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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
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 August 10, 2001, there were approximately 28,836,000 shares of the
Registrant's Common Stock outstanding.
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DIGITAL IMPACT, INC.
INDEX
PART I. FINANCIAL INFORMATION
PAGE NO.
--------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Statements of Operations for the
three months ended June 30, 2001 and 2000................... 1
Condensed Consolidated Balance Sheets as of June 30, 2001
and March 31, 2001.......................................... 2
Condensed Consolidated Statements of Cash Flows for the
three months ended June 30, 2001 and 2000................... 3
Notes to the Unaudited 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........................................................ 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................... 16
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
JUNE 30,
------------------
2001 2000
------- -------
Revenues.................................................... $10,006 $ 8,474
Cost of revenues............................................ 4,560 3,713
------- -------
Gross margin................................................ 5,446 4,761
Operating expenses:
Research and development.................................. 3,691 3,226
Sales and marketing....................................... 4,515 4,224
General and administrative................................ 2,330 2,300
Stock-based compensation.................................. 1,334 2,035
Amortization of goodwill and purchased intangibles........ 375 --
------- -------
Total operating expenses.................................... 12,245 11,785
------- -------
Loss from operations........................................ (6,799) (7,024)
Interest income, net........................................ $ 184 968
------- -------
Net loss.................................................... $(6,615) $(6,056)
======= =======
Net loss per common share - basic and diluted............... $ (0.25) $ (0.27)
======= =======
Shares used in net loss per common share calculation --basic
and diluted............................................... 26,930 22,160
======= =======
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)
(UNAUDITED)
ASSETS
JUNE 30, MARCH 31,
2001 2001
-------- ---------
Current assets:
Cash and cash equivalents................................. $ 30,588 $ 35,038
Accounts receivable, net.................................. 10,846 12,899
Prepaid expenses and other current assets................. 1,099 551
-------- --------
Total current assets.............................. 42,533 48,488
-------- --------
Property and equipment, net................................. 12,948 13,100
Restricted cash............................................. 1,847 1,847
Intangible assets........................................... 4,469 5,005
Other assets................................................ 578 579
-------- --------
Total assets...................................... $ 62,375 $ 69,019
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,654 $ 4,557
Deferred revenues......................................... 1,189 1,050
Accrued payroll........................................... 2,054 2,342
Accrued liabilities....................................... 977 1,087
Current portion of capital lease obligations.............. 894 862
Current portion of long term debt......................... 942 913
-------- --------
Total current liabilities......................... 9,710 10,811
-------- --------
Capital lease obligations, less current portion............. 270 524
Long term debt, less current portion........................ 1,893 2,129
-------- --------
Total liabilities................................. 11,873 13,464
-------- --------
Stockholders' equity:
Common Stock.............................................. 27 27
Additional paid-in capital................................ 142,986 141,823
Accumulated other comprehensive loss...................... (34) (34)
Unearned stock-based compensation......................... (3,904) (4,387)
Accumulated deficit....................................... (88,342) (81,727)
Less treasury stock at cost............................... $ (231) (147)
-------- --------
Total stockholders' equity........................ 50,502 55,555
-------- --------
Total liabilities and stockholders' equity........ $ 62,375 $ 69,019
======== ========
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)
THREE MONTHS ENDED
JUNE 30,
------------------
2001 2000
------- -------
Cash flows from operating activities
Net loss.................................................. $(6,615) $(6,056)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 1,897 763
Provision for (recovery of) bad debts.................. (155) 400
Amortization of unearned stock-based compensation...... 1,334 2,035
Changes in operating assets and liabilities:
Accounts receivable.................................. 2,208 (2,586)
Prepaid expenses and other current assets............ (548) (60)
Other assets......................................... 1 (20)
Accounts payable..................................... (903) (1,969)
Accrued liabilities and deferred revenue............. (259) 245
------- -------
Net cash used in operating activities....................... (3,040) (7,248)
------- -------
Cash flows from investing activities
Acquisition of property and equipment..................... (1,209) (1,614)
------- -------
Net cash used in investing activities....................... (1,209) (1,614)
------- -------
Cash flows from financing activities
Principal payments on long-term debt...................... (429) (219)
Proceeds from exercise of common stock options and
warrants, net of treasury stock repurchase............. 228 966
------- -------
Net cash provided by (used in) financing activities......... (201) 747
------- -------
Net decrease in cash and cash equivalents................... (4,450) (8,115)
Cash and cash equivalents at beginning of period............ 35,038 68,073
------- -------
Cash and cash equivalents at end of period.................. $30,588 $59,958
======= =======
Supplemental noncash information:
