-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WIpCvX0DEl8RRp0rFoIr1UNI9hGCh5stBAWE99bRhDLBecQuYusQaQvLeoZS3K9p F98INv+ZG+093+4qX+H82Q== 0000891618-99-004199.txt : 19990920 0000891618-99-004199.hdr.sgml : 19990920 ACCESSION NUMBER: 0000891618-99-004199 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19990917 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL IMPACT INC /DE/ CENTRAL INDEX KEY: 0001095105 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 943286913 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-87299 FILM NUMBER: 99713283 BUSINESS ADDRESS: STREET 1: 177 BOVER ROAD SUITE 200 CITY: SAN MATEO STATE: CA ZIP: 94402 BUSINESS PHONE: 6503563404 MAIL ADDRESS: STREET 1: 177 BOVER ROAD SUITE 200 CITY: SAN MATEO STATE: CA ZIP: 94402 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 DIGITAL IMPACT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7310 94-3286913 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
177 BOVET ROAD SAN MATEO, CALIFORNIA 94402 (650) 356-3400 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) WILLIAM PARK CHIEF EXECUTIVE OFFICER DIGITAL IMPACT, INC. 177 BOVET ROAD SAN MATEO, CALIFORNIA 94402 (650) 356-3400 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: JEFFREY D. SAPER, ESQ. ALAN F. DENENBERG, ESQ. SELIM DAY, ESQ. SHEARMAN & STERLING DAVID R. KING, ESQ. 1550 EL CAMINO REAL, SUITE 100 AVA M. HAHN, ESQ. MENLO PARK, CA 94025 WILSON SONSINI GOODRICH & ROSATI (650) 330-2200 PROFESSIONAL CORPORATION 650 PAGE MILL ROAD PALO ALTO, CALIFORNIA 94304 (650) 493-9300
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement is declared effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED OFFERING PRICE(1)(2) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------------ Common Stock, par value $0.001 per share.................... $65,000,000 $18,100.00 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------
(1) Includes shares that the Underwriters have the option to purchase solely to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a). THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THE PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED SEPTEMBER 17, 1999 Shares [LOGO] DIGITAL IMPACT Common Stock ------------------ Prior to this offering, there has been no public market for our common stock. The initial public offering price of the common stock is expected to be between $ and $ per share. We have applied to list our common stock on The Nasdaq Stock Market's National Market under the symbol "MPCT." The underwriters have an option to purchase a maximum of additional shares to cover over-allotments of shares. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 7.
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS DIGITAL IMPACT -------- ------------- -------------- Per Share............................................ $ $ $ Total................................................ $ $ $
Delivery of the shares of common stock will be made on or about , 1999. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON HAMBRECHT & QUIST DONALDSON, LUFKIN & JENRETTE U.S. BANCORP PIPER JAFFRAY The date of this prospectus is , 1999. 3 ------------------ TABLE OF CONTENTS
Page ---- PROSPECTUS SUMMARY ............... 3 RISK FACTORS ..................... 7 YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS ..................... 16 USE OF PROCEEDS .................. 16 DIVIDEND POLICY .................. 16 CAPITALIZATION ................... 17 DILUTION ......................... 18 SELECTED FINANCIAL DATA .......... 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...... 21
Page ---- BUSINESS ......................... 29 MANAGEMENT ....................... 43 CERTAIN TRANSACTIONS ............. 53 PRINCIPAL STOCKHOLDERS ........... 55 DESCRIPTION OF CAPITAL STOCK ..... 57 SHARES ELIGIBLE FOR FUTURE SALE ........................... 60 UNDERWRITING ..................... 62 NOTICE TO CANADIAN RESIDENTS ..... 65 LEGAL MATTERS .................... 66 EXPERTS .......................... 66 WHERE YOU CAN FIND OTHER DIGITAL IMPACT INFORMATION ............. 66 INDEX TO FINANCIAL STATEMENTS .... F-1
------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 4 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all the information you should consider before buying shares in this offering. You should read the entire prospectus carefully. DIGITAL IMPACT, INC. Digital Impact offers Internet direct marketing, or e-marketing, services to businesses that wish to communicate more effectively with their customers online through email. We combine proprietary technologies, rigorous business processes and expertise developed over thousands of email campaigns to provide a comprehensive, outsourced e-marketing solution. The services we provide are designed to maximize our clients' return on their marketing investment. Our core set of services includes campaign management, targeting and personalization, email format optimization, campaign tracking and reporting, and database hosting and management. We sell these services under the name Merchant Mail. In addition, we recently introduced the Email Exchange Network, an online marketing network that provides our clients with a new method to acquire additional online customers. Businesses and other marketing organizations spent an estimated $285 billion on general advertising in 1998, of which $160 billion was spent on direct marketing, according to the Direct Marketing Association. To capitalize on the growth of e-commerce, businesses are increasingly shifting this spending to online advertising and direct marketing. Forrester Research projects that total Internet advertising expenditures in the U.S. will increase from $1.3 billion in 1998 to over $10 billion in 2002. Forrester also estimates that Internet direct marketing will account for 60%, or $6.2 billion, of these expenditures in 2002, up from 15% in 1998. Email, the most widely used application on the Internet today, is a critical element of Internet direct marketing. Email offers businesses significant advantages over paper-based communications, including more rapid delivery, reduced costs and a greater degree of personalization. E-marketing campaigns using email also generate response rates that are between 3 and 10 times higher than the response rates for traditional direct mail campaigns. However, many businesses do not have the desire or the ability to effectively design, implement and manage their own e-marketing campaigns. We offer our clients a suite of technology-enabled services that includes email marketing services, customer acquisition tools, data mining and strategic analysis and client support services. These services provide our clients with the following benefits: - Targeted content relevant to each recipient. - Personalized formatting of customer emails. - Real-time performance tracking and campaign analysis. - Substantial e-marketing domain expertise. - A robust and scalable infrastructure. - Significantly improved time to market. 3 5 Our objective is to be the leading provider of technology-enabled, e-marketing services. As part of our strategy, we intend to: - Expand our service offerings. - Exploit new market opportunities. - Leverage our database of 20 million consumer profiles. - Establish the Email Exchange Network as a leading service for client acquisition. - Build our brand. We were incorporated in October 1997 and commenced sales of our services in December 1997. Our principal executive offices are located at 177 Bovet Road, Suite 200, San Mateo, California, 94402, and our telephone number is (650) 356-3400. Our web site is located at www.digitalimpact.com. Information contained on our web site does not constitute part of this prospectus. Merchant Mail and Digital Impact are our trademarks. Other trademarks or service marks appearing in this prospectus are trademarks or service marks of the companies that use them. 4 6 THE OFFERING Common stock offered................. shares Common stock to be outstanding after this offering...................... shares Use of proceeds...................... For general corporate purposes, principally working capital. Proposed Nasdaq National Market symbol............................. MPCT
- ------------------------- The share amounts in this table are based on shares outstanding as of June 30, 1999 and our shares of series C convertible preferred stock issued in July 1999. This table excludes: - 8,795,000 shares of common stock reserved for issuance under our 1998 stock plan, of which options to purchase 2,911,208 shares were outstanding as of June 30, 1999, at a per share weighted average exercise price of $0.15. - 128,000 shares of convertible preferred stock that are issuable upon the exercise of outstanding warrants, at a per share weighted average exercise price of $0.72, and are convertible into 128,000 shares of common stock immediately before completion of this offering. - 1,200,000 shares reserved for issuance under our 1999 employee stock purchase plan and our 1999 director option plan. ------------------------- Except as otherwise indicated, information in this prospectus is based on the following assumptions: - Our reincorporation in Delaware. - The conversion of each outstanding share of our convertible preferred stock into one share of common stock immediately before completion of this offering. - The filing of our amended and restated certificate of incorporation upon completion of this offering. - No exercise of the underwriters' over-allotment option. 5 7 SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
OCTOBER 16, 1997 THREE MONTHS ENDED (DATE OF INCEPTION) YEAR ENDED JUNE 30, TO MARCH 31, MARCH 31, ------------------- 1998 1999 1998 1999 ------------------- ---------- ------- -------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues...................... $ 4 $ 1,307 $ 25 $ 1,385 Cost of revenues.............. 4 674 24 672 ------ ------- ------ ------- Gross margin.................. -- 633 1 713 ------ ------- ------ ------- Operating expenses: Research and development.... 27 966 77 843 Sales and marketing......... -- 670 46 1,010 General and administrative........... 77 1,151 86 1,047 Stock-based compensation.... -- 1,157 95 977 ------ ------- ------ ------- Total operating expenses............... 104 3,944 304 3,877 ------ ------- ------ ------- Loss from operations.......... (104) (3,311) (303) (3,164) Interest income (expense), net......................... 1 71 6 4 ------ ------- ------ ------- Net loss...................... $ (103) $(3,240) $ (297) $(3,160) ====== ======= ====== ======= Net loss per common share -- basic and diluted........... $(0.45) $ (2.86) $(0.90) $ (1.27) ====== ======= ====== ======= Shares used in net loss per common share calculation -- basic and diluted........... 231 1,133 330 2,497 ====== ======= ====== ======= Pro forma net loss per share-- basic and diluted (unaudited)................. $ (0.39) $ (0.25) ======= ======= Shares used in pro forma net loss per share calculation -- basic and diluted (unaudited)......... 8,370 12,541 ======= =======
JUNE 30, 1999 --------------------- PRO FORMA ACTUAL AS ADJUSTED ------ ----------- (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents................................. $ 900 $ Working capital (deficit)................................. (912) Total assets.............................................. 5,719 Capital lease obligations, less current portion........... 352 Long term debt, less current portion...................... 196 Stockholders' equity...................................... 2,196
- ------------------------- The preceding balance sheet data is shown on an actual basis and a pro forma as adjusted basis to give effect to the issuance of the series C convertible preferred stock in July 1999 and the sale of shares of common stock by Digital Impact in this offering at an assumed initial public offering price of $ per share, after deducting the estimated underwriting discounts and commissions and offering expenses. 6 8 RISK FACTORS An investment in our common stock is very risky. You should carefully consider the risks described below, together with all of the other information in this prospectus, before buying shares in this offering. OUR LIMITED OPERATING HISTORY MAKES FINANCIAL FORECASTING AND EVALUATION OF OUR BUSINESS DIFFICULT. We were incorporated in October 1997 and first recorded revenue in December 1997. Our limited operating history makes financial forecasting and evaluation of our business difficult. Since we have limited financial data that you can use to evaluate our business, 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 e-marketing industry, we cannot determine trends that may emerge in our market or affect our business. The revenue and income potential of the e-marketing industry, and our business, are unproven. WE HAVE A HISTORY OF LOSSES, WE EXPECT CONTINUING LOSSES AND WE MAY NEVER ACHIEVE PROFITABILITY. Our operating costs have exceeded our revenues in each quarter since our inception in October 1997. We incurred net losses of approximately $3.3 million from October 1997 through March 31, 1999 and approximately $3.2 million for the three months ended June 30, 1999. We had an accumulated deficit of approximately $6.5 million as of June 30, 1999. We cannot assure you that our revenues will continue to grow or that we will achieve or maintain profitability in the future. In addition, we expect that our product development, sales and marketing and administrative expenses will increase significantly in the future. Accordingly, we will need to significantly increase our revenues to achieve and maintain profitability. If we do not achieve or sustain profitability in the future, we may be unable to continue our operations. OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND OUR STOCK PRICE MAY DECLINE IF WE FAIL TO MEET THE EXPECTATIONS OF ANALYSTS AND INVESTORS. Our operating results are difficult to predict. Our future quarterly operating results may fluctuate and may not meet the expectations of securities analysts or investors. If this occurs, the price of our common stock would likely decline. In addition to the risks discussed elsewhere in this prospectus, the factors that may cause our operating results to fluctuate include the following: - The fixed nature of many of our expenses, such as salaries and rent. - The loss of a major client or the timing of a significant e-marketing campaign. - The absence of continuing obligations of our clients to purchase services from us. - The variability in our sales cycle, which historically has ranged from one to six months. 7 9 SEASONAL TRENDS MAY MAKE IT DIFFICULT FOR INVESTORS TO PREDICT OUR QUARTERLY AND ANNUAL OPERATING RESULTS. The traditional direct marketing industry has typically generated lower revenues during the summer months and higher revenues during the year-end months. We believe our business may be subject to similar effects, but our limited operating history is insufficient to predict the existence or magnitude of these effects. If we do experience these effects, investors may not be able to predict our quarterly or annual operating results. OUR BUSINESS WILL SUFFER IF BUSINESSES OR CONSUMERS FAIL TO ACCEPT E-MARKETING. The market for e-marketing is new and rapidly evolving, and our business will be harmed if sufficient demand for our services does not develop. Our current and planned services are very different from the traditional methods that many of our clients have historically used to attract new customers and maintain customer relationships. Demand for e-marketing, including our services, may not materialize for several reasons, including: - Businesses that have already invested substantial resources in other methods of marketing and communications may be reluctant to adopt new marketing strategies and methods. - Consumers and businesses may choose not to accept e-marketing messages. - Businesses may elect not to engage in e-marketing because of concerns over privacy and unsolicited commercial email. - The effectiveness of direct marketing through the use of emails may diminish significantly if the volume of direct marketing email saturates consumers. IF WE ARE UNABLE TO INCREASE THE NUMBER OF OUR CLIENTS, OUR REVENUES WILL PROBABLY NOT GROW. We expect that our revenues will grow from period to period based in large part on our ability to attract additional clients. If we are unable to retain our current clients and attract additional clients, our revenues will probably not grow which could cause our stock price to fall. A SMALL NUMBER OF CLIENTS ACCOUNT FOR A HIGH PERCENTAGE OF OUR REVENUES, AND THE LOSS OF A MAJOR CLIENT COULD RESULT IN LOWER THAN EXPECTED REVENUES. A small number of clients account for a high percentage of our revenues. The loss of a major client could harm our business. For the fiscal year ended March 31, 1999, three clients accounted for 26.8%, 11.5% and 10.9% of our revenues. For the three months ended June 30, 1999, four of our clients accounted for 11.3%, 11.0%, 10.8% and 10.3% of our revenues. We expect that a small number of clients will continue to account for a high percentage of our revenues for at least the foreseeable future. COMPETITION IN THE E-MARKETING INDUSTRY IS INTENSE AND, IF WE ARE UNABLE TO COMPETE EFFECTIVELY, THE DEMAND FOR, OR THE PRICES OF, OUR SERVICES MAY DECLINE. The market for e-marketing is intensely competitive, rapidly evolving and subject to rapid technological change. We expect the intensity of competition to increase significantly 8 10 in the future because of the attention the Internet has received as a medium for advertising and direct marketing and because there are no significant barriers to entry into our market. Intense competition may result in price reductions, reduced sales, gross margins and operating margins, and loss of market share. Our principal competitors include: - Providers of e-marketing solutions such as Acxiom and its affiliate Bigfoot, @Once, Exactis.com, Kana Communications, L-Soft, Media Synergy, Message Media, Net Creations, Responsys.com and Yesmail.com. - The in-house information technology departments of our existing and prospective clients. In addition, we expect competition to persist and intensify in the future, which could harm our ability to increase sales and maintain our prices. In the future, we may experience competition from Internet service providers, advertising and direct marketing agencies and other large established businesses such as America Online, DoubleClick, Microsoft, IBM, AT&T, Yahoo!, ADVO and the Interpublic Group of Companies. Each of these companies possess large, existing customer bases, substantial financial resources and established distribution channels and could develop, market or resell a number of e-marketing solutions. Such potential competitors may also choose to enter the market for e-marketing by acquiring one of our existing competitors or by forming strategic alliances with such competitors. Any of these occurrences could harm our ability to compete effectively. For a further discussion of our competition, please see "Business -- Competition." RAPID TECHNOLOGICAL CHANGES COULD CAUSE OUR SERVICES TO BECOME OBSOLETE OR REQUIRE US TO REDESIGN OUR SERVICES. The market for e-marketing services is characterized by rapid technological change. Our services could become obsolete and unmarketable if we are unable to adapt our services to these new technologies. For example, the emergence of new media formats such as streaming video and audio may require us to adapt our services to remain competitive which could be costly and time-consuming. OUR BUSINESS WILL SUFFER IF WE DO NOT ATTRACT AND RETAIN ADDITIONAL HIGHLY-SKILLED PERSONNEL. If we fail to identify, attract, retain and motivate highly skilled personnel our business could be harmed. We plan to significantly expand our operations, and we will need to hire additional personnel as our business grows. Competition for qualified personnel is intense. In particular, we have experienced difficulties in hiring highly skilled technical and client services personnel due to significant competition for experienced personnel in our market. LOSS OF OUR KEY EMPLOYEES COULD HARM OUR BUSINESS. 