
increase in professional fees of $962,000 as we continued to invest in
technological capabilities to differentiate our offerings 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 $2.0
million for the three months ended December 31, 1999 to $4.9 million for the
three months ended December 31, 2000. The increase was primarily due to an
increase in marketing costs of $541,000 related to expanded advertising and
promotional activities and increased personnel costs of $1.4 million associated
with the growth of our sales force, client services 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. However, we anticipate that these expenses will continue to decrease
as a percentage of revenues in future periods.
General and Administrative. General and administrative expenses increased
from $1.6 million for the three months ended December 31, 1999 to $3.1 million
for the three months ended December 31, 2000. The increase was due primarily to
an increase in insurance costs of $200,000 largely related to the increase in
liability insurance during the current fiscal year, and an increase in personnel
related expenses of $600,000 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
continue to decrease as a percentage of revenues in future periods.
9
12
Stock-based Compensation. Stock-based compensation recognized during the
three months ended December 31, 1999 and 2000 was $3.2 million and $595,000
respectively. Unearned stock based compensation is recognized over the period
during which the underlying stock options vest, generally four years.
Amortization of Goodwill and Purchased Intangibles. During the quarter
ended December 31, 2000, we recorded amortization of goodwill and purchased
intangibles of $2.4 million. The goodwill and purchased intangibles relate to
the July 31, 2000 acquisition of MineShare and are being amortized over three
years.
Interest Income, Net. Interest income increased from $412,000 for the
quarter ended December 31, 1999 to $664,000 for the quarter ended December 31,
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.
NINE MONTHS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999
Revenues. Total revenues increased from $7.3 million for the nine months
ended December 31, 1999 to $30.0 million for the nine months ended December 31,
2000. The increase was largely attributable to the growth of our client base, a
significant increase in the number of campaigns sent on behalf of our clients,
and expansion of our core service offerings.
Cost of Revenues. Cost of revenues increased from $3.6 million for the nine
months ended December 31, 1999 to $13.2 million for the nine months ended
December 31, 2000. The increase was primarily attributable to increased
personnel costs needed to support our growing client base and higher volumes.
Gross margins improved from 51% for the nine months ended December 31, 1999 to
56% for the nine months ended December 31, 2000. This increase was primarily due
to the scaling of our technology as a result of higher email volumes and
increased capacity utilization.
Research and Development. Research and development expenses increased from
$4.7 million for the nine months ended December 31, 1999 to $12.8 million for
the nine months ended December 31, 2000. The increase was primarily due to
increased personnel costs of $4.8 million and an increase in professional fees
of $2.0 million.
Sales and Marketing. Sales and marketing expenses increased from $4.5
million for the nine months ended December 31, 1999 to $13.1 million for the
nine months ended December 31, 2000. The increase was largely due to growth in
our direct sales and marketing staff with personnel related costs increasing by
$3.1 million and an increase in promotional spending of $2.6 million related to
building our brand and growing sales.
General and administrative. General and administrative expenses increased
from $3.7 million for the nine months ended December 31, 1999 to $8.2 million
for the nine months ended December 31, 2000. The increase was due primarily to
an increase in personnel costs of $1.7 million, increased rent expense of
$900,000 and increased insurance costs of $908,000.
Stock-based Compensation. Stock-based compensation recognized during the
nine months ended December 31, 1999 and 2000 was $6.5 million and $4.4 million,
respectively. Unearned stock based compensation is recognized over the period
during which the underlying stock options vest, generally four years.
Amortization of Goodwill and Purchased Intangibles. During the nine months
ended December 31, 2000, we recorded amortization of goodwill and purchased
intangibles of $4.0 million. The goodwill and purchased intangibles relate to
the July 31, 2000 acquisition of MineShare.
Nonrecurring Charges. Nonrecurring charges recorded during the nine months
ended December 31, 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.
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Interest Income, Net. Interest income increased from $494,000 for the nine
months ended December 31, 1999 to $2.5 million for the nine months ended
December 31, 2000. The increase is largely due to higher average cash and cash
equivalents balances resulting from the $70.8 million net proceeds raised during
the Company's initial public offering completed in November 1999.
Income Taxes. No provision for federal and state income taxes was recorded
as we incurred net operating losses from inception through December 31, 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, 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 $18.8 million for the nine months
ended December 31, 2000, which was due primarily to a net loss of $27.7 million
and an increase in accounts receivable of $10.5 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 ($4.4 million), amortization of stock-based compensation ($4.4
million), and depreciation and amortization ($7.3 million). Net cash used in
operating activities for the nine months ended December 31, 1999 was $7.6
million.
Our investing activities used $8.2 million during the nine months ended
December 31, 2000 attributable primarily to the acquisition of property and
equipment related to significant investments in our data center infrastructure
and purchases for new office furniture and equipment for our increased staff.
Cash used in investing activities for the nine months ended December 31, 1999
was $3.0 million.
Financing activities generated $933,000 during the nine months ended
December 31, 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 offset by principal payments on our long-term debt. During the
nine months ended December 31, 1999, cash provided by financing activities was
$80.9 million, due primarily to the proceeds raised during our initial public
offering and a preferred stock round, net of issuance costs.
At December 31, 2000, we had $42.0 million in cash and cash equivalents and
availability of $160,000 under a leasing line of credit. Amounts borrowed under
this agreement of $927,000 at December 31, 2000 bear interest at rates of
between 6.2% and 10.1%. We have $44,236 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 December 31, 2000). We also have an equipment
loan facility with a maximum borrowing limit of $800,000, which is secured by
the equipment of our MineShare subsidiary and bears interest at 10 percent. As
of December 31, 2000, $396,050 was outstanding under this facility. We have a
second equipment loan facility with a borrowing limit of $1,000,000, which is
secured by the equipment of our MineShare subsidiary, and bears interest at 10
percent. As of December 31, 2000, $275,266 was outstanding under this facility.
At December 31, 2000, we also had $2.0 million outstanding under various
promissory notes which bear interest at rates between 9% and 12.7%. The
promissory notes mature in February 2001.
Our other principal commitments at December 31, 2000 consisted 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 online direct marketing services, the expansion of our sales and
marketing activities, investment in our infrastructure, and the acquisition or
investment in complementary products, businesses, or technologies.
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
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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.
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. 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.
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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.
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 our revenues for the three and
nine months ended December 31, 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 have recently been experiencing financial
problems. While the majority of our clients are not internet-based businesses,
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. 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, 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, 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. As a public company we face greater
difficulty attracting and retaining personnel 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
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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.
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
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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.
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
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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.
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 December 31, 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.
The majority of our sales are currently denominated in U.S. dollars. During the
first quarter of the year ending March 31, 2001, we established 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.
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 nine months ended
December 31, 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 online direct marketing services,
the expansion of our
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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 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
None
Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 12, 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
Sr. Vice President and Chief Financial
Officer, Treasurer and Secretary
(Principal Financial and Accounting
Officer)
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