Assets acquired under capital leases...................... $ -- $ 140
Unearned stock-based compensation......................... $ 851 $ (867)
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
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DIGITAL IMPACT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
Digital Impact, Inc. ("Digital Impact" or the "Company") is one of the
premier providers of online direct marketing solutions to enterprises. The
Company was incorporated in California in October 1997 and reincorporated in
Delaware in October 1999. Digital Impact's solutions -- Strategy, Customer
Acquisition and Customer Marketing -- enable corporations to create and deliver
marketing programs that drive revenue, influence behavior and deepen customer
relationships. Digital Impact solutions provide deeper customer insight and
powerful program execution through a combination of hosted web applications,
messaging technology infrastructure and professional services.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and liquidity
The accompanying interim consolidated financial statements are unaudited,
but in the opinion of management, contain all the adjustments (consisting of
those of a normal, recurring nature) considered necessary to present fairly the
financial position, the results of operations and cash flows for the periods
presented in conformity with generally accepted accounting principles applicable
to 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 under the Securities and
Exchange Commission's ("SEC") rules and regulations. Results of operations are
not necessarily indicative of the results expected for the full fiscal year or
any other future period.
The accompanying interim 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, 2001.
The Company's consolidated financial statements have been presented on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred a consolidated net loss of approximately $6.6 million for the three
months ended June 30, 2001 and used cash of $3.0 million in operations for the
period.
In April 2001, the Company realigned its operations and reduced its
workforce by 15% of its employee base. The Company continues to face risks
associated with the execution of its strategy. These risks include, but are not
limited to, technology and product development, introduction and market
acceptance of new products and services, changes in the marketplace, liquidity
and competition from existing and new competitors which may enter the
marketplace and retention of key personnel.
The Company believes that it has sufficient cash and cash equivalents to
fund operations for the next twelve months.
Principles of Consolidation
The accompanying interim consolidated financial statements include the
accounts of Digital Impact, Inc. and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been eliminated on
consolidation.
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 months ended June 30, 2001 was
attributable to an unrealized loss on cash equivalents. The Company did not have
any additional transactions
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DIGITAL IMPACT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
that were required to be reported in other comprehensive income during the three
months ended June 30, 2001.
Concentration of credit risk and other risks and uncertainties
Financial instruments subjecting the Company to concentration of credit
risk consist primarily of cash and cash equivalents and trade accounts
receivable. The Company's cash and cash equivalents are maintained at a major
U.S. financial institution. Deposits in this institution may exceed the amount
of insurance provided on such deposits.
The Company's customers are primarily concentrated in the United States.
The Company performs ongoing credit evaluations, and establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of
customers, historical trends and other information.
NOTE 3. 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 is effective for fiscal years beginning after June 15, 2000. The
Company does not currently hold derivative instruments or engage in hedging
activities and hence the implementation of SFAS 133 did not have a material
impact upon the financial statements of the Company.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141
"Business Combinations," which establishes financial accounting and reporting
for business combinations and supersedes APB Opinion No. 16, Business
Combinations, and FASB Statement No. 38, Accounting for Preacquisition
Contingencies of Purchased Enterprises. It requires that all business
combinations in the scope of this Statement are to be accounted for using one
method, the purchase method. The provisions of this Statement apply to all
business combinations initiated after June 30, 2001, and also applies to all
business combinations accounted for using the purchase method for which the date
of acquisition is July 1, 2001, or later. The Company does not expect the
adoption of SFAS No. 141 to have a material effect on its financial position or
results of operations.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142
"Goodwill and Other Intangible Assets," which establishes financial accounting
and reporting for acquired goodwill and other intangible assets and supersedes
APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that
are acquired individually or with a group of other assets (but not those
acquired in a business combination) should be accounted for in financial
statements upon their acquisition, and after they have been initially recognized
in the financial statements. The provisions of this Statement are effective
starting with fiscal years beginning after December 15, 2001. Early adoption is
permitted for entities with fiscal years beginning after March 15, 2001,
provided that the first interim financial statements have not previously been
issued. Accordingly, the Company has elected not to early adopt SFAS No. 142
beginning with the first quarter of fiscal 2002. Upon adoption of SFAS No. 142,
the Company will reclassify the amount relating to assembled workforce
(currently approximately $1.8 million) from intangible assets to goodwill and
will no longer amortize goodwill.