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 and Gerardo Capiel. The loss of the services of either of these individuals could harm our business and operations. In addition, we have not obtained life insurance 9 11 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, our business could be harmed. SEVERAL KEY MEMBERS OF OUR MANAGEMENT TEAM HAVE ONLY RECENTLY JOINED US AND IF THEY ARE UNABLE TO EFFECTIVELY INTEGRATE THEMSELVES INTO OUR BUSINESS OR WORK TOGETHER AS A MANAGEMENT TEAM, OUR BUSINESS WILL SUFFER. Several key members of our management team have joined us recently. David Oppenheimer, our Chief Financial Officer, Alan Flohr, our Vice President of Sales and Client Services, and Harry Drake, our Vice President of Client Services Engineering have joined since March 31, 1999. These individuals must spend a significant amount of time learning our business model and management system, in addition to performing their regular duties. If they are unable to effectively integrate themselves into our business or work together as a management team, our business will suffer. IF WE ARE UNABLE TO MANAGE OUR EXPECTED GROWTH, OUR BUSINESS WILL SUFFER. Our ability to successfully offer services and implement our business plan requires an effective planning and management process. If we are unable to manage our expected growth, our business will suffer. Since we began operations, we have significantly increased the size of our operations. We expect to continue this growth which will place a significant strain on our management and resources. We will need to continue to improve our operational, financial and managerial controls as well as our reporting systems and procedures. We also need to continue to expand, train and manage our work force. IF WE FAIL TO EXECUTE OUR STRATEGY TO EXPAND INTO NEW MARKETS, OUR BUSINESS WILL SUFFER. The majority of our e-marketing clients to date have been online business-to-consumer retailers. We intend to expand our presence among clients in other consumer markets, in markets where the customers are businesses rather than consumers, and in international markets. If this strategy fails, our business will be harmed. We have limited experience in these markets and may encounter obstacles which we have not anticipated. IF WE FAIL TO INTRODUCE NEW SERVICES, OUR REVENUES MAY NOT INCREASE. Part of our strategy is to increase our revenues by introducing new services. If we fail to introduce new services our revenues will not increase. For example, we recently introduced our Email Exchange Network which we expect will account for a growing percentage of our future revenues. If the Email Exchange Network is not accepted by our clients, our revenues may be lower. IF WE ARE UNABLE TO EXPAND CAPACITY WE MAY LOSE MARKET SHARE. If we are unable to expand capacity to keep pace with our clients' demands we may lose market share. The volume of emails we are sending has grown significantly and we expect this volume to continue to grow. We will need to enhance our services to handle both any increased email volume and the increased level of response from consumers that are generated by this volume. In addition, as we seek to grow our base of clients, we must add client services personnel to handle the increased volume of emails and campaigns. If we are unable to add client services personnel, our business will be harmed. 10 12 IF THE DELIVERY OF OUR EMAILS IS LIMITED OR BLOCKED, THEN OUR BUSINESS WILL BE HARMED. 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. America Online uses a proprietary set of technologies to handle and deliver email and to block unwanted messages. 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 and our business will be harmed. INTERRUPTION OF OUR SERVICE COULD CAUSE US TO LOSE CLIENTS. The success of our service depends on the efficient and uninterrupted operation of our proprietary and outsourced computer and communications hardware and software systems. These systems and operations are vulnerable to damage or interruption from human error, natural disasters, telecommunications failures, break-ins, sabotage, computer viruses, software defects, intentional acts of vandalism and similar adverse events. Interruption of our service for any of these, or other reasons, could cause us to lose clients. Our data center, which is critical to our ongoing operations, is located in Northern California at facilities provided by an independent party. Our operations depend on this party's ability to protect our data center from damage or interruption. Our disaster recovery plan may not be adequate to restore service in the event of damage or interruption, and our insurance policies may not sufficiently compensate us for any losses that we may incur. IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, OUR BUSINESS WILL SUFFER. 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 patent applications pending. We may not be able to adequately protect our proprietary rights which may harm our business. Unauthorized parties may attempt to obtain and use our proprietary information. Policing unauthorized use of our proprietary information is difficult, and we cannot be certain that the steps we have taken will prevent misappropriation, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. For a further discussion of our intellectual property, please see "Business -- Intellectual Property." OUR PROPRIETARY TECHNOLOGY MAY BE SUBJECT TO INFRINGEMENT CLAIMS WHICH COULD HARM OUR BUSINESS. There is a substantial risk of litigation regarding intellectual property rights in our industry. A successful claim of technology infringement against us and our failure or inability to license the infringed or similar technology could harm our business. We expect that our technologies may be increasingly subject to third-party infringement claims as the number of our competitors grows. In addition, we believe that 11 13 many of our competitors have filed or intend to file patent applications covering aspects of their technology that they may claim our intellectual property infringes. We cannot be certain that third parties will not make a claim of infringement against us with respect to our technology. Any claims, with or without merit, could: - Be time-consuming to defend. - Result in costly litigation. - Divert management's attention and resources. - Cause delays in delivering services. - Require the payment of monetary damages which may be tripled if the infringement is found to be willful. - Result in an injunction which would prohibit us from offering a particular service. - Require us to enter into royalty or licensing agreements which, if required, may not be available on acceptable terms. IF ANY OF THE THIRD PARTY TECHNOLOGIES WE USE BECOME UNAVAILABLE TO US, OUR BUSINESS WILL BE HARMED. We are highly dependent on technologies we license from TIBCO, Oracle, Sun Microsystems and Microsoft which enable us to send email through the Internet and allow us to offer a variety of targeted marketing capabilities. Our market is evolving, and we may need to license additional technologies to remain competitive. However, we may not be able to license these technologies on commercially reasonable terms or at all. Our inability to obtain any of these licenses could delay the development of our services until equivalent technology can be identified, licensed and integrated. Any delays could cause our business to suffer. Our use of third party licensed technology may expose us to additional risks, including risks related to: - Difficulties in integrating this technology with our services. - Defects in third party technology. - The diversion of resources from the development of our own proprietary technology. - Our inability to generate revenue from new technology sufficient to offset associated acquisition and maintenance costs. IF WE ARE UNABLE TO SAFEGUARD THE CONFIDENTIAL INFORMATION ON 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 database 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. 12 14 THE TERMINATION OF RELATIONSHIPS WITH DIRECT MARKETING FIRMS AND ADVERTISING AGENCIES COULD SIGNIFICANTLY REDUCE OUR FUTURE REVENUES AND INCREASE OUR COSTS. We have relationships with direct marketing firms and advertising agencies which we anticipate will provide significant revenues in the future. If these relationships are terminated or otherwise fail, our revenues may suffer and we may be required to devote additional resources to our sales, marketing and client services efforts. These companies generally are not obligated to offer our services to their clients or restricted from working with our competitors. Accordingly, our success will depend on their willingness to devote resources and efforts to marketing our services. WE MAY FACE CLAIMS FOR ACTIVITIES OF OUR CLIENTS WHICH COULD HARM OUR BUSINESS. 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 costs incurred as a result of that liability or asserted liability could harm our business. 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 such transmission 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, E-MARKETING AND THE INTERNET, COULD HARM OUR BUSINESS. Legislation has recently been enacted in several states restricting the sending of unsolicited commercial email. We cannot assure you that existing or future legislation regarding commercial email will not harm our business. The federal government and several other states are considering, or have considered, similar legislation. These provisions generally limit or prohibit both the transmission of unsolicited commercial emails and the use of forged or fraudulent routing and header information. Some states, including California, require that unsolicited emails include opt-out instructions and that senders of such emails honor any opt-out requests. Our business could be negatively impacted by new laws or regulations applicable to e-marketing or the Internet, the application of existing laws and regulations to e-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 e-marketing, which could, in turn, decrease the demand for our services and increase our cost of doing business, or otherwise harm our business. 13 15 YEAR 2000 ISSUES PRESENT TECHNOLOGICAL RISKS, COULD CAUSE DISRUPTION TO OUR BUSINESS AND COULD HARM SALES OF OUR SERVICES. Any failure of our technology or systems, third-party software or hardware on which we rely or the Internet to be Year 2000 compliant could cause disruption to our business and could harm our sales. Many currently installed computer systems and software products are coded to accept or recognize only two digit entries in the date code field. These systems and software products will need to accept four digit entries to distinguish dates before and after January 1, 2000. As a result, computer systems and software used by many companies and governmental agencies may need to be upgraded to comply with these Year 2000 requirements or risk system failure or miscalculations causing disruptions of normal business activities. We are currently assessing the Year 2000 readiness of the software, computer technology and other services that we use that may not be Year 2000 compliant. Since we have not completed this assessment, we are unable to predict to what extent our business may be affected if our technology or systems, third party hardware or software on which we rely or the Internet experience a material Year 2000 failure. For a further discussion of the impact of Year 2000 on our business, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Compliance." 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. Due to 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. This broad market volatility and industry volatility may reduce the price of our common stock, without regard to our operating performance. AN AGGREGATE OF 18,464,628 SHARES, OR %, OF OUR OUTSTANDING STOCK WILL BECOME ELIGIBLE FOR RESALE IN THE PUBLIC MARKET BETWEEN 180 DAYS AND ONE YEAR AFTER THIS OFFERING, AND FUTURE SALES OF SUCH STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE. The market price of our common stock could drop as a result of sales of a large number of shares of common stock in the market after this offering or in response to the perception that sales of a large number of shares could occur. No prediction can be made about the effect that future sales of common stock will have on the market price of our common stock. Of the shares of our common stock to be outstanding upon completion of the offering, the shares offered hereby (plus any shares issued upon exercise of the underwriters' over-allotment option) will be freely tradable. All of the shares outstanding prior to the offering will be "restricted securities" as the term is defined under Rule 144 promulgated under the Securities Act. Unless sold pursuant to Rule 144, which provides for minimum holding periods, public availability of information, and volume and manner restrictions on sales, "restricted securities" cannot be 14 16 sold without an effective registration statement on file with the Securities and Exchange Commission. These shares will be available for sale in the public market as follows:
NUMBER OF SHARES/ PERCENT OUTSTANDING AFTER THE OFFERING DATE WHEN SHARES BECOME AVAILABLE FOR RESALE IN THE PUBLIC MARKET ------------------- ----------------------------------------------------------------- / % 180 days after the date of this prospectus pursuant to agreements between the stockholders and the underwriters or Digital Impact, provided that none of these shares are released from lock-up restrictions by Credit Suisse First Boston Corporation. of these shares will also be subject to sales volume restrictions under Rule 144 under the Securities Act / % Upon expiration of applicable one-year holding periods under Rule 144, which will expire between , 2000 and , 2000, subject to sales volume restrictions under Rule 144
In addition, we intend to file a registration statement on Form S-8 under the Securities Act after the date of this offering to register an aggregate of million shares of common stock issued or reserved for issuance under our various stock plans. OUR STOCK HAS NO PRIOR TRADING MARKET AND YOU MAY NOT BE ABLE TO RESELL YOUR STOCK AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE Before this offering, there has not been a public trading market for our common stock, and an active trading market for our common stock may not develop or be sustained after this offering. Further, the market price of our common stock may decline below our initial public offering price. The initial public offering price will be determined by negotiations between the representatives of the underwriters and us. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. 15 17 YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS BECAUSE THEY ARE INHERENTLY UNCERTAIN You should not rely on forward-looking statements in this prospectus. This prospectus contains forward-looking statements that involve risks and uncertainties. We use words such as "anticipates," "believes," "expects," "plans," "future," "intends," "estimates," "should," "potential," "continue," "may," "will" and similar expressions to identify such forward-looking statements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this prospectus. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us described above and elsewhere in this prospectus. USE OF PROCEEDS Our net proceeds from the sale of the shares of common stock in this offering at an assumed public offering price of $ per share, are estimated to be $ , or $ if the underwriters' over-allotment option is exercised in full and after deducting the estimated underwriting discounts and commissions and offering expenses. We intend to use the net proceeds from this offering primarily for general corporate purposes, including working capital. Such uses are expected to include an expansion of our sales and marketing efforts and technical support services as well as expenses associated with our geographic expansion. We also may use a portion of the net proceeds to acquire complementary businesses, products or technologies; however, we currently have no commitments or agreements and are not involved in any negotiations to do so. Pending use of the net proceeds of this offering, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities. DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all future earnings, if any, for use in the operation and expansion of our business and do not anticipate declaring or paying cash dividends for the foreseeable future. Our existing line of credit prohibits the payment of cash dividends. 16 18 CAPITALIZATION The following table sets forth our capitalization as of June 30, 1999: - On an actual basis. - On a pro forma basis to give effect to the conversion of all outstanding shares of convertible preferred stock into 12,292,000 shares of common stock, including the series C convertible preferred stock issued in July 1999. - On a pro forma as adjusted basis to give effect to the sale of shares of common stock at an assumed initial public offering price of $ per share in this offering, less estimated underwriting discounts and commissions and offering expenses payable by Digital Impact.
JUNE 30, 1999 ----------------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED --------- ------------- ------------- (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED) Capital lease obligations, less current portion........................................ $ 352 $ 352 $ 352 Borrowings, less current portion................. 196 196 196 ------- ------- ------- Long term debt, less current portion........... 548 548 548 ------- ------- ------- Stockholders' equity: Convertible preferred stock, $0.001 par value per share, 12,000,000 shares authorized, 10,064,000 shares issued and outstanding, actual; 16,000,000 shares authorized, none issued or outstanding, pro forma; 5,000,000 shares authorized, none issued or outstanding, pro forma as adjusted.......... 3 Common stock, $0.001 par value per share, 54,000,000 shares authorized, 6,172,000 shares issued and outstanding, actual; 54,000,000 shares authorized, 18,464,000 shares issued and outstanding, pro forma; 100,000,000 shares authorized, shares issued and outstanding, pro forma as adjusted.................................... 1 18 Additional paid-in capital..................... 12,653 23,299 Unearned stock-based compensation.............. (3,958) (3,958) (3,958) Accumulated deficit............................ (6,503) (6,503) (6,503) ------- ------- ------- Total stockholders' equity.................. 2,196 12,856 ------- ------- ------- Total capitalization................... $ 2,744 $13,404 $ ======= ======= =======
This tables excludes: - 8,795,000 shares of common stock reserved for issuance under our 1998 stock plan, of which options to purchase 2,911,208 shares were outstanding as of June 30, 1999, at a per share weighted average exercise price of $0.15. - 128,000 shares of convertible preferred stock that are issuable upon the exercise of an outstanding warrant, at a per share weighted average exercise price of $0.72, and are convertible into 128,000 shares of common stock immediately before completion of this offering. - 1,200,000 shares reserved for issuance under our 1999 employee stock purchase plan and our 1999 director option plan. 17 19 DILUTION The pro forma net tangible book value as of June 30, 1999 was $12,856,000 or approximately $0.70 per share of common stock. Pro forma net tangible book value represents the amount of our total tangible assets less total liabilities, divided by the total number of shares of common stock outstanding after giving effect to the conversion of all outstanding shares of convertible preferred stock into 12,292,000 shares of common stock, including the series C convertible preferred stock issued in July 1999. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately following this offering. After giving effect to our sale of the shares of common stock offered in this offering and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of June 30, 1999 would have been $ , or approximately $ per share. This represents an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate dilution in net tangible book value of $ per share to new investors. The following table illustrates this dilution on a per share basis: Assumed initial public offering price per share............. $ Pro forma net tangible book value per share as of June 30, 1999................................................... $0.70 Increase per share attributable to new investors.......... Pro forma net tangible book value per share after the offering.................................................. ----- Dilution in pro forma net tangible book value per share to new investors............................................. $ =====
The following table sets forth, on a pro forma basis as of June 30, 1999, the differences between the number of shares of common stock purchased from us, the total price and average price per share paid by existing investors and by new investors, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, at an assumed public offering price of $ per share.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ----------------------- ------------------------ PRICE NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE ---------- ---------- ----------- ---------- --------- Existing stockholders..... 18,464,000 % $17,209,000 % $0.93 New investors............. ---------- --- ----------- ---- Total........... 100% $ 100% ========== === =========== ====
- ------------------------- This table assumes no exercise of outstanding options and warrants. See note 6 to the financial statements. The exercise of outstanding options and warrants would increase the dilutive effect to new investors. If the underwriters' over-allotment option is exercised in full, the following will occur: - The number of shares of common stock held by existing stockholders will decrease to approximately % of the total number of shares of our common stock outstanding after this offering. - The number of shares held by new investors will increase to or approximately % of the total number of shares of our common stock outstanding after this offering. 18 20 SELECTED FINANCIAL DATA The selected statement of operations data for the period from October 16, 1997 (date of inception) through March 31, 1998 and for the year ended March 31, 1999 and the selected balance sheet data as of March 31, 1998 and 1999 have been derived from our financial statements included elsewhere in this prospectus that have been audited by PricewaterhouseCoopers LLP independent accountants. The selected results of operations for the three months ended June 30, 1998 and 1999 and the selected balance sheet data as of June 30, 1999 are derived from unaudited financial statements included elsewhere in this prospectus that have been prepared on the same basis as the audited financial statements and, in the opinion of management, contain all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of our operating results for such periods and our financial condition as of such date. The historical results are not necessarily indicative of results to be expected for any future period. The data has been derived from financial statements that have been prepared in accordance with generally accepted accounting principles and should be read in conjunction with the financial statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.