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DIGITAL IMPACT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. NET LOSS PER SHARE
Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock, excluding common stock subject to
repurchase. Diluted net loss per share is computed using the weighted-average
number of outstanding shares of common stock and, when dilutive, potential
common shares from options and warrants to purchase common stock and common
stock subject to repurchase using the treasury stock method. The following table
presents the calculation of basic and diluted net loss per share:
THREE MONTHS ENDED
JUNE 30,
----------------------
2001 2000
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Numerator:
Net loss............................................... $(6,615) $(6,056)
======= =======
Denominator:
Weighted average common shares outstanding............. 27,740 24,620
Weighted average unvested common shares subject to
repurchase.......................................... (810) (2,460)
------- -------
Denominator for basic and diluted calculation............ 26,930 22,160
======= =======
Net loss per common share -- basic and diluted........... $ (0.25) $ (0.27)
======= =======
All 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. Warrants to purchase 38,000 shares at a weighted average exercise
price of $0.21 have been excluded from the computation of diluted net loss per
share at June 30, 2000. No warrants to purchase shares were outstanding at June
30, 2001. Options to purchase 7,094,000 and 5,928,000 shares of common stock at
a weighted average exercise price of $4.43 and $6.33 have been excluded from the
calculation of diluted net loss per share at June 30, 2001 and 2000,
respectively.
NOTE 5. STOCK-BASED COMPENSATION
During the three months ended June 30, 2001, the Company reduced unearned
stock-based compensation, a component of stockholders' equity, by approximately
$483,000. This reduction was the result of amortization of stock-based
compensation of approximately $1.3 million and a reduction of approximately
$493,000 related primarily to stock option cancellations and the revaluation of
options granted to consultants, offset by the recording of approximately $1.3
million of deferred compensation related to the issuance of restricted stock in
exchange for the cancellation of approximately 737,500 options. Unearned
stock-based compensation is amortized to expense over the period during which
the options and restricted stock vest, generally three to four years, in
accordance with FASB Interpretation No. 28.
In March 2001, the Company issued approximately 548,000 shares of
restricted stock with a fair value of $1.34 as part of a retention program
designed to retain key executive officers. The restricted stock was issued with
a purchase price of $0.001 with half the stock vesting on the date of issuance
and the remaining half vesting in the quarter ended September 30, 2001. As a
result, the Company recognized approximately $361,000 of compensation expense in
the fiscal year ended March 31, 2001 and $188,000 in the quarter ended June 30,
2001 for the shares that vested immediately and for the shares that vest in
September 2001, respectively. This amount is included in the $1.3 million of
deferred compensation reported above.
In May 2001, the Company issued approximately 797,500 shares of restricted
stock with a fair value of $1.17 in exchange for the cancellation of
approximately 737,500 options. The restricted stock was issued with a purchase
price of $0.001 with one sixth of the stock vesting on the grant date and the
remainder vesting over
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DIGITAL IMPACT, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
three years. As a result, the Company recognized approximately $657,000 of
compensation expense in the quarter ended June 30, 2001 for the shares that
vested immediately and the shares that vested in the first quarter. This amount
is included in the $1.3 million of deferred compensation reported above. The
remainder of the unearned stock-based compensation will be recognized over the
period which the restricted stock vests in accordance with FASB Interpretation
No. 28.
NOTE 6. RESTRUCTURING CHARGES
In March 2001, the company finalized its realignment plans. In April 2001,
management executed its plans to reduce employee headcount in order to better
align its sales, development and administrative organization. This involved the
involuntary terminations of approximately 60 employees, representing
approximately 15% of the Company's workforce. As a result Digital Impact,
recorded a $250,000 charge to operations during the fourth quarter of 2001
related to payments for severance as well as the costs of outplacement services
and the provision for continued benefits to terminated personnel.
As of June 30, 2001, substantially all of the $250,000 charge had been
paid. Digital Impact expects to pay any remaining costs related to this charge
in the second fiscal quarter of 2002.
NOTE 7. CONTINGENCIES
On June 5 2001, a putative securities class action, captioned Stein v.
Digital Impact, Inc., et al., Civil Action No. 01-CV-4942, was filed against
Digital Impact, two of its officers (William Park and David Oppenheimer), and
Credit Suisse First Boston Corporation ("CSFB"), an underwriter in Digital
Impact's initial public offering, in the United States District Court for the
Southern District of New York. The complaint alleges violations of Section 11 of
the Securities Act of 1933 (the "Securities Act") against all defendants, a
violation of Section 15 of the Securities Act against William Park and David
Oppenheimer, and violations of Section 12(a)(2) of the Securities Act and
Section 10(b) of the Securities Exchange Act of 1934 (and Rule 10b-5,
promulgated thereunder) against CSFB. The complaint seeks unspecified damages on
behalf of a purported class of purchasers of common stock between November 22,
1999 and December 6, 2000. On June 19, 2001, a similar complaint, captioned
Dramn v. Digital Impact et al., Civil Action No. 01-CV-5103, was filed in the
United States District Court for the Southern District of New York. The
complaint is substantially identical to the Stein complaint: it names the same
defendants, contains virtually identical claims, and seeks unspecified damages
on behalf of a purported class of purchasers of common stock during an identical
class period.
On June 29, 2001, another similar complaint, captioned Martin v. Digital
Impact et al., Civil Action No. 01-CV-5963, was filed in the United States
District Court for the Southern District of New York. The complaint is
substantially identical to the Stein complaint: it contains virtually identical
claims and seeks unspecified damages on behalf of a purported class of
purchasers of common stock during an identical class period. In addition to the
defendants named in Stein, the Martin complaint names Gerardo Capiel, a Digital
Impact director, as well as J.P. Morgan Chase, U.S. Bancorp Piper Jaffray, Inc.
and Bear, Stearns & Co. Inc. co-underwriters in Digital Impact's initial public
offering. The Martin complaint also alleges violations of Section 10(b) of the
Securities Exchange Act of 1934 (and Rule 10b-5 promulgated thereunder) against
Digital Impact, William Park, David Oppenheimer and Gerardo Capiel.
The Company anticipates that additional, substantially identical lawsuits
may be brought and further anticipates that all such lawsuits will eventually be
coordinated or consolidated with one another. Various plaintiffs have filed
similar actions asserting virtually identical allegations against more than 130
other companies. To date, there have been no significant developments in the
litigation. In the opinion of management, after consultation with legal counsel
and based on currently available information, the ultimate disposition of these
matters is not expected to have a material adverse effect on our business,
financial condition or results of operations.
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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 11, as well as factors set forth in Digital Impact's Annual
Report on Form 10-K for the fiscal year ended March 31, 2001. Any
forward-looking statements speak only as of the date such statements are made.
OVERVIEW
Digital Impact, Inc. is one of the premier providers of online direct
marketing solutions to enterprises. We were incorporated in California in
October 1997 and reincorporated in Delaware in October 1999. Digital Impact's
solutions -- Strategy, Customer Acquisition and Customer Marketing -- enable
corporations to create and deliver marketing programs that drive revenue,
influence behavior and deepen customer relationships. Digital Impact solutions
provide deeper customer insight and powerful program execution through a
combination of hosted web applications, messaging technology infrastructure and
professional services.
In July 2000, we acquired MineShare, Inc. ("MineShare"), a customer
intelligence and analysis company based in Santa Monica, California. The
transaction was accounted for using the purchase method of accounting.
Digital Impact generates revenues from the sale of solutions that enable
businesses to proactively communicate with their customers online. Historically,
these solutions have primarily consisted of the design and execution of online
direct marketing campaigns, the development and execution of customer
acquisition programs, and additional services delivered by our professional
services organization. In accordance with Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," revenue is recognized when online
direct marketing campaigns are delivered, provided that there are no remaining
significant obligations and collection of the resulting receivable is reasonably
assured. Revenue generated from our acquisition services group, which assists
clients in growing their email lists through the use of third party list
rentals, is recognized when the campaigns are delivered, provided there are no
significant remaining obligations and the collection of receivables is
reasonably assured. The cost of renting the list is passed through to our
clients and hence is offset against the corresponding revenue. Revenue generated
from our professional services is recognized as the services are provided.