OCTOBER 16, 1997 THREE MONTHS ENDED (DATE OF INCEPTION) YEAR ENDED JUNE 30, TO MARCH 31, MARCH 31, ------------------- 1998 1999 1998 1999 ------------------- ---------- ------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues............................... $ 4 $ 1,307 $ 25 $ 1,385 Cost of revenues....................... 4 674 24 672 ------ ------- ------ ------- Gross margin........................... -- 633 1 713 ------ ------- ------ ------- Operating expenses: Research and development............. 27 966 77 843 Sales and marketing.................. -- 670 46 1,010 General and administrative........... 77 1,151 86 1,047 Stock-based compensation............. -- 1,157 95 977 ------ ------- ------ ------- Total operating expenses.......... 104 3,944 304 3,877 ------ ------- ------ ------- Loss from operations................... (104) (3,311) (303) (3,164) Interest income (expense), net......... 1 71 6 4 ------ ------- ------ ------- Net loss............................... $ (103) $(3,240) $ (297) $(3,160) ====== ======= ====== ======= Net loss per common share -- basic and diluted.............................. $(0.45) $ (2.86) $(0.90) $ (1.27) ====== ======= ====== ======= Shares used in net loss per common share calculation -- basic and diluted.............................. 231 1,133 330 2,497 ====== ======= ====== ======= Pro forma net loss per share -- basic and diluted (unaudited).............. $ (0.39) $ (0.25) ======= ======= Shares used in pro forma net loss per share calculation -- basic and diluted (unaudited).................. 8,370 12,541 ======= =======
19 21
AS OF MARCH 31, ---------------- AS OF JUNE 30, 1998 1999 1999 ------ ------ -------------- (UNAUDITED) (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents............................... $1,032 $2,864 $ 900 Working capital (deficit)............................... 1,013 2,403 (912) Total assets............................................ 1,078 6,314 5,719 Capital lease obligations, less current portion......... -- 465 352 Long term debt, less current portion.................... -- 234 196 Stockholders' equity.................................... 1,056 4,370 2,196
20 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion of our financial condition and results of operations in conjunction with our financial statements and related notes. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of factors including those discussed in "Risk Factors," starting on page 6 and elsewhere in this prospectus. OVERVIEW We are a leading provider of technology-enabled, e-marketing services. Our primary suite of e-marketing services, Merchant Mail, is sold as a single service and currently consists of the following components: email campaign management, targeting and personalization, email format optimization, campaign tracking and reporting, and data hosting and management. We also recently introduced the Email Exchange Network, a service which enables our clients to acquire new customers by sharing email addresses with each other, with the consumer providing explicit consent. We were incorporated in October 1997 and commenced sales of our services in December 1997. During the period from inception through March 1998, we had insignificant revenues. Operating activities during this period related primarily to developing our services, building our corporate infrastructure and raising capital. In April 1998, we began executing e-marketing campaigns for major clients. To date our revenues have consisted of sales of Merchant Mail. In July 1999, we established the Email Exchange Network and expect that it will contribute to our revenue in future periods. Although our revenues have increased each quarter since inception, we have never been profitable. We expect to incur net losses for the foreseeable future and may never be profitable. As of June 30, 1999, we had an accumulated deficit of $6.5 million. We generate revenues from the sale of services to businesses that enable them to proactively communicate with their customers online. Historically, these services have primarily consisted of the design and execution of e-marketing campaigns. For each campaign, we generally charge our clients a fixed fee for the set up and a variable fee based on the number of emails sent to our clients' customers. We recognize revenue for these fees when we complete an e-marketing campaign, which typically lasts less than one week. Cost of revenues consists primarily of expenses relating to the delivery of e-marketing services, including personnel costs, primarily consisting of our client services staff, the amortization of equipment and licensed technology, and data center rent. Operating expenses are categorized into research and development, sales and marketing, general and administrative, and stock-based compensation. Research and development expenses consist primarily of personnel and related costs, consultants and outside contractor costs, and software and hardware maintenance costs for our development efforts. To date, all research and development costs have been expensed as incurred. 21 23 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 represents the aggregate difference, at the date of grant, between the respective exercise price of stock options and the deemed fair market value of the underlying stock. Stock-based compensation is amortized over the vesting period of the underlying options based on an accelerated vesting method, generally four years. Through June 30, 1999, we recorded unearned stock-based compensation totaling $5.5 million. For the year ended March 31, 1999, we recognized amortization of stock-based compensation of $542,000 and for the three months ended June 30, 1999, we recognized amortization of stock-based compensation of $1.0 million. We anticipate recognizing substantial additional stock-based compensation based on option grants in July and August 1999 and recording an additional $4.5 million of unearned stock-based compensation. The total unamortized unearned stock-based compensation recorded for all option grants through August 31, 1999 will be amortized as follows: $4.0 million for the remainder of the year ended March 31, 2000; $2.7 million for the year ended March 31, 2001; $1.3 million for the year ended March 31, 2002; and $472,000 for the year ended March 31, 2003 and thereafter. RESULTS OF OPERATIONS. THREE MONTHS ENDED JUNE 30, 1998 AND 1999 Revenues. Total revenues increased from $25,000 for the three months ended June 30, 1998 to $1.4 million for the three months ended June 30, 1999. The increase was primarily due to the increased number of clients to whom we provide e-marketing services, in addition to a significant increase in the number of emails sent on behalf of our clients. Cost of Revenues. Cost of revenues increased from $24,000 for the three months ended June 30, 1998 to $672,000 for the three months ended June 30, 1999. The increase was primarily due to increased personnel costs associated with supporting a larger number of clients and a higher volume of emails, as well as costs associated with expansion of our data center capacity. Gross margins increased from 4% for the three months ended June 30, 1998 to 51% for the three months ended June 30, 1999. This increase was primarily the result of higher capacity utilization as revenues increased at a greater rate than associated costs. Research and Development. Research and development expenses increased from $77,000 for the three months ended June 30, 1998 to $843,000 for the three months ended June 30, 1999. The increase was primarily due to the increase in personnel needed to further develop and enhance our services. We are continuing to invest substantially in research and development, and we expect costs of research and development to increase on an absolute basis in future periods. Sales and Marketing. Sales and marketing expenses increased from $46,000 for the three months ended June 30, 1998 to $1.0 million for the three months ended June 30, 22 24 1999. The increase was a result of growth primarily in our direct sales force, and marketing staff, as well as an increase in promotional spending targeted at building our brand, increasing our client base and growing sales. We expect our sales and marketing expenses to significantly increase on an absolute basis as we continue to grow our sales force and expand our marketing activities. General and Administrative. General and administrative expenses increased from $86,000 for the three months ended June 30, 1998 to $1.0 million for the three months ended June 30, 1999. The increase was due primarily to an increase in personnel and an increase in overhead costs associated with the growth of our business. Stock-based Compensation. We recorded unearned stock-based compensation of $350,000 during the three months ended June 30, 1998 and $3.7 million during the three months ended June 30, 1999, which is being amortized over the period during which the options vest, generally four years. Amortization of this stock-based compensation recognized during the three months ended June 30, 1998 was $95,000 and during the three months ended June 30, 1999 was $977,000. PERIOD FROM OCTOBER 16, 1997 (DATE OF INCEPTION) TO MARCH 31, 1998 AND YEAR ENDED MARCH 31, 1999 Revenues. Total revenues increased from $4,000 for the period ended March 31, 1998 to $1.3 million for the year ended March 31, 1999. The increase was primarily due to the increased number of clients to whom we provide e-marketing services, in addition to a significant increase in the number of emails sent on behalf of our clients. Cost of Revenues. Cost of revenues increased from $4,000 for the period ended March 31, 1998 to $674,000 for the year ended March 31, 1999. The increase was primarily due to increased personnel costs associated with supporting a larger number of clients and a higher volume of emails, as well as costs associated with expansion of our data center capacity. Gross margins were 48% for the year ended March 31, 1999. This increase was primarily the result of higher capacity utilization as revenues increased at a greater rate than associated costs. Research and Development. Research and development expenses increased from $27,000 for the period ended March 31, 1998 to $966,000 for the year ended March 31, 1999. The increase was primarily due to an increase in personnel and costs associated with new product development. Sales and Marketing. Sales and marketing expenses were not significant for the period ended March 31, 1998 and were $670,000 for the year ended March 31, 1999. The increase was a result of growth primarily in our direct sales force, and marketing staff, as well as an increase in promotional spending targeted at building our brand, increasing our client base and growing sales. General and Administrative. General and administrative expenses increased from $77,000 for the period ended March 31, 1998 to $1.2 million for the year ended March 31, 1999. The increase was due primarily to an increase in personnel and an increase in overhead costs associated with the growth of our business. Stock-based compensation. During the year ended March 31, 1999, we recorded unearned stock-based compensation of $1.8 million which is being amortized over the period during which the options vest, generally four years. For the year ended March 31, 23 25 1999, we recognized amortization of stock-based compensation of $542,000 as a result of options granted to employees and non-employees during the year. In addition, we recognized additional stock-based compensation of $614,000 in the year for 270,000 shares of common stock which we issued as a bonus to a founder. Income Taxes. No provision for federal and state income taxes was recorded as we incurred net operating losses from inception through June 30, 1999. As of March 31, 1999 we had approximately $2.1 million of federal and state net operating loss carryforwards which expire in varying amounts beginning in 2005. Due to the uncertainty regarding the ultimate utilization of the net operating loss carryforwards, we have not recorded any benefit for losses and a valuation allowance has been recorded for the entire amount of the net deferred tax asset. In addition, sales of our stock, including shares sold in this offering, may further restrict our ability to utilize our net operating loss carryforwards. 24 26 QUARTERLY OPERATING RESULTS The following table presents our historical unaudited quarterly results of operations for our most recent five quarters. This data is unaudited and derived from our audited annual financial statements and notes included elsewhere in this prospectus. In the opinion of management, such quarterly financial information has been prepared on the same basis as our annual financial statements and includes all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial results set forth therein. Such statement of operations data should be read in conjunction with the financial statements and related notes included in this prospectus. Our results of operations have fluctuated and are likely to continue to fluctuate in the future. Results of operations for any previous periods are not necessarily comparable to future periods.
THREE MONTHS ENDED -------------------------------------------------------------- JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1998 1998 1998 1999 1999 -------- ------------- ------------ --------- -------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues...................... $ 25 $ 96 $ 396 $ 790 $ 1,385 Cost of revenues.............. 24 63 189 398 672 -------- ------- ------- ------- ------- Gross margin.................. 1 33 207 392 713 -------- ------- ------- ------- ------- Operating expenses: Research and development.... 77 132 292 465 843 Sales and marketing......... 46 88 152 384 1,010 General and administrative............ 86 95 225 745 1,047 Stock-based compensation.... 95 67 110 885 977 -------- ------- ------- ------- ------- Total operating expenses.......... 304 382 779 2,479 3,877 -------- ------- ------- ------- ------- Loss from operations.......... (303) (349) (572) (2,087) (3,164) Interest income (expense), net......................... 6 4 22 39 4 -------- ------- ------- ------- ------- Net loss...................... $ (297) $ (345) $ (550) $(2,048) $(3,160) ======== ======= ======= ======= ======= AS A PERCENTAGE OF REVENUES: Revenues...................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues.............. 96.0 65.6 47.7 50.3 48.5 -------- ------- ------- ------- ------- Gross margin.................. 4.0 34.4 52.3 49.7 51.5 -------- ------- ------- ------- ------- Operating expenses: Research and development.... 308.0 137.5 73.7 58.9 61.0 Sales and marketing......... 184.0 91.7 38.4 48.6 72.9 General and administrative............ 344.0 99.0 56.8 94.3 75.6 Stock-based compensation.... 380.0 69.8 27.8 112.0 70.5 -------- ------- ------- ------- ------- Total operating expenses.......... 1216.0 398.0 196.7 313.8 280.0 -------- ------- ------- ------- ------- Loss from operations.......... (1212.0) (363.6) (144.4) (264.1) (228.5) Interest income (expense), net......................... 24.0 4.2 5.6 4.9 0.3 -------- ------- ------- ------- ------- Net loss...................... (1188.0)% (359.4)% (138.8)% (259.2)% (228.2)% ======== ======= ======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES From our inception to June 30, 1999, we funded our operations primarily with $6.5 million raised through the private sale of our equity securities. As of June 30, 1999, we had cash and cash equivalents of $900,000 and availability of $1.3 million under a 25 27 leasing line of credit. Since June 30, 1999, we have raised an additional $10.6 million through the private sale of our equity securities. Net cash used in operating activities was $95,000 for the period ended March 31, 1998 and $2.0 million for the year ended March 31, 1999, primarily the result of net losses of $103,000 for the period ended March 31, 1998 and $2.0 million for the year ended March 31, 1999, after adjusting for stock-based compensation expense of $1.2 million for the year ended March 31, 1999. Net cash used in operating activities was $1.2 million for three months ended June 30, 1999, primarily the result of net losses of $2.2 million, after adjusting for stock-based compensation expense of $1.0 million. Net cash used in investing activities was $31,000 for the period ended March 31, 1998, $2.4 million for the year ended March 31, 1999 and $1.1 million for the three months ended June 30, 1999. The cash used in investing activities was related to purchases of property and equipment. Net cash provided by financing activities was $1.2 million for the period ended March 31, 1998 and $6.2 million for the year ended March 31, 1999. Cash provided by financing activities was primarily from proceeds of the sale of our preferred stock and the sale and leaseback of assets, as well as draws against our line of credit. Net cash provided by financing activities was $359,000 for the three months ended June 30, 1999. We believe that the net proceeds from this offering, together with our current cash and cash equivalents and availability under our line of credit facilities, will be sufficient to meet our anticipated cash needs for working capital, repayment of debt and capital expenditures for at least the next twelve months. After that time, we may need additional capital. However, we may need to raise additional funds sooner to fund additional expansion, develop new or enhanced services, respond to competitive pressures or make acquisitions. We cannot be certain that additional financing will be available to us on favorable terms. If adequate funds are not available on acceptable terms, our business will be harmed. YEAR 2000 READINESS DISCLOSURE Many currently installed computer systems and software products are coded to accept or recognize only two digit entries in the date code field. These systems and software products will need to accept four digit entries to distinguish dates before and after January 1, 2000. This could result in system failures or miscalculations causing disruption of operations for any company using such computer programs or hardware. As a result, many companies' computer systems may need to be upgraded or replaced in order to avoid Year 2000 issues. We are a comparatively new enterprise, and, accordingly, the majority of software and hardware we use to manage our business has all been purchased or developed by us within the last 18 months. While this does not completely protect us against Year 2000 exposure, we believe our exposure is limited because the technology we use to manage our business is not based upon legacy hardware and software systems. We are in the process of testing our technology and systems. The testing we have completed has primarily been performed internally, and we have recently retained a consultant to test and review our systems for Year 2000 compliance. Based on the testing we have performed, we believe that our software is Year 2000 compliant. 26 28 In addition, we rely on software and hardware developed by third parties, which we have not independently tested to determine Year 2000 compliance. We have reviewed certifications from our key equipment suppliers for our data centers that their equipment is Year 2000 compliant. Additionally, we have reviewed certifications from the providers of key software applications that their software is Year 2000 compliant. Based on an initial evaluation of our broader list of software and hardware providers, we believe that these providers are in the process of reviewing and implementing their own Year 2000 compliance programs. We will work with these providers to address the Year 2000 issue and continue to seek assurances from them that their products are Year 2000 compliant. To date we have incurred less than $100,000 in costs associated with our Year 2000 remediation efforts, and anticipate that any future costs will not exceed $500,000. However, if we, or third party providers of hardware, software and communications services fail to remedy any Year 2000 issues, the result could be lost revenues, increased operating expenses, the loss of customers and other business interruptions, any of which could harm our business. Moreover, the failure to adequately address Year 2000 compliance issues in the delivery of services to our clients could result in claims against us of misrepresentation or breach of contract and related litigation, any of which could be costly and time consuming to defend. We have not developed any specific contingency plans for Year 2000 issues. Our worst case scenario for Year 2000 problems would be our inability to execute our clients' e-marketing campaigns and the potential initiation by our clients of associated litigation. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position 98-1, or SOP 98-1, "Software for Internal Use," which provides guidance on accounting for the cost of computer software developed or obtained for internal use. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. We believe that the adoption of SOP 98-1 will not have a material impact on our financial statements. In April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, or SOP 98-5, "Reporting on the Costs of Start-Up Activities." This standard requires companies to expense the costs of start-up activities and organization costs as incurred. In general, SOP 98-5 is effective for fiscal years beginning after December 15, 1998. We believe the adoption of SOP 98-5 will not have a material impact on our results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities. SFAS 133 requires that all derivatives be recognized at fair value in the statement of financial position, and that the corresponding gains or losses be reported either in the statement of operations or as a component of comprehensive income, depending on the type of hedging relationship that exists. SFAS 133 will be effective for fiscal years beginning after June 15, 2000. We do not currently hold derivative instruments or engage in hedging activities. 27 29 QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK We provide our services to clients primarily in the U.S. As a result, it is unlikely that our financial results could be directly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. All of our sales are currently denominated in U.S. dollars. Our exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our investment portfolio and on the increase or decrease in the amount of interest expense we must pay with respect to 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. 28 30 BUSINESS OVERVIEW We offer Internet direct marketing, or e-marketing, services to businesses that wish to communicate more effectively with their customers online through email. We combine proprietary technologies, rigorous business processes and expertise developed over thousands of email campaigns to provide a comprehensive, outsourced e-marketing solution. The services we provide are designed to maximize our clients' return on their marketing investment. Our core set of services includes campaign management, targeting and personalization, email format optimization, campaign tracking and reporting, and database hosting and management. We sell these services under the name Merchant Mail. In addition, we recently introduced the Email Exchange Network, an online marketing network that provides our clients with a new method to acquire additional online customers. INDUSTRY BACKGROUND THE GROWTH OF INTERNET COMMERCE AND EMAIL The explosive growth of the Internet as a tool for global communications and commerce has prompted a wide variety of businesses to develop strategies to sell products and services online. International Data Corporation, or IDC, estimates that worldwide commerce over the Internet will increase from approximately $50 billion in 1998 to $1.3 trillion in 2003. To attract and retain a broader range of customers and increase e-commerce revenues, businesses are seeking ways to more effectively communicate with their customers online. Email is the most widely used application on the Internet today and its proliferation has been critical to the growth of e-commerce. Businesses use email as the primary means to proactively communicate with their customers online. For example, email is often used to confirm electronic transactions and to notify customers of important new developments or product offerings. IDC estimates that the number of electronic mailboxes worldwide will grow from approximately 240 million in 1998 to over 590 million by 2003, and that the number of emails sent annually worldwide will grow from 809 billion to 4.8 trillion during the same period. THE EMERGENCE OF INTERNET DIRECT MARKETING Businesses and other marketing organizations spent an estimated $285 billion on general advertising in 1998, of which $160 billion was spent on direct marketing, according to the Direct Marketing Association. An increasing percentage of this spending is expected to move into online forms of advertising and direct marketing as businesses seek to grow their e-commerce revenues. Since direct marketing expenditures have traditionally been larger than expenditures for advertising, spending on Internet direct marketing, or e-marketing, is expected to soon outpace Internet advertising spending as a means to drive e-commerce. Forrester Research projects total Internet advertising expenditures in the U.S. to increase from $1.3 billion in 1998 to over $10 billion in 2002. Forrester also estimates that Internet direct marketing will account for 60%, or $6.2 billion, of these expenditures in 2002, up from 15% in 1998. 