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 and customer service staff, the
amortization of equipment, purchased and licensed technology, and data center
expenses.
Our operating expenses are classified into three general categories:
research and development, sales and marketing, and general and administrative.
We classify all charges to these operating expense categories based on the
nature of the expenditures. Although each category includes expenses that are
unique to the category, some expenditures, such as compensation, employee
benefits, recruiting costs, equipment costs, travel and entertainment costs,
facilities costs and third-party professional service fees, occur in each of
these categories.
We allocate the total cost for information services and facilities to each
functional area that uses the information services and facilities based on its
relative headcount. These allocated charges include rent and other
facility-related costs, communication charges and depreciation expense for
furniture and equipment.
Total operating expenses also include non-cash expenses related to
stock-based compensation and amortization of goodwill and purchased intangibles.
As of June 30, 2001 we had 328 full-time employees. In April 2001 we
realigned our organization with a workforce reduction of approximately 60
employees in order to streamline operations, reduce costs and bring our staffing
structure in line with current economic conditions. In March 2001, the Company
finalized its
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realignment plans. As a result, the costs associated with the work force
reduction, including severance and other employee-related costs, were accrued in
the balance sheet for the fiscal year ended March 31, 2001.
RESULTS OF OPERATIONS
The following table sets forth selected data for the periods indicated as a
percentage of total revenues. These operating results are not necessarily
indicative of results for any future periods.
THREE MONTHS ENDED
JUNE 30,
------------------
2001 2000
----- -----
Net revenue................................................ 100% 100%
Cost of revenue............................................ 46% 44%
--- ---
Gross margin............................................... 54% 56%
Operating expenses:
Research and development................................. 37% 38%
Sales and marketing...................................... 45% 50%
General and administrative............................... 23% 27%
Stock-based compensation................................. 13% 24%
Amortization of goodwill and purchased intangibles....... 4% --
--- ---
Total operating expenses......................... 122% 139%
Loss from operations....................................... (68)% (83)%
=== ===
Interest income, net....................................... 2% 12%
--- ---
Net loss......................................... (66)% (71)%
=== ===
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
Revenues. Total revenues increased 18% from $8.5 million for the three
months ended June 30, 2000 to $10.0 million for the three months ended June 30,
2001. The increase was primarily due to the addition of new clients from June
2000 through June 2001, increased volume from continuing clients, and expansion
of our core service offerings.
Cost of Revenues. Total cost of revenues increased from $3.7 million during
the quarter ended June 30, 2000 to $4.6 million during the quarter ended June
30, 2001. 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
declined from 56% for the quarter ended June 30, 2000 to 54% for the quarter
ended June 30, 2001, largely due to continued investment in our data center
infrastructure, resulting in excess capacity that when spread over our revenue
base resulted in slightly lower margins.
Research and Development. 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.
Research and development expenses increased by 16% to $3.7 million for the
quarter ended June 30, 2001 from $3.2 million for the quarter ended June 30,
2000. The increase is primarily a result of an increase in personnel costs of
approximately $300,000, largely related to the increase in engineering staff
associated with our MineShare acquisition, and a $161,000 increase in amortized
tangible purchased technology expense related to our MineShare acquisition. We
expect to continue to make substantial investments in research and development.
Sales and Marketing. Sales and marketing expenses consist of personnel and
related costs primarily for our direct sales force and marketing staff, as well
as marketing programs, which include trade shows, advertisements, promotional
activities and media events. Sales and marketing expenses increased 7% to $4.5
million for the three months ended June 30, 2001 from $4.2 million for the three
months ended June 30,
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2000. The increase was primarily due to an increase in marketing costs of
$400,000 related to expanded advertising and promotional activities.
General and Administrative. General and administrative expenses consist
primarily of personnel and related costs for general corporate purposes,
including information services, finance, accounting, human resources, facilities
and legal. General and administrative expenses remained constant at $2.3 million
for the three months ended June 30, 2001 and 2000.
Stock-based Compensation. In connection with the granting of stock options
to our employees and the assumption of options related to the acquisition of
MineShare, we recorded unearned stock based compensation totaling approximately
$19.4 million, net of cancellations, through June 30, 2001. This amount
represents the total difference between the exercise prices of the stock options
and the deemed fair market value of the underlying common stock for accounting
purposes on the date these stock options were granted. This amount is included
as a component of stockholders' equity and is being amortized on an accelerated
basis by charges to operations over the vesting period of the options,
consistent with the methods described in FASB Interpretation No. 28.
Stock-based compensation, a noncash expense, decreased 34% to $1.3 million
for the three months ended June 30, 2001 from $2.0 million for the three months
ended June 30, 2000. 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 June 30, 2001, we recorded amortization of goodwill and purchased
intangibles of $375,000. 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 decreased from $968,000 for the
quarter ended June 30, 2000 to $184,000 for the quarter ended June 30, 2001. The
decrease is largely due to lower average cash and cash equivalents balances
resulting from the use of cash to fund current operations and lower prevailing
interest rates.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $3.0 million for the three months
ended June 30, 2001, which was due primarily to a net loss of $6.6 million, a
$900,000 decline in accounts payable and an increase in prepaid expenses and
other current assets of $548,000. This was partially offset by noncash charges
including the amortization of stock-based compensation ($1.3 million) and
depreciation and amortization ($1.9 million), as well as a decrease of $2.2
million in accounts receivable related to aggressive collection efforts. Net
cash used in operating activities for the three months ended June 30, 2000 was
$7.2 million.
Our investing activities used $1.2 million during the three months ended
June 30, 2001, which was attributable primarily to the acquisition of property
and equipment related to significant investments in our data center
infrastructure. Cash used in investing activities for the three months ended
June 30, 2000 was $1.6 million.
Financing activities used $200,000 during the three months ended June 30,
2001, which was attributable primarily to payments on long-term debt. This was
partially offset by proceeds from the exercise of stock options and the purchase
of shares through our employee stock purchase plan. During the three months
ended June 30, 2000, cash provided by financing activities was $747,000, which
consisted primarily of 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.
At June 30, 2001, we had $30.6 million in cash and cash equivalents and
availability of $160,000 under a leasing line of credit. Amounts borrowed under
this leasing line of credit totaled approximately $675,000 at June 30, 2001 and
bear interest at rates of between 6.2% and 10.1%. We also had $2.8 million
outstanding under a term loan. The loan bears interest at the three-year
Treasury rate plus 950 basis points (14.02% as of June 30, 2001) and is secured
by the underlying assets. Our MineShare subsidiary had approximately $42,000
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outstanding under a $50,000 revolving line of credit that bears interest at
prime plus 3% (9.75% as of June 30, 2001). We 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 a rate of 10%. As of June 30,
2001, approximately $321,000 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 a
rate of 10%. As of June 30, 2001, approximately $112,000 was outstanding under
this facility.
Our other principal commitments at June 30, 2001 consisted of obligations
under operating leases for facilities and our pledge of $1.8 million of cash as
collateral for an outstanding letter of credit. For additional information, see
the financial statements. We believe that our existing cash and cash equivalents
will be sufficient to satisfy our currently anticipated cash requirements for
the next twelve months.
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, as amended, is effective for fiscal years beginning after June 15,
2000. The Company does not currently hold derivative instruments or engage in
hedging activities and hence SFAS 133 did not have a material impact upon the
financial statements of the Company.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141
"Business Combinations," which establishes financial accounting and reporting
for business combinations and supersedes APB Opinion No. 16, Business
Combinations, and FASB Statement No. 38, Accounting for Preacquisition
Contingencies of Purchased Enterprises. It requires that all business
combinations in the scope of this Statement are to be accounted for using one
method, the purchase method. The provisions of this Statement apply to all
business combinations initiated after June 30, 2001, and also applies to all
business combinations accounted for using the purchase method for which the date
of acquisition is July 1, 2001, or later. The Company does not expect the
adoption of SFAS No. 141 to have a material effect on its financial position or
results of operations.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142
"Goodwill and Other Intangible Assets," which establishes financial accounting
and reporting for acquired goodwill and other intangible assets and supersedes
APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that
are acquired individually or with a group of other assets (but not those
acquired in a business combination) should be accounted for in financial
statements upon their acquisition, and after they have been initially recognized
in the financial statements. The provisions of this Statement are effective
starting with fiscal years beginning after December 15, 2001. Early adoption is
permitted for entities with fiscal years beginning after March 15, 2001,
provided that the first interim financial statements have not previously been
issued. Accordingly, the Company has elected not to early adopt SFAS No. 142
beginning with the first quarter of fiscal 2002. Upon adoption of SFAS No. 142,
the Company will reclassify the amount relating to assembled workforce
(currently approximately $1.8 million) from intangible assets to goodwill and
will no longer amortize goodwill.