29 31 E-marketing allows businesses to cost-effectively target online customers through customized email marketing campaigns. Initially, email did not gain wide acceptance as an e-marketing tool because of concerns regarding privacy and unsolicited communication. With the recent advent of permission-based email, where individuals sign up to receive information from specific sources on topics of interest to them, email has become an increasingly important direct marketing tool. Email campaigns offer significant advantages over paper-based communications, including more rapid delivery, reduced cost and a greater degree of personalization. Direct email campaigns generate response rates that are 3 to 10 times higher than response rates for traditional direct mail campaigns. CHALLENGES IN IMPLEMENTING E-MARKETING PROGRAMS Companies face significant challenges in effectively implementing e-marketing programs internally. These challenges include the difficulties and costs associated with: - Assembling and delivering high volumes of personalized email messages. - Determining the most effective layout, copy and graphical email format for each recipient. - Tracking and analyzing large volumes of individual customer response data. - Hiring and retaining a team of specialized e-marketing and technology experts. - Building and maintaining the necessary hardware and software infrastructure. - Rapidly setting-up, designing and executing successful e-marketing campaigns. A company's failure to adequately address any of these challenges can result in lost business opportunities and substantial damage to its brand. As a result, we believe companies are seeking an outsourced solution that will enable them to fully realize their e-marketing objectives while maintaining a focus on their core competencies. THE DIGITAL IMPACT SOLUTION We offer a comprehensive suite of e-marketing services designed to maximize our clients' return on their marketing investment. Our e-marketing services currently include direct email marketing services, customer acquisition tools, strategic and data mining analysis and client support services. We combine proprietary technologies, a rigorous process methodology and the domain expertise of our client services professionals to create e-marketing campaigns for our clients. We provide our clients with a high quality e-marketing solution featuring accurate and timely delivery of email messages with limited client oversight requirements. The benefits of our solution include: Targeted, relevant content. Through our proprietary technologies and processes, we can dynamically assemble and deliver millions of personalized emails based on recipient profiles. Each recipient's profile can include demographic information, past response and purchase behavior and customizable business rules. We continually update each individual profile with real-time response data. Personalized email formatting. Our email sensor technology enables us to ensure that each recipient receives an email that fully utilizes the graphical capabilities of that recipient's email software. This technology allows us to deliver a particular email in one of several formats, including basic text, America Online format, and hypertext markup language, or HTML, depending on the recipient's email capabilities. Our use of rich graphical formats can significantly increase the likelihood of a customer response. 30 32 Real-time performance tracking and campaign analysis. Using our campaign management tools, we can track and analyze large volumes of real-time customer response data. This capability allows our clients to quickly execute test campaigns, gain valuable market research data, and evaluate the effectiveness of alternative e-marketing strategies. Clients can then launch full-scale campaigns based on these test results, all within a short period of time. Domain expertise. Our experience gained from designing and managing thousands of email campaigns has allowed us to develop an e-marketing process built on best practices, a term we use to describe our accumulated knowledge of effective e-marketing strategies and techniques. This institutionalized process provides us with a methodology to reliably execute each phase of a campaign, from initial setup to results analysis and allows us to consistently deliver valuable e-marketing services to our clients. Robust and scalable infrastructure. Our ongoing investments in hardware and software enable us to reliably assemble and deliver large volumes of client emails on a timely basis. We delivered over 28 million emails in June 1999 and have the capacity to deliver up to 180 million emails per month with our existing hardware infrastructure. We have designed our systems to be highly scalable so that we can readily expand to meet the increasing demands of our clients. Significantly improve time to market. By leveraging our investment in infrastructure and technology, combined with our institutionalized processes and experience, our clients are able to deploy their e-marketing campaigns rapidly and reliably. This approach allows our clients to remain focused on their core business competencies and enhance their competitive positions. STRATEGY Our objective is to be the leader in technology-enabled e-marketing services. The following are the key elements of our strategy: Expand our service offerings. We intend to leverage our e-marketing and technology expertise to develop new tools, functionalities and features that will enable us to maximize our clients' return on their marketing investment. By working closely with our network of clients, we continually refine our e-marketing expertise to increase the value of each of our services. Exploit new market opportunities. We believe there are significant opportunities to introduce our services into new markets. The majority of our e-marketing clients to date have been traditional and online retailers. We intend to expand our presence among clients in other consumer markets, in markets where the customers are businesses rather than consumers, and in international markets. Leverage our database of consumer profiles. We intend to leverage our database of consumer profiles to implement new services in a permission-based environment. We believe that the increasing scope and depth of this database will create opportunities for the sharing of information among our clients. This will enable our network of clients to obtain broader and more meaningful information about consumers than any single client would otherwise obtain on its own. Establish the Email Exchange Network as a leading service for client acquisition. We recently began offering our clients the opportunity to participate in the Email Exchange 31 33 Network, a cooperative marketing network that allows our clients to collectively acquire new customer information and share email addresses in an opt-in, permission-based program. We believe that the Email Exchange Network will provide us with an additional means to attract and retain clients. Build brand awareness and strategic alliances. To increase our brand awareness, we are promoting our services to online marketers and advertising agencies through the use of our Web site, trade advertisements and selected media events. We are also promoting our client success stories through the use of case studies, technical papers and regular briefings with industry analysts. We intend to build alliances with leading Internet technology and service providers to leverage their sales, marketing and engineering capabilities, and to enhance awareness of our brand. SERVICES We provide comprehensive services for executing personalized direct email marketing campaigns designed to enable our clients to acquire and retain online customers. Our primary suite of e-marketing services, Merchant Mail, is sold as a single service and currently consists of the following components: - Email campaign management. - Targeting and personalization. - Media optimization. - Tracking and reporting. - Data hosting and management. We also provide the Email Exchange Network, a service which enables our clients to acquire new customers by sharing email addresses with each other, with the consumer providing explicit consent. EMAIL CAMPAIGN MANAGEMENT We assign each client a client services manager, an e-marketing specialist who applies our extensive domain expertise and methodologies, to manage that client's email campaigns. The campaign management process includes: - Establishing rules for email personalization based upon each recipient's profile and email software environment. - Checking the quality of each email across over 30 email software packages. - Applying our accumulated knowledge base to analyze the results of each campaign. - Managing and ensuring the integrity of data transfers with our clients. 32 34 TARGETING AND PERSONALIZATION We create targeted email messages for each customer based on our clients' e-marketing objectives. Our targeting and personalization capabilities include: - Matching a particular email offer to the appropriate group of recipients based on a pre-defined set of marketing parameters determined by our clients. For example, in a recent campaign we emailed different offers to multiple customer groups based on the timing of their last purchase from that client. In another instance, we created and delivered emails containing gardening advice tailored to each recipient's geographic region. - Automatically sending an email based on a pre-determined event or schedule. For example, currently we help one of our clients sell additional products by sending each online purchaser an order confirmation email containing offers for related products. - Dynamically assembling unique emails using sophisticated algorithms and statistical models to predict the content most relevant to each recipient. For example, we recently assembled and delivered 35,000 unique emails, each featuring six different products from a pool of 3,000 possible choices. The six products and the order in which they were presented to each customer were determined on the basis of the customer's purchase behavior, self-reported preferences and demographic profile. EMAIL FORMAT OPTIMIZATION We use our email sensor technology to determine the optimal graphical format for each recipient's email software environment. This technology enables us to deliver email at the highest level of graphics and interaction currently available to the recipient, including: - Plain text emails with universal resource locator, or URL, links. - Plain text emails with hyperlinked words that are blue and underlined. - Emails tailored for subscribers of America Online with hyperlinked words and font formatting. - Hypertext markup language, or HTML, emails with advanced graphical elements. - Dynamic HTML and Java-based email with interactive capabilities greater than HTML. CAMPAIGN TRACKING AND REPORTING We monitor and report the performance of our clients' email campaigns. The data is collected at the individual customer level and includes the number and percentage of: - Emails successfully delivered. - Emails rejected by email servers. - HTML and dynamic HTML emails opened. - Click throughs per campaign, per recipient and per specific offer. - Email replies from customers. 33 35 DATA HOSTING AND MANAGEMENT We collect, warehouse and manage key marketing elements of our clients' customer information. In total, we manage over 20 million consumer profiles. Our data hosting and management services include: - Maintaining the integrity of our clients' email lists by purging undeliverable addresses, correcting invalid addresses and eliminating duplicate records. - Developing and hosting Web pages that transparently integrate with a client's Web site and that allow consumers to enter and update their profile and subscription information. - Capturing and processing real-time campaign response data at the individual recipient level, including the recipient's email software environment, whether the email was successfully delivered and opened and which items were clicked on within the email. - Automatically handling campaign email replies, including unsubscribe requests, vacation notices, undeliverable messages, and forwarding of customer service requests. THE EMAIL EXCHANGE NETWORK We have created an online cooperative marketing network, the Email Exchange Network, which provides our clients with a new customer acquisition model. Our Email Exchange Network operates as follows: - Clients select other participating clients with whom they would like to share customer profiles. - Clients include links to the Email Exchange Network web site in their emails or on their web sites. - Consumers click on these links to access the Email Exchange Network. - Consumers choose the participating clients from whom they would like to receive information, and complete an optional profile form. - Each consumer's email address and optional profile information is automatically added to the customer profile database of the selected clients. - Clients pay us for every consumer profile added and are credited when one of their customers joins another participant's list. 34 36 CLIENTS We began providing services in March 1998 and as of August 31, 1999, have over 40 clients. Our clients consist of a diverse group of companies operating in many industries throughout the United States, ranging from Fortune 100 to small private companies. For the year ended March 31, 1999 Preview Travel, ONSALE and The Gap accounted for 26.8%, 11.5% and 10.9% of our revenues. For the quarter ended June 30, 1999, four of our clients accounted for 11.3%, 11.0%, 10.8% and 10.3% of revenues. During the six months ended August 31, 1999, we completed a campaign for each of the following clients: Another Universe Apple Computer Avon BMG Direct Barnes and Noble Cooking.com Digital Work Doughnet eBay Elemental Software eToys Expedia Financial Engines Flooz.com Fogdog Sports Furniture.com The Gap Garden.com Hewlett-Packard iGo Intel iTurf Knight-Ridder Macy's Mastercard Medscape Netcentives Omaha Steaks ONSALE Peet's Coffee and Tea Petco Pets.com Preview Travel Reel.com Service Merchandise Sharper Image Smarter Kids Sprint Tavolo (formerly Digital Chef) Tektronix Tower Records Universal Studios Virtual Vineyards yourPharmacy.com 35 37 SELECTED CLIENT CASE STUDIES The following case studies illustrate different components of the e-marketing services we perform for our clients. The clients described in these case studies are current clients, and they did not, in the aggregate, constitute more than 15% of our revenues for the quarter ended June 30, 1999.
- ------------------------------------------------------------------------------------------- SERVICE CLIENT COMPONENT SUMMARY OF CASE STUDY - ------------------------------------------------------------------------------------------- The Sharper Image Email Campaign The Sharper Image, a specialty gifts retailer Management tested and validated new e-marketing strategies with the aid of our campaign management system. Over the course of several months, we measured the effectiveness of promotions and email layouts based on the characteristics of different customer groups. Using the results of these tests, The Sharper Image refined their e-marketing strategy to increase the frequency and size of customer orders. We began working with The Sharper Image in May 1998. - ------------------------------------------------------------------------------------------- ONSALE Targeting and ONSALE, an online auction retailer, used our Personalization services to target and deliver personalized email offers to their customers. We adapted our data modeling system to assemble personalized emails containing offers for selected ONSALE customers based on their bid and buy behavior in previous auctions. This model utilized daily customer response data to improve the effectiveness of the campaigns over time. We began working with ONSALE in November 1998. - ------------------------------------------------------------------------------------------- Peet's Coffee & Tea Media Optimization Peet's Coffee and Tea, a gourmet beverage retailer, used our email sensor technology to determine the graphical capabilities of each recipient's email. We then delivered a New Yorker cartoon to those customers who could view graphics in their email. All other customers received an email containing a hyperlink to the Peet's website where the cartoon was displayed. We began working with Peet's in April 1999. - ------------------------------------------------------------------------------------------- Tower Records Tracking and Tower Records, a leading music retailer, used Reporting our services to track and report their customers' music interests. We provided them with comprehensive reporting on those customers who responded to each e-marketing campaign, the timing of that response, and the revenue and return on investment per campaign. Using our services, Tower Records was able to gauge customer reaction to its outbound e-marketing campaigns and gain insight into online customer behavior. We began working with Tower Records in March 1998. - -------------------------------------------------------------------------------------------
SALES AND MARKETING We sell our services primarily through direct sales representatives located in San Mateo, California and New York City. We focus our sales efforts on the senior marketing 36 38 and business executives of our prospective clients. Our sales personnel tailor their demonstrations and proposals to address each client's particular needs. We complement our direct sales force by entering into arrangements with leading companies in the direct marketing and advertising industries. We have an agreement with Harte-Hanks, a large direct marketing company, under which we are the exclusive provider of e-marketing services sold by Harte-Hanks' over 200 national and international sales representatives. In addition, we recently launched a marketing program to enable advertising agencies to offer our services to their clients. Our marketing strategy is to build and promote our brand and to generate qualified leads for our sales team. We focus our marketing efforts on dedicated Internet companies as well as traditional companies seeking to take advantage of the commercial opportunities presented by e-commerce. We rely on a range of marketing activities to pursue our objectives, including trade shows, trade advertisements, selected media events and our own web site. We publish collateral materials to support the sales process, including company brochures, feature descriptions, technology research papers and client case studies. CLIENT SERVICES Our client services group is responsible for the ongoing support of our clients. Based on the specific requirements of their e-marketing campaigns, each client is assigned a team that typically consists of the following personnel: - A client services manager, responsible for the overall relationship and coordination of activities to effectively serve our client. - A production specialist, responsible for integration of content and offers to be sent in our client's email campaigns. - A graphic designer, responsible for the creation of the graphic design elements for the campaigns. - A marketing analyst, responsible for testing services and for providing insight into the results of campaigns. For clients that require additional services, the client services manager has access to a staff of marketing statisticians and engineers capable of creating complex data mining and modeling algorithms and developing extensions to our core services. TECHNOLOGY Our technology organization is responsible for research and development, systems integration quality assurance and network operations. We have designed an architecture based in part on proprietary technologies and in part on licensed technologies. 37 39 ARCHITECTURE Our scalable, distributed architecture is based on a publish-and-subscribe model and parallel computing technology. The key components of our architecture are illustrated in the chart below: [GRAPHIC] Client Information. We use proprietary software tools to import a client's customer profile information and email content elements, and convert them into a format compatible with our data warehouse. Data Warehouse. Our data warehouse currently stores over 20 million customer profiles, each of which may include consumer preferences, demographics, transaction histories and e-marketing response data. The data warehouse also contains the assembly instructions for our clients' e-marketing campaigns. Information in our data warehouse is organized by use of a proprietary set of tables and relationships to optimize the performance and scalability of the other system components. Campaign Management. We use a variety of campaign management tools that enable our client services managers to implement e-marketing campaigns. These tools consist of the following: - Data mining. We employ various technologies to review and analyze customer response data, transaction histories, web site tracking data and customer-reported preference data to identify patterns of behavior and predict subsequent purchase behavior. We refer to these technologies collectively as data mining. - Campaign configuration. Our campaign configuration system is a proprietary software application used to configure the content, targeting, formatting and delivery timing of our clients' e-marketing campaigns. 38 40 - Reporting. We provide immediate reporting of campaign results to our clients. We deliver these reports to our clients as spreadsheet attachments to an email, through their Internet browser or as raw data files. Assembly and Delivery Engine. Our email assembly and delivery engine is designed to construct, format and deliver large volumes of personalized email on behalf of our clients. The modules of this engine are optimized for specific tasks, including dynamic email assembly, high volume email delivery, graphical content serving and load management. Response Handler. We use proprietary web-based software to track the delivery of our email transmissions and each recipient's response to those emails. We track emails delivered, emails opened, emails rejected, unsubscribe requests and recipients' responses to our clients' offers. We also use our proprietary email sensor to automatically detect a recipient's ability to display emails in media formats other than plain text, such as HTML, dynamic HTML and Java-based content. NETWORK OPERATIONS AND SYSTEM SECURITY Our servers are located at Exodus Communications in Santa Clara, California. Exodus provides fully redundant Internet access with an aggregate network capacity of over 17 gigabits per second. Additionally, Exodus provides power, climate control and monitoring services 24 hours per day, seven days per week. We plan to add a similar facility in the eastern United States within the next 12 months. Our internal network operations are managed by experienced systems architects and security experts who provide around the clock operations and database administration support. Our data center consists of over 100 Sun Microsystems and Intel-based servers. These servers are connected to a high speed network backbone. Our production and internal networks are protected by a fault-tolerant firewall system that filters all network communications. We have also implemented a secure link with our corporate office facility that allows direct and secure access to our data center systems, enabling timely campaign administration. CORE TECHNOLOGIES We utilize a number of industry-standard technologies to support our architecture. Our software is written primarily in the Java programming language, enabling us to build reusable components and designs. We also use the extensible markup language, or XML, to facilitate the dynamic assembly of emails. We use Sun Solaris, Linux and Microsoft Windows NT operating systems running on Sun Microsystems and Intel-based servers. We also license technologies from a number of third parties. Our data warehouse is managed using Oracle 8.0 relational database software. The performance of our email assembly and delivery engine is monitored using software licensed from TIBCO, which also allows us to easily install additional servers to increase capacity without service interruptions. Campaign results are reported on the Internet to clients using software we license from Actuate. 