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
investors could experience losses on their investment.
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BECAUSE OF OUR LIMITED OPERATING HISTORY AND THE EMERGING NATURE OF THE ONLINE
DIRECT MARKETING 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 online direct marketing industry, we cannot determine
trends that may emerge in our market or affect our business. The revenue and
income potential of the online direct marketing 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. Because we do experience these effects, analysts and investors
may not be able to predict our quarterly or annual operating results. If we fail
to meet expectations of analysts and investors, our stock price could decline.
IF BUSINESSES AND CONSUMERS FAIL TO ACCEPT ONLINE DIRECT MARKETING AS A MEANS TO
ATTRACT NEW CUSTOMERS, DEMAND FOR OUR SERVICES MAY NOT DEVELOP AND THE PRICE OF
OUR STOCK COULD DECLINE.
The market for online direct marketing services is relatively new and
rapidly evolving, and our business may be harmed if sufficient demand for our
services does not develop. Our current and planned services are very different
from the traditional methods that many of our clients have historically used to
attract new customers and maintain customer relationships.
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 client
accounted for more than 10% of our revenues for the quarter ended June 30, 2001,
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 our results of operations.
THE ONLINE DIRECT MARKETING 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 online direct marketing is highly competitive, rapidly
evolving and experiencing 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 online
direct marketing solutions such as Exactis.com (recently acquired by Experian),
DoubleClick (through its acquisition of FloNetwork and its proposed acquisition
of MessageMedia), Responsys.com, Netcentives Inc. (through its subsidiary Post
Communications), 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
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providers, advertising and direct marketing agencies and other large established
businesses such as America Online, Microsoft, IBM, AT&T, 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 online
direct marketing solutions. These potential competitors may also choose to
enter, or have already entered, the market for online direct marketing by
acquiring one of our existing competitors or by forming strategic alliances with
a competitor.
Many of these potential competitors have broad distribution channels and
they may bundle competing products or services. As a result of future
competition, the demand for our services could substantially decline. 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 online direct marketing
expertise. Our main offices are located in the San Francisco Bay Area, where
competition for personnel with Internet-related technology and marketing skills
is 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 our co-founders William Park, our Chief Executive
Officer, and Gerardo Capiel, our Chief Technology Officer, whose vision for our
company, knowledge of our business and technical expertise would be extremely
difficult to replace. In addition, we have not obtained life insurance
benefiting Digital Impact covering 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 could 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.
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THE CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR
EXPENSES.
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. California has on some occasions
implemented, and has announced its intention in the future to continue to
implement, rolling blackouts throughout California. We currently do not have
backup generators and possess limited alternate sources of power in the event of
a blackout. If blackouts interrupt our power supply, we would be temporarily
unable to continue operations at our California facilities. Any such
interruption in our ability to continue operations at our facilities could
damage our reputation, harm our ability to retain existing customers and to
obtain new customers, and could result in lost revenue, any of which could
substantially harm our business.
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' ONLINE DIRECT MARKETING 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 results
in damage to our data center or systems, we may be unable to execute our
clients' online direct marketing 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 nine registered U.S. trademarks and have three
trademark applications pending in the U.S. and Europe. We may not be able to
adequately protect our proprietary rights. Unauthorized parties may attempt to
obtain and use our proprietary information. Policing unauthorized use of our
proprietary information is difficult, and we cannot be certain that the steps we
have taken will prevent misappropriation, particularly in foreign countries
where the laws may not protect our proprietary rights as fully as in the United
States.
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 store confidential customer information in a secure data
warehouse. We cannot be certain, 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.
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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, including but not limited to laws and regulations
surrounding the Internet. 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, ONLINE DIRECT MARKETING AND THE INTERNET COULD PROHIBIT,
LIMIT OR INCREASE THE COST OF OUR BUSINESS.
Legislation has 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, foreign governments and several other states are considering, or
have considered, similar legislation. These provisions generally limit or
prohibit both the transmission of unsolicited commercial emails and the use of
forged or fraudulent routing and header information. Some states, including
California, require that unsolicited emails include opt-out instructions and
that senders of these emails honor any opt-out requests.
Our business could be negatively impacted by new laws or regulations
applicable to online direct marketing or the Internet, the application of
existing laws and regulations to online direct marketing 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 online direct marketing,
which could, in turn, decrease the demand for our services and prohibit, limit
or increase the cost of our 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 related to the operating performance of the
companies and may accordingly reduce the price of our common stock without
regard to our operating performance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the period from our inception through June 30, 2001, 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
quarter ended June 30, 2000, 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
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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 1. LEGAL PROCEEDINGS
On June 5 2001, a putative securities class action, captioned Stein v.
Digital Impact, Inc., et al., Civil Action No. 01-CV-4942, was filed against
Digital Impact, two of its officers (William Park and David Oppenheimer), and
Credit Suisse First Boston Corporation ("CSFB"), an underwriter in Digital
Impact's initial public offering, in the United States District Court for the
Southern District of New York. The complaint alleges violations of Section 11 of
the Securities Act of 1933 (the "Securities Act") against all defendants, a
violation of Section 15 of the Securities Act against William Park and David
Oppenheimer, and violations of Section 12(a)(2) of the Securities Act and
Section 10(b) of the Securities Exchange Act of 1934 (and Rule 10b-5,
promulgated thereunder) against CSFB. The complaint seeks unspecified damages on
behalf of a purported class of purchasers of common stock between November 22,
1999 and December 6, 2000. On June 19, 2001, a similar complaint, captioned
Dramn v. Digital Impact et al., Civil Action No. 01-CV-5103, was filed in the
United States District Court for the Southern District of New York. The
complaint is substantially identical to the Stein complaint: it names the same
defendants, contains virtually identical claims, and seeks unspecified damages
on behalf of a purported class of purchasers of common stock during an identical
class period.
On June 29, 2001, another similar complaint, captioned Martin v. Digital
Impact et al., Civil Action No. 01-CV-5963, was filed in the United States
District Court for the Southern District of New York. The complaint is
substantially identical to the Stein complaint: it contains virtually identical
claims and seeks unspecified damages on behalf of a purported class of
purchasers of common stock during an identical class period. In addition to the
defendants named in Stein, the Martin complaint names Gerardo Capiel, a Digital
Impact director, as well as J.P. Morgan Chase, U.S. Bancorp Piper Jaffray, Inc.
and Bear, Stearns & Co. Inc. co-underwriters in Digital Impact's initial public
offering. The Martin complaint also alleges violations of Section 10(b) of the
Securities Exchange Act of 1934 (and Rule 10b-5 promulgated thereunder) against
Digital Impact, William Park, David Oppenheimer and Gerardo Capiel.
The Company anticipates that additional, substantially identical lawsuits
may be brought and further anticipates that all such lawsuits will eventually be
coordinated or consolidated with one another. Various plaintiffs have filed
similar actions asserting virtually identical allegations against more than 130
other companies. To date, there have been no significant developments in the
litigation. In the opinion of management, after consultation with legal counsel
and based on currently available information, the ultimate disposition of these
matters is not expected to have a material adverse effect on our business,
financial condition or results of operations.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
In November 1999, we completed our initial public offering of 5,175,000
shares of our common stock, which included 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 sale
of our shares of common stock in the offering was 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 Securities and Exchange
Commission 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
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represented underwriting discounts and commissions and approximately $1.4
million represented other expenses related to the offering.
Currently, we have placed the remaining net proceeds (approximately $30
million) from the offering in short-term, interest bearing, investment grade
securities. During the first quarter, we used approximately $4.5 million of the
net proceeds to fund our general operations. 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 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.
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: August 14, 2001 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, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting
Officer)
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