39 41 COMPETITION The market for e-marketing services is intensely competitive, rapidly evolving and subject to rapid technological change. We expect competition to increase significantly in the future because of the attention the Internet has received as a means of advertising and direct marketing and because there are no significant barriers to entry into our market. We believe that the factors on which we compete include: - Credibility of clients and their willingness to act as references. - Quality and features of e-marketing services. - Quality of customer service. - Sophistication and reliability of core technology. - Speed of implementation of e-marketing campaigns. - Cost-effectiveness of a given solution. Although we believe that our solution currently competes favorably with respect to these factors, our market is relatively new and is evolving rapidly. We may not be able to maintain our competitive position against current and potential competitors. Our principal competitors include providers of e-marketing services such as Acxiom and its affiliate Bigfoot, @Once, Exactis.com, Kana Communications, L-Soft, Media Synergy, Message Media, Net Creations, Responsys.com and Yesmail.com. We also compete with the information technology departments of current and prospective clients. We may experience additional competition from Internet service providers, advertising and direct marketing agencies and other large established businesses such as America Online, DoubleClick, Microsoft, IBM, AT&T, Yahoo!, ADVO and the Interpublic Group of Companies. Each of these companies possess large, existing customer bases, substantial financial resources and established distribution channels and could develop, market or resell a number of e-marketing services. Such potential competitors may also choose to enter the market for e-marketing services by acquiring one of our existing competitors or by forming strategic alliances with such competitors. Any of these occurrences could harm our ability to compete effectively. Many of our current and potential competitors have longer operating histories, greater name recognition, larger customer bases, more diversified lines of products and services and significantly greater resources than we have. These competitors may be able to devote significant resources to sales and marketing, adopt more aggressive pricing policies and deliver superior solutions. In addition, many of our current or potential competitors have broad distribution channels that may be used to bundle competing products or services. If such competitors bundle competing products or services, the demand for our services could substantially decline. As a result, we cannot assure you that we will compete effectively with our current or future competitors or that competitive pressures will not harm our business. INTELLECTUAL PROPERTY RIGHTS Our success and ability to compete are substantially dependent upon our technology and intellectual property. While we rely on copyright, trade secret and trademark law to 40 42 protect our technology and intellectual property, we believe that factors such as the technological and creative skills of our personnel, new service developments and frequent service enhancements are more essential to establishing and maintaining an intellectual property leadership position. We have two patent applications pending and two trademark applications pending. We generally enter into confidentiality agreements with our employees and consultants. Despite our efforts to protect our proprietary information, unauthorized parties may attempt to obtain and use our proprietary information. Policing unauthorized use of our proprietary information is difficult, and the steps we have taken might not prevent misappropriation, particularly in foreign countries where the laws may not protect our proprietary rights as fully as do the laws of the United States. We collect and use data derived from our clients. This creates the potential for claims to be made against us, either directly or through contractual indemnification provisions with customers, including copyright or trademark infringement, invasion of privacy or other legal theories. Although we carry general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed. Substantial litigation regarding intellectual property rights exists in the technology industry. From time to time, third parties have asserted and may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies and related standards that are important to us. We expect that we may increasingly be subject to infringement claims as the number of competitors in our industry segments grows and the functionality of products and services in different industry segments overlaps. In addition, we believe that many of our competitors have filed or intend to file patent applications covering aspects of their technology that they may claim our intellectual property infringes. Although we have not been party to any litigation asserting claims that allege infringement of intellectual property rights, we cannot assure you that we will not be a party to litigation in the future. Any third party claims, with or without merit, could be time-consuming to defend, result in costly litigation, divert management's attention and resources or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all. A successful claim of infringement against us could harm our business. GOVERNMENT REGULATION Legislation has recently been enacted in several states restricting the sending of unsolicited commercial email. The federal government and several other states are considering, or have considered, similar legislation. Although the provisions of these current and contemplated laws vary, they generally limit or prohibit both the transmission of unsolicited commercial emails and the use of forged or fraudulent routing and header information. Some states, including California, require that unsolicited emails include opt-out instructions and that senders of such emails honor any opt-out requests. We believe that our current suite of services will not be affected by such legislation because we do not send unsolicited commercial email. We cannot assure you that future legislation or the application of existing legislation will not harm our business. There is a growing body of laws and regulations applicable to access to or commerce on the Internet. Due to the increasing popularity and use of the Internet, it is likely that a growing number of laws and regulations will be adopted at the international, federal, state 41 43 and local level with respect to the Internet or e-marketing services covering issues such as user privacy, pricing, content, copyrights, distribution, antitrust and characteristics and quality of services. Further, the growth and development of the market for e-marketing may prompt calls for more stringent consumer protection laws that may impose additional burdens on those companies conducting business online. The adoption of any additional laws or regulations may impair the growth of the Internet or e-marketing, which could, in turn, decrease the demand for our services and increase our cost of doing business. Moreover, the applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. Any such new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business or the application of existing laws and regulations to the Internet could harm our business. EMPLOYEES As of June 30, 1999, we had a total of 83 employees, all of whom were full-time employees. Of the total number of employees, 24 were engaged in research and development, 10 in sales, marketing and business development, 42 in professional services and technical support and 7 in finance, administration and operations. Our future performance depends in significant part upon the continued service of our key technical, sales and senior management personnel. Our future success also depends on our continuing ability to attract, train and retain highly qualified technical, sales and managerial personnel. Competition for such personnel is intense, and we may not be able to retain our key personnel in the future. None of our employees is represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good. FACILITIES Our principal executive offices are located in San Mateo, California, where we lease approximately 29,400 square feet under two leases that expire in 2002 and 2003. 42 44 MANAGEMENT EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS The following table sets forth information regarding our executive officers, key employees and directors as of September 17, 1999:
NAME AGE POSITION(S) ---- --- ----------- William Park....................... 32 Chief Executive Officer and Chairman of the Board of Directors David Oppenheimer.................. 42 Vice President, Finance, Chief Financial Officer, Treasurer and Secretary Gerardo Capiel..................... 31 Chief Technical Officer and Director Raymond Kaupp...................... 47 Vice President, Marketing and Business Development Alan Flohr......................... 34 Vice President, Sales and Client Services Harry Drake........................ 32 Vice President, Client Services Engineering Brian Platter...................... 34 Vice President, Product Management Ruthann Quindlen................... 45 Director Warren Packard..................... 31 Director Michael Brown...................... 40 Director
William Park has served as our Chief Executive Officer since July 1999 and serves as Chairman of our board of directors, a position he has held since he co-founded Digital Impact in October 1997. From October 1997 through June 1999, Mr. Park served as our President. From July 1996 until November 1996, Mr. Park was Director of Profile Marketing for NetAngels, an Internet company focused on web personalization technologies. From 1989 to 1994, Mr. Park held a variety of marketing positions at ZAI*NET Software, Inc., an enterprise software company, where he became Vice President of Marketing in 1993. Mr. Park holds a B.A. from the University of Pennsylvania and an M.B.A. from Stanford University. Gerardo Capiel has served as our Chief Technology Officer and as a member of our board of directors, a position he has held since he co-founded Digital Impact in October 1997. From August 1996 to August 1997, Mr. Capiel was Director of Internet/ Internet Solutions for Altro Solutions, an information technology and business process consulting firm. From June 1995 to September 1995, Mr. Capiel was a marketing analyst at Broadvision, an Internet applications software company. Prior to that, Mr. Capiel held various positions at Altro Solutions. Mr. Capiel holds a B.S. in engineering systems and computation from the Massachusetts Institute of Technology and an M.B.A. from Stanford University. David Oppenheimer has served as our Vice President, Finance and Chief Financial Officer since July 1999. From November 1997 to July 1999, Mr. Oppenheimer was Vice President, Finance for Autodesk, Inc., a supplier of design and visual effect software. From January 1995 to November 1997, Mr. Oppenheimer held several positions with AlliedSignal, Inc., an advanced technology and manufacturing company, including Chief Financial Officer of AlliedSignal Electronic Materials, Vice President of Finance for AlliedSignal Aerospace Services and Controller of AlliedSignal Engines. From August 1985 to January 1995, Mr. Oppenheimer was employed by United Airlines, a commercial air transportation company, most recently as Division Controller. Mr. Oppenheimer holds a 43 45 B.S. in mechanical engineering from State University of New York, Buffalo and an M.B.A. from the University of California, Berkeley. Raymond Kaupp has served as our Vice President, Marketing and Business Development since April 1998. From July 1993 to March 1998, Mr. Kaupp served as President of UGC, a catalog retailer. From January 1988 to July 1993, Mr. Kaupp held a variety of marketing management positions at Apple Computer, a computer manufacturer. Prior to that, Mr. Kaupp served as a marketing manager at Metaphor Computer Systems, a decision support systems company. Mr. Kaupp holds a B.S. in business administration from San Diego State University and an M.B.A. from the University of California, Berkeley. Alan Flohr has served as our Vice President, Sales and Client Services since August 1999. From April 1999 to August 1999, Mr. Flohr served as Vice President, Sales. From May 1995 to April 1999, Mr. Flohr was employed by Advo Incorporated, a direct mail marketing company, as Vice President of Strategic Account Development, Vice President of Field Marketing and Director of Marketing Planning. From December 1992 to April 1995, Mr. Flohr co-founded and served as principal of New Paradigm Ventures, a marketing consulting and venture capital company. Mr. Flohr holds a B.S. in industrial engineering from State University of New York, Buffalo and an M.B.A. from The Amos Tuck School of Business Administration at Dartmouth College. Harry Drake has served as our Vice President, Client Services Engineering since July 1999. Mr. Drake joined Digital Impact in February 1999 as Director, Client Services Engineering. From March 1994 until February 1999, Mr. Drake was a Director for Altro Systems, an information technology and business process consulting firm. Mr. Drake holds a B.A. in economics from the University of California, Berkeley. Brian Platter has served as our Vice President, Product Management since May 1999. Mr. Platter joined Digital Impact in April 1998 and served as Director, Client Services through April 1999. From July 1997 to January 1998, Mr. Platter worked for Fujitsu Computer Products of America, an information technology company. From June 1994 until July 1997, Mr. Platter served as a Senior Consultant for Gemini Management Consulting, a management consulting firm. Mr. Platter holds a B.S. in mechanical engineering from the University of Colorado and an M.B.A. from Stanford University. Ruthann Quindlen has served as a member of our board of directors since November 1998. Since June 1994, Ms. Quindlen has been a general partner of Institutional Venture Partners, a venture capital investment firm. Ms. Quindlen serves on the board of directors of Mpath Inc., an Internet media company, and on the board of directors of several private companies. Ms. Quindlen holds a B.S. in economics from Georgetown University and an M.B.A. from the Wharton School of the University of Pennsylvania. Warren Packard has served as a member of our board of directors since March 1998. Mr. Packard is a partner of Draper Fisher Jurvetson, a position he has held since June 1997. From January 1996 to June 1997, Mr. Packard founded and served as the Vice President of Business Development of Angara Database Systems. From June 1996 to January 1997 Mr. Packard was an associate at Institutional Venture Partners. Mr. Packard also serves on the board of directors of several private companies. Mr. Packard holds a B.S. and M.S. in mechanical engineering and an M.B.A. from Stanford University. Michael Brown has served as a member of our board of directors since September 1999. Mr. Brown also serves as Chief Executive Officer of Quantum Corporation, a data 44 46 storage company, a position he has held since September 1995. In May 1998, he was also appointed Chairman of the Board of Quantum. Prior to September 1995, Mr. Brown held several other positions at Quantum. Mr. Brown holds a B.A. in economics from Harvard University and an M.B.A. from Stanford University. BOARD COMPOSITION Our certificate of incorporation provides for a classified board of directors consisting of three classes of directors, each serving staggered three-year terms. As a result, a portion of the board of directors will be elected each year. To implement the classified structure, prior to the consummation of the offering, two of the nominees to the board will be elected to a one-year term, one will be elected to a two-year term and two will be elected to three-year terms. Subsequently, directors will be elected for three-year terms. Mr. Capiel and Mr. Packard have been designated Class I directors whose term expires at the 2000 annual meeting of stockholders. Ms. Quindlen has been designated a Class II director whose term expires at the 2001 annual meeting of stockholders. Mr. Brown and Mr. Park have been designated Class III directors whose term expires at the 2002 annual meeting of stockholders. There are no family relationships among any of our directors, officers or key employees. BOARD COMMITTEES We established an audit committee in September 1999 and a compensation committee in July 1999. Our audit committee consists of Ms. Quindlen and Mr. Packard. The audit committee reviews internal accounting procedures and consults with and reviews the services provided by our independent accountants. Our compensation committee consists of Ms. Quindlen and Mr. Brown. The compensation committee establishes salaries, incentives and other forms of compensation for officers and other employees. This committee also administers our incentive compensation and benefit plans. DIRECTOR COMPENSATION Directors do not currently receive any cash compensation from us for their service as members of the board of directors. Directors who are employees of Digital Impact are eligible to participate in our 1998 stock plan and our 1999 employee stock purchase plan. Directors who are not employees of Digital Impact are eligible to participate in our 1999 director option plan. Our 1999 director option plan generally provides for an automatic initial grant of an option to purchase 20,000 shares of our common stock to each non-employee director on the later to occur of the effective date of the plan or the date on which a person first becomes a non-employee director. After the initial grant, a non-employee director will be granted a subsequent option to purchase 5,000 shares of our common stock each year on the date of our annual meeting of stockholders, if on such date he or she has served as a director for at least six months. These grants have a term of ten years. Each initial option grant will vest as to 25% of the shares subject to the option on each anniversary of its date of grant and each subsequent option grant will vest as to 100% of the shares subject to the option on each anniversary of its date of grant. The exercise price of all options will be 100% of the fair market value per share of our common 45 47 stock on the date of grant. For an additional description of these option plans, please refer to our discussion under "-- Compensation Plans." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of our compensation committee is an officer or employee of Digital Impact. No interlocking relationship exists between our board of directors or compensation committee and the board of directors or compensation committee of any other company, nor has such an interlocking relationship existed in the past. Ms. Quindlen, a member of our compensation committee, is a general partner of Institutional Venture Partners, a stockholder of our company. For more information on this relationship, please refer to "Certain Transactions." EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS Mr. Oppenheimer is party to an at-will employment agreement, dated July 29, 1999, effective as of August 2, 1999. Under the agreement, we agreed to pay Mr. Oppenheimer an annual salary of $225,000, and granted him an option to purchase 275,000 shares of our common stock. The shares subject to this option will vest over a four year period, with 6.25% of these shares vesting at the end of the first three months of employment and the remaining shares vesting monthly thereafter. In the event that Mr. Oppenheimer is terminated without cause, he will be entitled to receive continued payment of his base salary for three months as severance. If within twelve months of a change in control, Mr. Oppenheimer's employment is terminated without cause or he terminates his employment as a result of a reduction in his compensation, a change in his responsibilities or refusal of the successor company to assume our responsibilities under the employment agreement, 50% of his unvested shares shall have their vesting accelerated in full as of the date of termination. A change of control will be deemed to have occurred in the event of a merger or reorganization in which we are not the surviving corporation, our transfer of all or substantially all of our assets, our liquidation or dissolution, or if any person becomes the beneficial owner of 50% or more of our voting stock. Mr. Flohr is party to an at-will employment agreement, dated March 12, 1999, effective as of April 1, 1999. Under this agreement, we agreed to pay Mr. Flohr an annual salary of $165,000, and granted him an option to purchase 300,000 shares of our common stock. Mr. Flohr is also eligible to receive a sales commission of $85,000 upon achieving his sales quota. The shares subject to this option will vest over a four year period, with 12.5% of these shares vesting at the end of six months and the remaining shares vesting monthly thereafter. In the event that Mr. Flohr is terminated without cause, he will be entitled to receive continued payment of his base salary for six months as severance. 46 48 EXECUTIVE COMPENSATION The following table sets forth the compensation earned for services rendered to us in all capacities for the fiscal year ended March 31, 1999 by our Chief Executive Officer and our other most highly compensated executive officer who earned more than aggregate cash compensation of $100,000 during the fiscal year ended March 31, 1999. These executives are referred to as the named executive officers in this prospectus. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL ------------ COMPENSATION SECURITIES -------------------- UNDERLYING NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS --------------------------- --------- -------- ------------ William Park................................... $ 83,333 $ -- -- Chief Executive Officer Raymond Kaupp.................................. 131,969 7,875 260,820 Vice President, Marketing and Business Development
Mr. Park has served as our Chief Executive Officer since July 1999. Prior to that time, we did not have a Chief Executive Officer. Mr. Park, as our President, acted in a capacity similar to Chief Executive Officer during that period. Messrs. Oppenheimer and Flohr were hired as executive officers subsequent to March 31, 1999 and are compensated at annual rates of $225,000 and $200,000, respectively. OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth information with respect to stock options granted to each of the named executive officers in the fiscal year ended March 31, 1999, including the potential realizable value over the term of the options which may be five to ten years, based on assumed rates of stock appreciation of 5% and 10%, compounded annually. These assumed rates of appreciation comply with the rules of the Securities and Exchange Commission and do not represent our estimate of future stock price. Actual gains, if any, on stock option exercises will be dependent on the future performance of our common stock. The percentages below are based on a total of 1,964,804 shares subject to options granted by us during the year ended March 31, 1999 to employees, directors and consultants. All options were granted under our 1998 stock plan at exercise prices at the fair market value of our common stock on the date of grant, as determined in good faith by the board of directors. All options listed below are immediately exercisable upon grant; however, any unvested shares are subject to repurchase by us at their cost if the optionee's service with us terminates. All option shares listed in the table below vest over four years, with 25% of the option shares vesting one year after the option grant date, and the remaining option shares vesting ratably each month thereafter. 47 49
INDIVIDUAL GRANTS POTENTIAL REALIZABLE --------------------------------------------------- VALUE AT ASSUMED NUMBER OF ANNUAL RATES OF STOCK SHARES PERCENTAGE OF PRICE APPRECIATION FOR UNDERLYING TOTAL OPTIONS EXERCISE OPTION TERM OPTIONS GRANTED TO PRICE EXPIRATION ---------------------- NAME GRANTED EMPLOYEES PER SHARE DATE 5% 10% ---- ---------- ------------- --------- ---------- --------- --------- William Park......... -- --% $ -- -- $ -- $ -- Raymond Kaupp........ 260,820 13.3 0.02 4/29/08 -- --
FISCAL YEAR-END OPTION VALUES The following table provides summary information concerning the shares of common stock represented by outstanding stock options held by each of the named executive officers as of March 31, 1999. No options were exercised by the named executive officers during the year ended March 31, 1999.
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS MARCH 31, 1999 MARCH 31, 1999 ---------------------------- ---------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- William Park............... -- -- $ -- -- Raymond Kaupp.............. 260,820 -- 125,193 --
These values are based on the fair market value as of March 31, 1999, as determined by the board of directors, minus the exercise price, multiplied by the number of shares underlying the option. In April 1999, we granted to Mr. Flohr options to purchase 300,000 shares of common stock at an exercise price of $0.25 per share. In July 1999, we granted to Mr. Oppenheimer options to purchase 275,000 shares of common stock at an exercise price of $2.50 per share. In August 1999, we granted to Mr. Flohr options to purchase 100,000 shares of common stock at an exercise price of $2.50 per share. In September 1999, we granted to Mr. Kaupp options to purchase 50,000 shares of common stock at an exercise price of $8.00 per share. These options vest over a four year period. COMPENSATION PLANS AMENDED AND RESTATED 1998 STOCK PLAN Our amended and restated 1998 stock plan provides for the grant of incentive stock options to employees, including officers and employee directors, and for the grant of nonstatutory stock options and stock purchase rights to employees, directors and consultants. The 1998 stock plan was originally adopted by our board of directors and approved by the stockholders in March 1998 and amended and restated by the board of directors in September 1999, subject to stockholder approval. Unless terminated sooner, the 1998 stock plan will terminate automatically ten years from the date of obtaining stockholder approval. A total of 8,795,000 shares of our common stock has been reserved for issuance under this plan. In addition, annual increases will be added to the 1998 stock plan, beginning on 48 50 January 1, 2001, equal to the lesser of 1,500,000 shares, 4% of the outstanding shares or an amount determined by our board of directors. As of June 30, 1999, options to purchase 2,911,208 shares of common stock were outstanding under the 1998 stock plan and 4,711,497 were available for further issuance. The administrator of our 1998 stock plan has the power to determine, among other things: - the terms of the options or stock purchase rights granted, including the exercise price of the option or stock purchase right; - the number of shares subject to each option or stock purchase right; - the exercisability of each option or stock purchase right; and - the form of consideration payable upon the exercise of each option or stock purchase right. In addition, the administrator has the authority to amend, suspend or terminate the 1998 stock plan, so long as no such action affects any shares of common stock previously issued and sold or any option previously granted under the 1998 stock plan. During any fiscal year, each optionee may be granted options to purchase a maximum of 1,000,000 shares. In addition, in connection with an optionee's initial employment with us, such optionee may be granted an option covering an additional 1,000,000 shares. Options and stock purchase rights granted under our 1998 stock plan are generally not transferable by the optionee, and each option and stock purchase right is exercisable during the lifetime of the optionee only by such optionee. Options granted under the 1998 stock plan must generally be exercised within three months after the end of optionee's status as an employee, director or consultant of Digital Impact, or within twelve months after such optionee's termination by death or disability, but in no event later than the expiration of the option's term. In the case of stock purchase rights, unless the administrator determines otherwise, the restricted stock purchase agreement grants us a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment or consulting relationship with us for any reason, including death or disability. The purchase price for shares repurchased pursuant to the restricted stock purchase agreement must be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to us. The repurchase option lapses at a rate determined by the administrator. The exercise price of all incentive stock options granted under the 1998 stock plan must be at least equal to the fair market value of the common stock on the date of grant. The exercise price of nonstatutory stock options and stock purchase rights granted under the 1998 stock plan is determined by the administrator, but with respect to nonstatutory stock options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Internal Revenue Code, the exercise price must be at least equal to the fair market value of our common stock on the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of our outstanding capital stock, the exercise price of any incentive stock option granted must be at least equal to 110% of the fair market value on the grant date and the term of such incentive stock option must not exceed five years. The term of all other options granted under the 1998 stock plan may not exceed ten years. 49 51 The 1998 stock plan provides that in the event of our merger with or into another corporation, or a sale of substantially all of our assets, each option and stock purchase right shall be assumed or an equivalent option substituted for by the successor corporation. If the outstanding options and stock purchase rights are not assumed or substituted for by the successor corporation, the optionees will become fully vested in and have the right to exercise such options or stock purchase rights. If an option or stock purchase right becomes fully vested and exercisable in the event of a merger or sale of assets, the administrator must notify the optionee that the option or stock purchase right is fully exercisable for a period of 15 days from the date of the notice, and the option or stock purchase right will terminate upon the expiration of the 15 day period. 1999 EMPLOYEE STOCK PURCHASE PLAN Our 1999 employee stock purchase plan was adopted by our board of directors in September 1999, subject to stockholder approval. A total of 700,000 shares of our common stock has been reserved for issuance under the 1999 employee stock purchase plan, plus annual increases beginning on January 1, 2001 equal to the lesser of 700,000 shares, 2% of the outstanding shares on such date or an amount determined by our board of directors. As of the date of this prospectus, no shares have been issued under the 1999 employee stock purchase plan. The 1999 employee stock purchase plan, which is intended to qualify under Section 423 of the Internal Revenue Code, contains consecutive, overlapping, twelve month offering periods. Each offering period includes two six-month purchase periods. The offering periods generally start on the first trading day on or after June 1 and December 1 of each year, except for the first such offering period which commences on the first trading day on or after the effective date of this offering and ends on the last trading day on or before November 30, 2000. Employees are eligible to participate if they are customarily employed by us or any participating subsidiary for at least 20 hours per week and more than five months in any calendar year. However, employees may not be granted an option to purchase stock under the 1999 employee stock purchase plan if they either: - immediately after grant, own stock possessing 5% or more of the total combined voting power or value of all classes of our capital stock, or - hold rights to purchase stock under our employee stock purchase plans which accrue at a rate which exceeds $25,000 worth of stock for each calendar year. The 1999 employee stock purchase plan permits participants to purchase our common stock through payroll deductions of up to 15% of the participant's "compensation." Compensation is defined as the participant's base straight time gross earnings and commissions but exclusive of payments for overtime, profit sharing payments, shift premium payments, incentive compensation, incentive payments and bonuses. The maximum number of shares a participant may purchase during a single purchase period is 5,000 shares. 50 52 Amounts deducted and accumulated by the participant are used to purchase shares of common stock at the end of each purchase period. The price of stock purchased under the 1999 purchase plan is generally 85% of the lower of the fair market value of the common stock either: - at the beginning of the offering period; or - at the end of the purchase period. In the event the fair market value at the end of a purchase period is less than the fair market value at the beginning of the offering period, the participants will be withdrawn from the current offering period following exercise and automatically re-enrolled in a new offering period. The new offering period will use the lower fair market value as of the first date of the new offering period to determine the purchase price for future purchase periods. Participants may end their participation at any time during an offering period, and they will be paid their payroll deductions to date. Participation ends automatically upon termination of employment with Digital Impact. Rights granted under the 1999 employee stock purchase plan are not transferable by a participant other than by will, the laws of descent and distribution, or as otherwise provided under the 1999 employee stock purchase plan. The 1999 employee stock purchase plan provides that, in the event we merge with or into another corporation or there is a sale of substantially all of our assets, each outstanding option may be assumed or substituted for by the successor corporation. If the successor corporation refuses to assume or substitute for the outstanding options, the offering period then in progress will be shortened and a new exercise date will be set. The 1999 employee stock purchase plan will terminate in 2009. Our board of directors has the authority to amend or terminate the 1999 employee stock purchase plan, except that no such action may adversely affect any outstanding rights to purchase stock under the 1999 employee stock purchase plan. 1999 DIRECTOR OPTION PLAN Non-employee directors are entitled to participate in our 1999 director option plan. The 1999 director option plan was adopted by our board of directors in September 1999, subject to stockholder approval. The 1999 director option plan has a term of ten years, unless terminated sooner by our board of directors. A total of 500,000 shares of our common stock have been reserved for issuance under the 1999 director option plan. In addition, annual increases will be added to this plan, beginning on January 1, 2001, equal to the lesser of 250,000 shares, or an amount determined by our board of directors. The 1999 director option plan generally provides for an automatic initial grant of an option to purchase 20,000 shares of our common stock to each non-employee director on the date which the later of the following events occur: - the effective date of the 1999 director option plan; or - the date when a person first becomes a non-employee director. After the initial grant, a non-employee director will be granted a subsequent option to purchase 5,000 shares of our common stock each year on the date of our annual meeting of stockholders, if on such date he or she has served on our board of directors for at least six months. Each initial option grant and each subsequent option grant shall have a term of 10 years. Each initial option grant will vest as to 25% of the shares subject to the option 51 53 on each anniversary of its date of grant and each subsequent option grant will vest as to 100% of the shares subject to the option on each anniversary of its date of grant. The exercise price of all options will be 100% of the fair market value per share of our common stock on the date of grant. The 1999 director option plan provides that in the event of our merger with or into another corporation, or a sale of substantially all of our assets, the successor corporation shall assume each option or substitute an equivalent option. If following such assumption or substitution, the optionee's status as a director is terminated other than upon voluntary resignation, each option will become fully vested and exercisable generally for a period of three months from the date of termination. If outstanding options are not assumed or substituted for by the successor corporation, each option will become fully vested and exercisable for a period of thirty days from the date our board of directors notifies the optionee of the option's full exercisability, after which period the option shall terminate. Options granted under the 1999 director option plan must be exercised within three months of the end of the optionee's tenure as our director, or within twelve months after such director's termination by death or disability, but in no event later than the expiration of the option's ten year term. No option granted under the 1999 director option plan is transferable by the optionee other than by will or the laws of descent and distribution, and each option is exercisable, during the lifetime of the optionee, only by the optionee. LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS Our certificate of incorporation limits the liability of directors to the maximum extent permitted by Delaware law. Section 145 of the Delaware General Corporation Law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for: - any breach of their duty of loyalty to the corporation or its stockholders; - acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; - unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; or - any transaction from which the director derived an improper personal benefit. This limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. Our certificate of incorporation and bylaws provide that we shall indemnify our directors and executive officers and may indemnify other officers and employees and our agents to the fullest extent permitted by law. We believe that indemnification under our bylaws covers at least negligence and gross negligence on the part of indemnified parties. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the bylaws would permit indemnification. We maintain directors' and officers' liability insurance. 52 54 CERTAIN TRANSACTIONS PREFERRED STOCK SALE SERIES A CONVERTIBLE PREFERRED STOCK. In March 1998, we sold shares of our series A preferred stock convertible into an aggregate of 5,592,000 shares of common stock at a price of approximately $0.21 per share, to raise capital to finance our operations. The following 5% stockholders purchased shares in the financing:
NUMBER OF COMMON EQUIVALENT AGGREGATE PURCHASER SHARES CONSIDERATION --------- ----------------- ------------- Draper Fisher Associates Fund IV, L.P. .................................. 3,124,800 $ 651,000 Draper Fisher Partners IV, L.L.C. ....... 235,200 49,000 Draper Richards L.P. .................... 1,440,000 240,000
The share numbers and price per share set forth above reflect the three-for-one stock split of our capital stock effected in November 1998 and the two-for-one stock split of our capital stock effected in August 1999. The holders of our series A preferred stock were allotted one seat on our board of directors, currently filled by Mr. Packard, in connection with their investment. This right expires upon closing of this offering. SERIES B CONVERTIBLE PREFERRED STOCK. In November 1998, we sold shares of our series B preferred stock convertible into an aggregate of 4,448,264 shares of common stock at a price of approximately $1.21 per share, to raise capital to finance our operations. The following 5% stockholders purchased shares in the financing:
NUMBER OF COMMON EQUIVALENT AGGREGATE PURCHASER SHARES CONSIDERATION --------- ----------------- ------------- Institutional Venture Partners VIII, L.P. .................................. 3,429,312 $ 4,143,809 IVM Investment Fund VIII, LLC............ 36,930 44,624 IVM Investment Fund VIII-A, LLC.......... 15,828 19,125 IVP Founders Fund I, L.P. ............... 35,172 42,500 Draper Fisher Associates Fund IV, L.P. .................................. 747,654 903,428 Draper Fisher Partners IV, L.L.C. ....... 56,276 68,001 Draper Richards L.P. .................... 82,758 100,000
The share numbers and price per share set forth above reflect the two-for-one stock split of our capital stock effected in August 1999. The holders of our series B preferred stock were allotted one seat on our board of directors, currently filled by Ms. Quindlen, in connection with their investment. This right expires upon closing of this offering. SERIES C CONVERTIBLE PREFERRED STOCK. In July 1999, we sold shares of our series C preferred stock convertible into an aggregate of 2,227,294 shares of common stock at a price of approximately $4.78 per share, to raise capital to finance our operations. The following 5% stockholders purchased shares in the financing:
NUMBER OF COMMON EQUIVALENT AGGREGATE PURCHASER SHARES CONSIDERATION --------- ----------------- ------------- Institutional Venture Partners VIII, L.P. .................................. 1,230,720 $ 5,888,995 IVM Investment Fund VIII, LLC............ 23,198 111,002 Draper Fisher Associates Fund IV, L.P. .................................. 429,530 2,055,300 Draper Fisher Partners IV, L.L.C. ....... 32,330 154,700 Draper Richards L.P. .................... 52,247 250,000
53 55 The share numbers and price per share set forth above reflect the two-for-one stock split of our capital stock effected in August 1999. OTHER TRANSACTIONS In connection with the above transactions, we entered into an agreement with the investors providing for registration rights with respect to these shares. For more information regarding this agreement, see "Description of Capital Stock -- Registration Rights." For information regarding agreements between us and some of our executive officers, please see "Management -- Employment Contracts and Change of Control Arrangements." COMMON STOCK ISSUANCE In February 1999, William Park, our Chief Executive Officer, contributed to our capital 270,000 shares of our common stock, without consideration. Contemporaneously, we issued to Gerardo Capiel, our Chief Technology Officer, an aggregate of 270,000 shares of our common stock as a bonus. 54 56 PRINCIPAL STOCKHOLDERS The table on the following page sets forth information regarding the beneficial ownership of our common stock as of June 30, 1999, and assumes the issuance of the series C convertible preferred stock issued in July 1999, by the following individuals or groups: - each person or entity who is known by us to own beneficially more than 5% of our outstanding stock. - each of the named executive officers and directors. - all directors and executive officers as a group. Unless otherwise indicated, the persons listed below have sole voting and investment power with respect to shares of our common stock shown as beneficially owned by them, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Percentage of beneficial ownership prior to the offering is based on 18,464,628 shares of common stock outstanding as of June 30, 1999, and assumes the issuance of the series C convertible preferred stock issued in July 1999. Each beneficial owner's percentage ownership assumes the exercise or conversion of all options, warrants and other convertible securities held by such person and that are exercisable or convertible 60 days after June 30, 1999. Each beneficial owner's percentage ownership does not include any shares of common stock that such owner may purchase in the offering. Except as otherwise noted, the address of each person listed is c/o Digital Impact, Inc., 177 Bovet Road, Suite 200, San Mateo, California 94402.
PERCENTAGE OF SHARES OUTSTANDING ---------------------- NUMBER OF SHARES PRIOR TO AFTER NAME AND ADDRESS BENEFICIALLY OWNED OFFERING OFFERING ---------------- ------------------ --------- --------- Entities affiliated with Institutional Venture Partners(1).................. 4,771,160 25.8% 3000 Sand Hill Road Building 2, Suite 290 Menlo Park, California 94025 Entities affiliated with Draper Fisher Jurvetson(2)......................... 4,625,790 25.1 400 Seaport Court, Suite 250 Redwood City, California 94063 Draper Richards L.P.................... 1,575,004 8.5 50 California Street, Suite 2925 San Francisco, California 94111 William Park(3)........................ 3,600,000 19.5 Gerardo Capiel(4)...................... 2,070,000 11.0 Alan Flohr(5).......................... 300,000 1.6 David Oppenheimer(6)................... -- -- Raymond Kaupp(7)....................... 260,820 1.4 Michael Brown(8)....................... -- * Warren Packard(9)...................... 4,625,790 25.1 Ruthann Quindlen(10)................... 4,771,160 25.8 All executive officers and directors as a group (8 persons)(11).............. 15,627,770 82.1%
55 57 - ------------------------- * Less than 1% of the outstanding shares of common stock. (1) Consists of 4,660,032 shares held by Institutional Venture Partners VIII, L.P., 60,128 shares held by IVM Investment Fund VIII, LLC, 15,828 shares held by IVM Investment Fund VIII-A, LLC and 35,172 shares held by IVP Founders Fund I, L.P. Ruthann Quindlen, a member of our board of directors, is a general partner of Institutional Venture Partners. (2) Consists of 4,301,984 shares held by Draper Fisher Associates Fund IV, L.P., and 323,806 shares held by Draper Fisher Partners IV, L.L.C. Warren Packard, a member of our board of directors, is a general partner of Draper Fisher Jurvetson. (3) Consists of 3,600,000 restricted shares which are subject to a repurchase option held by us which lapses over a four year period. (4) Consists of 270,000 shares of common stock and 1,800,000 restricted shares which are subject to a repurchase option held by us which lapses over a four year period. (5) Consists of 300,000 shares issuable upon exercise of currently exercisable stock options. Mr. Flohr was granted an option to purchase an additional 100,000 shares of common stock subsequent to June 30, 1999. (6) Mr. Oppenheimer was granted an option to purchase 275,000 shares of common stock subsequent to June 30, 1999. (7) Consists of 260,820 shares issuable upon exercise of currently exercisable stock options. (8) Mr. Brown was granted an option to purchase 30,000 shares of common stock subsequent to June 30, 1999. (9) Mr. Packard disclaims beneficial ownership of the shares held by the entities associated with Draper Fisher Jurvetson except to the extent of his pecuniary interest in Draper Fisher Jurvetson. (10) Ms. Quindlen disclaims beneficial ownership of the shares held by the entities associated with Institutional Venture Partners except to the extent of her pecuniary interest in Institutional Venture Partners. (11) Includes the information contained in footnotes (1) to (10) above and includes an aggregate of 560,820 shares issuable upon exercise of stock options held by the directors and officers that are exercisable within 60 days of June 30, 1999. 56 58 DESCRIPTION OF CAPITAL STOCK GENERAL Upon the completion of this offering, we will be authorized to issue 100,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of undesignated preferred stock, $0.001 par value. COMMON STOCK As of June 30, 1999, and assuming the issuance of the series C convertible preferred stock issued in July 1999, there were 18,464,628 shares of common stock outstanding which were held of record by 22 stockholders. There will be shares outstanding, assuming no exercise of the underwriters' over-allotment option and no exercise or conversion of outstanding options after June 30, 1999, after giving effect to the sale of the shares of common stock offered hereby. The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors out of funds legally available for that purpose. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of Digital Impact, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. The holders of common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and nonassessable, and the shares of common stock to be issued upon the closing of this offering will be fully paid and nonassessable. PREFERRED STOCK The board of directors has the authority, without action by the stockholders, to designate and issue preferred stock in one or more series and to designate the rights, preferences and privileges of each series, any or all of which may be greater than the rights of the common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock upon the rights of holders of the common stock until the board of directors determines the specific rights of the holders of such preferred stock. However, the effects might include, among other things, restricting dividends on the common stock, diluting the voting power of the common stock, impairing the liquidation rights of the common stock and delaying or preventing a change in control without further action by the stockholders. Immediately prior to the closing, no shares of preferred stock will be outstanding. We have no present plans to issue any shares of preferred stock. REGISTRATION RIGHTS As of June 30, 1999, and assuming the issuance of the series C convertible preferred stock issued in July 1999, the holders of 12,354,638 shares of our common stock have rights to register those shares under the Securities Act pursuant to an investor rights agreement. Holders of these registrable shares have unlimited rights to request that these shares be included in any Digital Impact-initiated underwritten public offering of our securities. The underwriters may reduce the registrable shares to be included on the registration statement for marketing reasons. In addition, at any time the earlier of July 7, 57 59 2002 or one year after the effective date of this prospectus, holders of at least two-thirds of the registrable shares may demand that we register their shares up to two times. Also, after we become eligible to use Form S-3, holders of registrable shares may request that we effect a registration of these shares on a shelf registration statement up to two times in any twelve month period. All expenses incurred in connection with these registrations, other than underwriters' and brokers' discounts and commissions, will be borne by us. DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS Certain provisions of Delaware law and our certificate of incorporation and bylaws summarized below could make more difficult our acquisition by means of a tender offer, a proxy contest or otherwise and the removal of incumbent officers and directors. These provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control to first negotiate with us. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweighs the disadvantages of discouraging such proposals because, among other things, negotiation of such proposals could result in an improvement of their terms. STOCKHOLDER MEETINGS Under our restated certificate of incorporation and restated bylaws, the Board of Directors, the Chairman of the Board and the President may call special meetings of stockholders but the stockholders may not call a special meeting. In addition, our restated certificate of incorporation and restated bylaws do not provide for the right of stockholders to act by written consent without a meeting or for cumulative voting in the election of directors. REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND PROPOSALS Our restated bylaws establish advance notice procedures with respect to stockholder proposals and the nomination of candidates for election as directors, other than nominations made by or at the direction of the Board of Directors or a committee thereof. CLASSIFIED BOARD Our amended and restated certificate of incorporation provides that the board of directors will be divided into three classes, each serving staggered three-year terms. For more information concerning our classified board of directors, see "Management -- Board Composition." DELAWARE ANTI-TAKEOVER LAW We are subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date the person became an interested stockholder, unless, with some exceptions, the "business combination" or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a "business combination" includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. Generally, an "interested stockholder" is 58 60 a person who, together with affiliates and associates, owns, or within three years prior to the determination of interested stockholder status, did own, 15% or more of a corporation's voting stock. The existence of this provision would be expected to have an anti-takeover effect with respect to transactions not approved in advance by the Board of Directors, including discouraging attempts that might result in a premium over the market price for the shares of common stock held by stockholders. UNDESIGNATED PREFERRED STOCK The authorization of undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of Digital Impact. These and other provisions may have the effect of deferring hostile takeovers or delaying changes in control or management. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the common stock is . NASDAQ NATIONAL MARKET LISTING We have applied to list our common stock on The Nasdaq National Market under the trading symbol "MPCT." 59 61 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock. If our stockholders sell substantial amounts of our common stock (including shares issued upon the exercise of outstanding options) in the public market following this offering, the market price of our common stock could fall dramatically. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. The number of shares of common stock available for sale in the public market is limited by restrictions under federal securities law and by certain "lock-up" agreements that our stockholders have entered into with the underwriters. For a description of these "lock-up" agreements, please see "Underwriting." Upon completion of this offering, we will have outstanding shares of common stock (based on shares outstanding as of June 30, 1999 and assuming the issuance of the series C convertible preferred stock issued in July 1999), assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options after June 30, 1999. Of these shares, the shares to be sold in this offering ( shares if the underwriters' over-allotment option is exercised in full) will be freely tradable in the public market without restriction under the Securities Act, unless the shares are held by "affiliates" of Digital Impact, as that term is defined in Rule 144 under the Securities Act. The remaining 18,464,628 shares outstanding upon completion of this offering will be "restricted securities" as that term is defined under Rule 144. Restricted securities may be sold in the public market only if they are registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act, which are summarized below. Pursuant to "lock-up" agreements, all the executive officers, directors and stockholders of Digital Impact, who collectively hold an aggregate of 18,464,628 of these restricted securities, have agreed not to offer, sell, contract to sell, grant any option to purchase or otherwise dispose of any of these shares for a period of 180 days from the date of this prospectus. We also have entered into an agreement with the underwriters that we will not offer, sell or otherwise dispose of common stock for a period of 180 days from the date of this prospectus. However, Credit Suisse First Boston Corporation may in its sole discretion, at any time without notice, release all or any portion of the shares subject to lock-up agreements. Taking into account the lock-up agreements and assuming Credit Suisse First Boston Corporation does not release stockholders from these agreements, the following shares will be eligible for sale in the public market at the following times: - beginning on the effective date of this prospectus, only the shares sold in the offering will be immediately available for sale in the public market; - beginning 180 days after the effective date of this prospectus, approximately shares will be eligible for sale pursuant to Rules 144 and 701 of the Securities Act; - an additional shares will be eligible for sale under Rule 144 upon the expiration of various one-year holding periods after the expiration of the lock-up period; 60 62 Any common stock that has been purchased or may be purchased in this offering by our "affiliates," as defined in Rule 144 of the Securities Act, will be subject to the volume and other selling limitations under Rule 144 of the Securities Act. All of the shares eligible for sale at the 180th day after the date of this prospectus or afterward will be subject initially to certain volume and other limitations under Rule 144 of the Securities Act. In addition, we intend to file, after the effective date of this offering, a registration statement on Form S-8 under the Securities Act covering all shares of common stock reserved for issuance under our 1998 stock plan, 1999 employee stock purchase plan and 1999 director option plan. The registration statement will become effective automatically upon filing. Shares registered under this registration statement would be available for sale in the open market in the future unless these shares are subject to vesting restrictions with Digital Impact or the contractual restrictions described above. For more information on shares eligible for resale, our stock plans and registration rights, see "Risk Factors -- An aggregate of shares, or %, of our outstanding stock will become eligible for resale in the public market between 180 days and one year after this offering, and future sales of such stock may cause our stock price to decline," "Management -- Compensation Plans," and "Description of Capital Stock -- Registration Rights." 61 63 UNDERWRITING Under the terms of and subject to the conditions contained in an underwriting agreement dated , 1999, we have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston Corporation, Hambrecht & Quist LLC, Donaldson, Lufkin & Jenrette Securities Corporation and U.S. Bancorp Piper Jaffray Inc. are acting as representatives, the following respective numbers of shares of common stock:
Number of Underwriter Shares ----------- --------- Credit Suisse First Boston Corporation...................... Hambrecht & Quist LLC....................................... Donaldson, Lufkin & Jenrette Securities Corporation......... U.S. Bancorp Piper Jaffray Inc.............................. ------- Total..................................................... =======
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering of common stock may be terminated. We have granted to the underwriters a thirty-day option to purchase on a pro rata basis up to additional shares from us at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock. The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a concession of $ per share. The underwriters and selling group members may allow a discount of $ per share on sales to other brokers/dealers. After the initial public offering, the public offering price and concession and discount to broker/dealers may be changed by the representatives. The following table summarizes the compensation and estimated expenses we will pay.
Per Share Total ------------------------------- ------------------------------- Without With Without With Over-allotment Over-allotment Over-allotment Over-allotment -------------- -------------- -------------- -------------- Underwriting discounts and commissions payable by us....................... $ $ $ $ Expenses payable by us..... $ $ $ $
The underwriters have informed us that they do not expect discretionary sales to exceed 5% of the shares of common stock being offered. 62 64 We, our officers and directors and our stockholders have agreed that we and they will not offer, sell, contract to sell, announce an intention to sell, pledge or directly or indirectly dispose of, or file with the Commission a registration statement under the Securities Act relating to, any additional shares of common stock or securities convertible into or exchangeable or exercisable for any shares of common stock without the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus. These restrictions do not prohibit us from issuing employee stock options and common stock issuable upon exercise of employee stock options outstanding on the date of this prospectus, or filing a registration statement on Form S-8 covering all shares of common stock reserved for issuance under our compensation plans. The underwriters have reserved for sale, at the initial public offering price, up to shares of the common stock for our customers and business partners. At the discretion of our management, other parties, including our employees, may participate in the reserve share program. The number of shares available for sale to the general public in the offering will be reduced to the extent such persons purchase reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares. We have agreed to indemnify the underwriters against liabilities under the Securities Act or contribute to payments which the underwriters may be required to make in that respect. We have applied to list our common stock on The Nasdaq National Market under the symbol "MPCT." Before this offering, there has been no public market for the common stock. The initial public offering price will be determined by negotiation between us and the underwriters. The principal factors to be considered in determining the public offering price include: - the information set forth in this prospectus and otherwise available to the underwriters; - the history and the prospectus for the industry in which we will compete; - the ability of our management; - the prospects for our future earnings; - the present state of our development and our current financial condition; - the general condition of the securities markets at the time of this offering; and - the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies. The representatives may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934. - Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. - Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified number. 63 65 - Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed to cover syndicate short positions. - Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a syndicate covering transaction to cover syndicate short positions. These stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the common stock to be higher than it would be in the absence of these transactions. These transactions may be effected on The Nasdaq National Market or otherwise, and, if commenced, may be discontinued at any time. 64 66 NOTICE TO CANADIAN RESIDENTS RESALE RESTRICTIONS The distribution of the common stock in Canada is being made only on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are effected. Accordingly, any resale of the common stock in Canada must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock. REPRESENTATIONS OF PURCHASERS Each purchaser of common stock in Canada who receives a purchase confirmation will be deemed to represent to us and the dealer from whom the purchase confirmation is received that (i) such purchaser is entitled under applicable provincial securities laws to purchase such common stock without the benefit of a prospectus qualified under such securities laws, (ii) where required by law, that such purchaser is purchasing as principal and not as agent, and (iii) such purchaser has reviewed the text above under "Resale Restrictions." RIGHTS OF ACTION (ONTARIO PURCHASERS) The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by Ontario Securities law. As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the U.S. federal securities laws. ENFORCEMENT OF LEGAL RIGHTS All of the issuer's directors and officers as well as the experts names herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon the issuer or such persons. All or a substantial portion of the assets of the issuer and such persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or such persons in Canada or to enforce a judgment obtained in Canadian courts against such issuer or persons outside of Canada. NOTICE TO BRITISH COLUMBIA RESIDENTS A purchaser of common stock to whom the Securities Act (British Columbia) applies is advised that such purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any common stock acquired by such purchaser pursuant to this offering. Such report must be in the form attached to British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained from us. Only one such report must be filed in respect of common stock acquired on the same date and under the same prospectus exemption. 65 67 TAXATION AND ELIGIBILITY FOR INVESTMENT Canadian purchasers of common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the common stock in their particular circumstances and with respect to the eligibility of the common stock for investment by the purchaser under relevant Canadian legislation. LEGAL MATTERS The validity of our common stock offered hereby will be passed upon for Digital Impact by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California, and for the underwriters by Shearman & Sterling, Menlo Park, California. A member of Wilson Sonsini Goodrich & Rosati is the holder of an option to acquire 20,000 shares of our common stock. EXPERTS The financial statements as of March 31, 1998 and 1999, and for the period from October 16, 1997 (date of inception) to March 31, 1998 and for the year ended March 31, 1999 included in this Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in accounting and auditing. WHERE YOU CAN FIND OTHER DIGITAL IMPACT INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits filed as a part thereof, certain parts of which are omitted in accordance with the rules and regulations of the SEC. For further information with respect to us and the common stock offered hereby, reference is made to the registration statement and to the exhibits filed as a part thereof. Statements contained in this prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete and are qualified in their entirety by reference to each such contract, agreement or other document which is filed as an exhibit to the registration statement. The registration statement, including the exhibits and schedules thereto, may be inspected without charge at the principal office of the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or at the Regional Offices of the SEC at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York 10048. Our SEC filings are also available to the public from the SEC's web site at http://www.sec.gov. In addition, such material will be available for inspection at the offices of The Nasdaq Stock Market, Inc., at 1735 K Street, N.W., Washington D.C. 20006. Copies of such material may be obtained by mail from the Public Reference Branch of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. 66 68 DIGITAL IMPACT, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants........................... F-2 Balance Sheets.............................................. F-3 Statements of Operations.................................... F-4 Statement of Stockholders' Equity........................... F-5 Statements of Cash Flows.................................... F-6 Notes to Financial Statements............................... F-7
F-1 69 REPORT OF INDEPENDENT ACCOUNTANTS To the board of directors and stockholders of Digital Impact, Inc. In our opinion, the accompanying balance sheets and the related statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Digital Impact, Inc. at March 31, 1998 and 1999, and the results of its operations and its cash flows for the period from October 16, 1997 (date of inception) to March 31, 1998 and for the year ended March 31, 1999, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. San Jose, California June 16, 1999, except for Note 10, as to which the date is September 16, 1999 To the board of directors and stockholders of Digital Impact, Inc. The accompanying financial statements included herein reflect the approval by the Company's board to reincorporate under the laws of Delaware. The above opinion is in the form that will be signed by PricewaterhouseCoopers LLP upon the effectiveness of such event assuming that from September 16, 1999 to the effective date of that event, no other events shall have occurred that would affect the accompanying financial statements. San Jose, California September 16, 1999 F-2 70 DIGITAL IMPACT, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA STOCKHOLDERS' MARCH 31, EQUITY ---------------- JUNE 30, JUNE 30, 1998 1999 1999 1999 ------ ------- -------- ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.................. $1,032 $ 2,864 $ 900 Accounts receivable, net of allowance for doubtful accounts of $0, $10 and $28 at March 31, 1998, 1999 and June 30, 1999, respectively............................ -- 668 1,036 Prepaid and other current assets........... 3 116 127 ------ ------- ------- Total current assets.................... 1,035 3,648 2,063 Property and equipment, net.................. 28 2,494 3,410 Restricted cash.............................. -- 108 108 Other assets................................. 15 64 138 ------ ------- ------- Total assets............................ $1,078 $ 6,314 $ 5,719 ====== ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................... $ 21 $ 591 $ 1,495 Accrued liabilities........................ 1 221 546 Current portion of capital lease obligations............................. -- 199 200 Current portion of long term debt.......... -- 234 234 Bridge loan................................ -- -- 500 ------ ------- ------- Total current liabilities............... 22 1,245 2,975 ------ ------- ------- Capital lease obligations, less current portion................................. -- 465 352 Long term debt, less current portion....... -- 234 196 ------ ------- ------- Total liabilities....................... 22 1,944 3,523 ------ ------- ------- Commitments (Note 5) Stockholders' equity: Convertible preferred stock, $0.001 par value Authorized: 16,000 shares; Issued and outstanding: 5,592, 10,040 and 10,064 shares at March 31, 1998, 1999 and June 30, 1999, respectively; and none pro forma.................... 3 3 3 $ -- (Liquidation preference: $6,540) Common stock, $0.001 par value Authorized: 54,000 shares; Issued and outstanding: 6,000, 6,022 and 6,172 shares at March 31, 1998, 1999 and June 30, 1999, respectively; and 18,464 pro forma...................... 1 1 1 18 Additional paid-in capital................. 1,155 8,937 12,653 23,299 Unearned stock-based compensation.......... -- (1,227) (3,958) (3,958) Stock subscription receivable.............. -- (1) -- -- Accumulated deficit........................ (103) (3,343) (6,503) (6,503) ------ ------- ------- ------- Total stockholders' equity.............. 1,056 4,370 2,196 $12,856 ------ ------- ------- ======= Total liabilities and stockholders' equity................................ $1,078 $ 6,314 $ 5,719 ====== ======= =======
The accompanying notes are an integral part of these financial statements. F-3 71 DIGITAL IMPACT, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
OCTOBER 16, 1997 (DATE OF INCEPTION) THREE MONTHS ENDED TO YEAR ENDED JUNE 30, MARCH 31, MARCH 31, ------------------- 1998 1999 1998 1999 ------------------- ---------- ------- -------- (UNAUDITED) Revenues........................ $ 4 $ 1,307 $ 25 $ 1,385 Cost of revenues................ 4 674 24 672 ------ ------- ------ ------- Gross margin.................... -- 633 1 713 ------ ------- ------ ------- Operating expenses: Research and development...... 27 966 77 843 Sales and marketing........... -- 670 46 1,010 General and administrative.... 77 1,151 86 1,047 Stock-based compensation...... -- 1,157 95 977 ------ ------- ------ ------- Total operating expenses... 104 3,944 304 3,877 ------ ------- ------ ------- Loss from operations............ (104) (3,311) (303) (3,164) Interest income (expense), net........................... 1 71 6 4 ------ ------- ------ ------- Net loss........................ $ (103) $(3,240) $ (297) $(3,160) ====== ======= ====== ======= Net loss per common share -- basic and diluted.... $(0.45) $ (2.86) $(0.90) $ (1.27) ====== ======= ====== ======= Shares used in net loss per common share calculation -- basic and diluted....................... 231 1,133 330 2,497 ====== ======= ====== ======= Pro forma net loss per share -- basic and diluted (unaudited)................... $ (0.39) $ (0.25) ======= ======= Shares used in pro forma net loss per share calculation -- basic and diluted (unaudited)........... 8,370 12,541 ======= =======
The accompanying notes are an integral part of these financial statements. F-4 72 DIGITAL IMPACT, INC. STATEMENT OF STOCKHOLDERS' EQUITY FOR THE PERIOD FROM OCTOBER 16, 1997 (DATE OF INCEPTION) TO JUNE 30, 1999 (IN THOUSANDS)
CONVERTIBLE PREFERRED STOCK COMMON STOCK ADDITIONAL UNEARNED STOCK --------------- --------------- PAID-IN STOCK-BASED SUBSCRIPTION ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION RECEIVABLE DEFICIT TOTAL ------ ------ ------ ------ ---------- ------------ ------------ ----------- ------- Issuance of common stock to founders................. -- $-- 6,000 $1 $ -- $ -- $-- $ -- $ 1 Issuance of Series A convertible preferred stock, net of issuance costs of $19............. 5,592 3 -- -- 1,155 -- -- -- 1,158 Net loss................... -- -- -- -- -- -- -- (103) (103) ------ -- ----- -- ------- ------- -- ------- ------- Balances, March 31, 1998... 5,592 3 6,000 1 1,155 -- -- (103) 1,056 Issuance of Series B convertible preferred stock, net of issuance costs of $30............. 4,448 -- -- -- 5,345 -- -- -- 5,345 Issuance of Series B convertible preferred stock warrant............ -- -- -- -- 52 -- -- -- 52 Exercise of stock options.................. -- -- 22 -- 1 -- (1) -- -- Issuance of common stock options for services..... -- -- -- -- 1 -- -- -- 1 Unearned stock-based compensation............. -- -- -- -- 1,769 (1,769) -- -- -- Amortization of unearned stock-based compensation............. -- -- -- -- -- 542 -- -- 542 Contribution of shares from a founder................ -- -- (270) -- -- -- -- -- -- Issuance of shares as bonus to a founder............. -- -- 270 -- 614 -- -- -- 614 Net loss................... -- -- -- -- -- -- -- (3,240) (3,240) ------ -- ----- -- ------- ------- -- ------- ------- Balances, March 31, 1999... 10,040 3 6,022 1 8,937 (1,227) (1) (3,343) 4,370 Exercise of convertible preferred stock warrant.. 24 -- -- -- 6 -- -- -- 6 Exercise of stock options.................. -- -- 150 -- 2 -- -- -- 2 Issuance of common stock options for services..... -- -- -- -- 9 -- -- -- 9 Unearned stock-based compensation............. -- -- -- -- 3,699 (3,699) -- -- -- Amortization of unearned stock-based compensation............. -- -- -- -- -- 968 -- -- 968 Repayment on stock subscription............. -- -- -- -- -- -- 1 -- 1 Net loss................... -- -- -- -- -- -- -- (3,160) (3,160) ------ -- ----- -- ------- ------- -- ------- ------- Balances, June 30, 1999 (unaudited).............. 10,064 $3 6,172 $1 $12,653 $(3,958) $-- $(6,503) $ 2,196 ====== == ===== == ======= ======= == ======= =======
The accompanying notes are an integral part of these financial statements. F-5 73 DIGITAL IMPACT, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
OCTOBER 16, 1997 THREE MONTHS (DATE OF INCEPTION) YEAR ENDED ENDED JUNE 30, TO MARCH 31, MARCH 31, ---------------- 1998 1999 1998 1999 ------------------- ---------- ----- ------- (UNAUDITED) Cash flows from operations: Net loss........................................... $ (103) $(3,240) $(297) $(3,160) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.................... 3 250 4 190 Provision for bad debts.......................... -- 10 -- 18 Stock-based compensation expense for shares issued to founder............................. -- 614 -- -- Amortization of unearned stock-based compensation.................................. -- 543 95 977 Change in assets and liabilities: Accounts receivable......................... -- (678) (4) (386) Prepaid expenses and other current assets... (3) (113) (1) (11) Restricted cash............................. -- (108) -- -- Other assets................................ (14) (49) -- (74) Accounts payable............................ 21 570 4 904 Accrued liabilities......................... 1 220 (1) 325 ------ ------- ----- ------- Net cash used in operating activities....... (95) (1,981) (200) (1,217) ------ ------- ----- ------- Cash flows from investing activities: Acquisition of property and equipment.............. (31) (2,423) (84) (1,106) ------ ------- ----- ------- Net cash used in investing activities....... (31) (2,423) (84) (1,106) ------ ------- ----- ------- Cash flows from financing activities: Proceeds from long-term debt....................... -- 350 -- -- Principal payments on long-term debt............... -- (173) -- (150) Proceeds from bridge loan.......................... -- -- -- 500 Proceeds from sale of assets, subject to lease-back....................................... -- 714 -- -- Proceeds from issuance of common stock............. -- -- -- 2 Proceeds from issuance of convertible preferred stock, net....................................... 1,158 5,345 -- 6 Repayment of stock subscription.................... -- -- -- 1 ------ ------- ----- ------- Net cash provided by financing activities... 1,158 6,236 -- 359 ------ ------- ----- ------- Net increase (decrease) in cash and cash equivalents........................................ 1,032 1,832 (284) (1,964) Cash and cash equivalents at beginning of period..... -- 1,032 1,032 2,864 ------ ------- ----- ------- Cash and cash equivalents at end of period........... $1,032 $ 2,864 $ 748 $ 900 ====== ======= ===== ======= Supplemental disclosure of cash flow information: Cash paid for interest............................. $ 1 $ 18 $ 1 $ 10 Supplemental disclosure of noncash financing activities: Acquisition of software license in exchange for note............................................. $ -- $ 291 $ -- $ -- Contribution of technology in exchange for Common Stock............................................ $ 1 $ -- $ -- $ -- Warrant issued for preferred stock................. $ -- $ 52 $ -- $ -- Assets acquired under capital leases............... $ -- $ 714 $ -- $ -- Unearned stock-based compensation.................. $ -- $ 1,769 $ 350 $ 3,699
The accompanying notes are an integral part of these financial statements. F-6 74 DIGITAL IMPACT, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 -- THE COMPANY: Digital Impact, Inc. (the "Company") was incorporated in the state of California on October 16, 1997. The Company is a leading provider of technology-enabled e-marketing services. The Company's (primary suite) of e-marketing services, Merchant Mail, is sold as a single service and currently consists of the following components: email campaign management, targeting and personalization, media optimization, tracking and reporting, and data hosting and management. In connection with the organization of the Company, the founders transferred some proprietary technology and other intangible assets to the Company in exchange for 6,000,000 shares of common stock. For accounting purposes, a nominal value was assigned to this transaction as there was no predecessor basis in the technology and other intangible assets. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: UNAUDITED INTERIM RESULTS The accompanying balance sheet as of June 30, 1999, the statements of operations and of cash flows for the three months ended June 30, 1998 and 1999 and the statement of stockholders' equity for the three months ended June 30, 1999 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's financial position and its results of operations and its cash flows for the three months ended June 30, 1998 and 1999. The financial data and other information disclosed in these notes to financial statements related to these periods are unaudited. The results for the three months ended June 30, 1999 are not necessarily indicative of the results to be expected for the year ending March 31, 2000. USE OF ESTIMATES Preparation of the accompanying financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. REVENUE RECOGNITION The Company generates from the sale of services such as design and execution of Internet direct marketing or e-marketing campaigns. For each campaign, the Company charges their clients a fixed fee for the set up and a variable fee based on the number of emails sent to the customers of the Company's clients. The Company also enters into contractual arrangements to provide a minimum number of email campaigns for a monthly fee. Revenue is recognized upon the completion of campaigns provided that there are no remaining significant obligations and collection of the resulting receivable is probable. F-7 75 DIGITAL IMPACT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. At March 31, 1999, approximately $108,000 of cash was pledged as collateral for an outstanding letter of credit (see Note 5). CONCENTRATION OF CREDIT RISK AND OTHER RISKS AND UNCERTAINTIES The Company's cash and cash equivalents are maintained at a major U.S. financial institution. Deposits in this institution may exceed the amount of insurance provided on such deposits. During the year ended March 31, 1999, three clients accounted for 26.8%, 11.5% and 10.9% of the Company's revenue and as of March 31, 1999, these same three clients accounted for 22.1%, 12.5% and 13.6% of accounts receivables. For the three months ended June 30, 1999, four of the Company's clients accounted for 11.3%, 11.0%, 10.8% and 10.3% of revenues for that period. FINANCIAL INSTRUMENTS The carrying value of the Company's financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to their relatively short maturities. RESEARCH AND DEVELOPMENT EXPENSES Research and development costs are expensed as incurred. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization is computed using the straight-line method over the shorter of the estimated useful lives of the assets, generally three to five years, or the lease term, if applicable. Gains and losses upon asset disposal are taken into income in the year of disposition. Maintenance and repairs are charged to operations as incurred. IMPAIRMENT OF LONG-LIVED ASSETS The Company continually monitors its long-lived assets to determine whether any impairment of these assets has occurred. In making such determination, the Company evaluates the performance of the underlying products and product lines. The Company recognizes impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. No material impairments have been experienced to date. SEGMENTS The Company follows Statement of Financial Accounting Standards No. 131, or SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." The F-8 76 DIGITAL IMPACT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Company operates in one segment, using one measurement of profitability to manage its business. All long-lived assets are maintained in the United States. INCOME TAXES Deferred tax assets and liabilities are determined based on the differences between financial reporting and tax basis of assets and liabilities, measured at tax rates that will be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company's employee stock option plans are accounted for in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and complies with the disclosure provisions required under Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS 123 and Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." COMPREHENSIVE INCOME Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Through March 31, 1999, the Company has not had any transactions that are required to be reported in comprehensive income. NET LOSS PER COMMON SHARE Basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of vested common shares outstanding for the period. Diluted net loss per share is computed giving effect to all dilutive potential common shares, including options, warrants and preferred stock. Options, warrants and preferred stock were not included in the computation of diluted net loss per share for the period ended March 31, 1998 and for the year ended March 31,1999 because the effect would be antidilutive. A reconciliation of the numerator and denominator used in the F-9 77 DIGITAL IMPACT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) calculation of historical basic and diluted net loss per share follows (in thousands, except per share data):
PERIOD FROM OCTOBER 16, 1997, THREE MONTHS (DATE OF INCEPTION) YEAR ENDED ENDED JUNE 30, TO MARCH 31, MARCH 31, ------------------ 1998 1999 1998 1999 ------------------- ---------- ------- ------- (UNAUDITED) Numerator: Net loss....................... $ (103) $(3,240) $ (297) $(3,160) ======= ======= ======= ======= Denominator: Weighted average common shares outstanding...... 4,771 6,002 6,000 6,123 Weighted average unvested common shares subject to repurchase.............. (4,540) (4,869) (5,670) (3,626) ------- ------- ------- ------- Denominator for basic and diluted calculation.......... 231 1,133 330 2,497 ======= ======= ======= ======= Net loss per common share -- basic and diluted............ $ (0.45) $ (2.86) $ (0.90) $ (1.27) ======= ======= ======= =======
ANTIDILUTIVE SECURITIES Warrants to purchase 86,000 shares of Series A convertible preferred stock at an exercise price of $0.2083 per share have not been included in the computation of diluted net loss per share for the period from October 16, 1997 (date of inception) to March 31, 1998. Options to purchase 1,887,000 shares of common stock at a weighted average exercise price of $0.043 per share and warrants to purchase 152,000 shares of Series A and B convertible preferred stock at a weighted average exercise price of $0.643 per share have not been included in the computation of diluted net loss per share for the year ended March 31, 1999. Options to purchase 2,912,000 shares of common stock at a weighted average exercise price of $0.154 per share and warrants to purchase 128,000 shares of Series A and B convertible preferred stock at a weighted average exercise price of $0.724 per share have not been included in the computation of diluted net loss per share for three months ended June 30, 1999. Additionally, all shares of convertible preferred stock have not been included in the computation of diluted net loss per share for all periods presented as they are anti-dilutive (see Note 9). RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position No. 98-1, or SOP 98-1, "Software for Internal Use," which provides guidance on accounting for the cost of computer software developed or obtained for internal use. SOP 98-1 is effective for financial statements for fiscal years beginning after F-10 78 DIGITAL IMPACT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 15, 1998. The Company does not expect that the adoption of SOP 98-1 will have a material impact on its financial statements. In April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, or SOP 98-5, "Reporting on the Costs of Start-Up Activities." This standard requires companies to expense the costs of start-up activities and organization costs as incurred. In general, SOP 98-5 is effective for fiscal years beginning after December 15, 1998. The Company believes the adoption of SOP 98-5 will not have a material impact on its results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities. SFAS 133 requires that all derivatives be recognized at fair value in the statement of financial position, and that the corresponding gains or losses be reported either in the statement of operations or as a component of comprehensive income, depending on the type of hedging relationship that exists. SFAS 133 will be effective for fiscal years beginning after June 15, 2000. The Company does not currently hold derivative instruments or engage in hedging activities. \NOTE 3 -- BALANCE SHEET COMPONENTS PROPERTY AND EQUIPMENT, NET (IN THOUSANDS):
MARCH 31, -------------- 1998 1999 ---- ------ Furniture and office equipment......................... $ 3 $ 201 Computer equipment and software........................ 28 2,544 --- ------ Total cost............................................. 31 2,745 Less accumulated depreciation.......................... (3) (251) --- ------ $28 $2,494 === ======
Depreciation and amortization expense was $3,000 and $248,000 for the period ended March 31, 1998 and for the year ended March 31, 1999, respectively. During the year ended March 31, 1999, the Company sold to a financial institution computer equipment and software at cost and leased-back the assets, which were classified as capital leases. The cost of the assets acquired under capital leases was $714,000 at March 31, 1999. The accumulated depreciation on these assets was $11,000 at March 31, 1999. ACCRUED LIABILITIES (IN THOUSANDS):
MARCH 31, ------------ 1998 1999 ---- ---- Payroll and related..................................... $ -- $185 Other................................................... 1 36 ---- ---- $ 1 $221 ==== ====
F-11 79 DIGITAL IMPACT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- BORROWINGS: The Company had $312,000 outstanding for equipment purchases under a loan and security agreement with a bank at March 31, 1999. The loan agreement provides for borrowings of up to $350,000, $300,000 of which is collateralized by the Company's property and equipment. Under the terms of the loan agreement, certain transactions, including payment of dividends, are prohibited without the bank's consent. The loan bears interest at the prime rate (8.25% at March 31, 1999) plus 0.25% per annum. The Company is required to make monthly repayments on this loan through December 2000. Principal payments under the loan are $200,000 in the year ending March 31, 2000 and $112,000 in the year ending March 31, 2001. In November 1998, the Company acquired a software license in exchange for a promissory note for $291,000. The note bears interest at 12.7% per annum. This note is collateralized by the software license purchased. Remaining principal payments due under the note are $34,000 in the year ending March 31, 2000 and $122,000 in the year ending March 31, 2001. On February 12, 1999, the Company signed an agreement with a leasing company for a leasing line of credit of $2.0 million. Amounts borrowed under this agreement bear interest at rates of between 2.70% and 3.66% and are collateralized by the leased assets. At March 31, 1999, the Company had used $714,000 of this leasing line of credit. In conjunction with this agreement, the Company issued a warrant to the leasing company for 66,000 shares of Series B convertible preferred stock at an exercise price of $1.20875 per share (see Note 6). NOTE 5 -- COMMITMENTS: OPERATING LEASES The Company leases its facility under an operating lease which expires in 2002. Rent expense for the period from October 16, 1997 (date of inception) to March 31, 1998 and for the year ended March 31, 1999 was $7,000 and $122,000 respectively. Rent expense for the three months ended June 30, 1999 was $153,000. F-12 80 DIGITAL IMPACT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Future minimum lease payments under noncancelable capital and operating leases, including lease commitments entered into as of March 31, 1999 are as follows (in thousands):
YEAR ENDING CAPITAL OPERATING MARCH 31, LEASES LEASES ----------- ------- --------- 2000........................................................ $267 $ 423 2001........................................................ 267 435 2002........................................................ 173 353 2003........................................................ 40 -- ---- ------ Total minimum lease payments................................ 747 $1,211 ---- ====== Less: Discount due to warrants.............................. (50) Less: Amount representing interest.......................... (33) ---- Present value of capital lease obligations.................. 664 Less: Current portion....................................... 199 ---- Long-term portion of capital lease obligations.............. $465 ====
LETTER OF CREDIT The Company obtained a letter of credit from a financial institution totaling $108,000 in lieu of a security deposit for leased office space. No amounts have been drawn against the letter of credit at March 31, 1999. NOTE 6 -- STOCKHOLDERS' EQUITY: CONVERTIBLE PREFERRED STOCK Convertible preferred stock at March 31, 1999 consists of the following (in thousands):
PROCEEDS SHARES NET OF ------------------------ LIQUIDATION ISSUANCE SERIES AUTHORIZED OUTSTANDING AMOUNT COSTS ------ ---------- ----------- ----------- -------- A..................................... 6,000 5,592 $1,165 $1,158 B..................................... 6,000 4,448 5,375 5,345 C..................................... 4,000 -- -- -- ------- ------ ------ ------ 16,000 10,040 $6,540 $6,503 ======= ====== ====== ======
The holders of convertible preferred stock have various rights and preferences as follows: DIVIDENDS The holders of Series A and Series B convertible preferred stock are entitled to receive dividends of $0.0167 and $0.0967 per share per annum, respectively. Such dividends, which are in preference to any common stock dividends, are payable whenever funds are legally available and when declared by the board of directors. The right of the F-13 81 DIGITAL IMPACT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) holders of the preferred stock to receive dividends is not cumulative. At March 31, 1999 no dividends have been declared. LIQUIDATION In the event of any liquidation, dissolution or winding up of the Company, the holders of convertible preferred stock are entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of common stock, an amount per share equal to the sum of $0.2083 and $1.2085 for each outstanding share of Series A and Series B convertible preferred stock, respectively, plus any declared and unpaid dividends. If the funds available for distribution are insufficient to cover the liquidation preference, then the entire assets and funds of the Company legally available for distribution are to be distributed ratably among the holders of preferred stock. After payment of the full liquidation preference of the preferred stockholders, any remaining assets of the Company legally available are to be distributed ratably to the holders of common stock. CONVERSION Each share of preferred stock, at the option of the holder, is convertible into a number of fully paid shares of common stock as determined by dividing the respective preferred stock issue price by the conversion price in effect at the time. The initial conversion prices of Series A and Series B convertible preferred stock are $0.2083 and $1.2085, respectively, subject to adjustments in accordance with antidilution provisions contained in the Company's Certificate of Incorporation. Conversion is automatic immediately upon the closing of a firm commitment underwritten public offering in which the per share price values the Company on a fully-diluted basis to be at least $125 million, and the gross proceeds raised exceed $10,000,000. VOTING RIGHTS As long as at least 4,140,000 shares of preferred stock remain outstanding, the Company must obtain approval from a majority of the holders of preferred stock to declare or pay any dividend on common stock; redeem, purchase or otherwise acquire any common stock other than shares subject to right of repurchase by the Company; cause the acquisition, reorganization, merger or consolidation of the Company that results in a transfer of 50% or more of the voting control of the Company; authorize or issue another equity security having a preference over, or being on parity with, the Series A and Series B convertible preferred stock; increase the number of directors of the Company; or alter the Certificate of Incorporation as it relates to the preferred stock or change the authorized number of shares of preferred stock. WARRANTS FOR CONVERTIBLE PREFERRED STOCK In March 1998, the Company granted a fully exercisable warrant to purchase 86,000 shares of Series A convertible preferred for $0.2083 per share in connection with the issuance of Series A convertible preferred stock. Such warrants are outstanding at F-14 82 DIGITAL IMPACT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) March 31, 1999 and expire five years after issuance. Using the Black-Scholes pricing model, the Company determined that the fair value of the warrants was $12,000. In November 1998, the Company granted a fully exercisable warrant to purchase 66,000 shares of Series B convertible preferred for $1.2085 per share in connection with a capital lease agreement. Such warrants were outstanding at March 31, 1999 and expire five years after issuance. Using the Black Scholes pricing model, the Company determined that the fair value of these warrants was $52,000. The warrants were recorded as a discount on the debt and will be amortized over the life of the underlying borrowings. The amortization recorded in the year ended March 31, 1999 was $2,000. COMMON STOCK Share information for all periods has been retroactively adjusted to reflect a 10-for-1 common stock split effected in March 1998 and a 3-for-1 preferred and common stock split effected in November 1998. The Company has issued 6,000,000 shares of its common stock to the founders of the Company under stock purchase agreements. Each share of common stock has the right to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to the prior rights of holders of all classes of stock outstanding having priority rights as to dividends. No dividends have been declared or paid through March 31, 1999. All of the 6,000,000 shares of common stock issued thus far have been issued under restrictive stock purchase agreements, under which the Company has the option to repurchase issued shares of common stock. Generally, 25% of the Company's repurchase rights lapse within one year, with the remaining rights lapsing at a rate of 2.083% per month until all shares have been released. At March 31, 1998 and 1999, 5,670,000 and 3,609,000 outstanding common shares were subject to repurchase, respectively. STOCK OPTION PLAN In 1998, the Company adopted the 1998 Stock Plan (the "Plan") under which 3,795,000 shares of the Company's common stock were reserved for issuance to employees, directors and consultants. Options granted under the Plan may be incentive stock options or non-statutory stock options. Incentive stock options may only be granted to employees. The board of directors determines the period over which options become exercisable, however, options shall become exercisable at a rate of no less than 20% per year over five years from the date the options are granted. The exercise price of incentive stock options and non-statutory stock options shall be no less than 100% and 85%, respectively, of the fair market value per share of the Company's common stock on the grant date. The term of the options granted under the Plan may range from four to ten years. F-15 83 DIGITAL IMPACT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Activity under this Plan is as follows (in thousands, except per share amounts):
OPTIONS OUTSTANDING ------------------------------------------------------ SHARES WEIGHTED AVAILABLE NUMBER OF PRICE PER AVERAGE AGGREGATE FOR GRANT SHARES SHARE EXERCISE PRICE PROCEEDS --------- --------- ------------- -------------- --------- Options reserved at Plan inception.............. 1,695 -- -- -- -- ------ Balances, March 31, 1998................... 1,695 -- -- -- -- Additional shares reserved............... 2,100 -- -- -- -- Options granted.......... (1,965) 1,965 $0.02-$0.25 $0.08 $160 Options exercised........ -- (22) $ 0.02 $0.02 $ 0 Options cancelled........ 56 (56) $0.02-$0.25 $0.24 $ (2) ------ ----- ---- Balances, March 31, 1999................... 1,886 1,887 $0.02-$0.25 $0.08 $158 Options granted.......... (1,175) 1,175 $ 0.25 $0.25 $291 Options exercised........ -- (150) $ 0.02 $0.02 $ (2) ------ ----- ---- Balances, June 30, 1999 (unaudited)............ 711 2,912 $0.02-$0.25 $0.15 $447 ====== ===== ====
PRO FORMA STOCK-BASED COMPENSATION The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Had compensation cost been determined based on the fair value at the grant date for the awards for the periods ended March 31, 1998 and 1999 and the three months ended June 30, 1999 consistent with the provisions of SFAS No. 123, the Company's net loss for the year ended March 31, 1999 and for the three months ended June 30, 1999, respectively, would have been as follows (in thousands, except per share amounts):
THREE MONTHS YEAR ENDED ENDED MARCH 31, JUNE 30, 1999 1999 ---------- ------------ (UNAUDITED) Net loss attributable to common stockholders -- as reported.......................................... $(3,240) $(3,160) Net loss attributable to common stockholders -- pro forma............................................. $(3,252) $(3,180) Net loss per common share -- basic and diluted as reported.......................................... $ (2.86) $ (1.27) Net loss per common share -- basic and diluted pro forma............................................. $ (2.87) $ (1.27)
F-16 84 DIGITAL IMPACT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Such pro forma disclosures may not be representative of future compensation cost because options vest over several years and additional grants are made each year. The fair value of each option grant is estimated on the date of grant using the minimum value method with the following assumptions used for grants:
THREE MONTHS YEAR ENDED ENDED MARCH 31, JUNE 30, 1999 1999 ---------- ------------ (UNAUDITED) Expected volatility........................... 0% 0% Weighted average risk-free interest rate...... 5.18% 5.45% Expected life (from vesting date)............. 5 years 5 years Expected dividends............................ 0% 0%
MINIMUM VALUE OF OPTION Based on the above assumptions, the weighted average minimum values per share of options granted were $0.02 and $0.06 the year ended March 31, 1999 and the three months ended June 30, 1999, respectively. The options outstanding and currently exercisable by exercise price at March 31, 1999 are as follows (in thousands except per share amounts):
OPTIONS OUTSTANDING ----------------------------------------------- OPTIONS EXERCISABLE WEIGHTED ---------------------- AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE ----------- ----------------------- -------- ----------- -------- 1,376 9.2 $0.02 64 $0.02 511 9.8 $0.25 3 $0.25 ----------- -- 1,887 9.4 67 =========== ==
The options outstanding and currently exercisable by exercise price at June 30, 1999 (unaudited) are as follows (in thousands except per share amounts):
OPTIONS OUTSTANDING ----------------------------------------------- OPTIONS EXERCISABLE WEIGHTED ---------------------- AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE ----------- ----------------------- -------- ----------- -------- 1,226 9.0 $0.02 224 $0.02 1,686 9.8 $0.25 11 $0.25 ----------- --- 2,912 9.4 235 =========== ===
During the year ended March 31, 1999 the Company recorded unearned stock-based compensation totalling $1,769,000 which is being amortized to expense over the period F-17 85 DIGITAL IMPACT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) during which the options vest, generally four years. For the year ended March 31, 1999, the Company recorded stock-based compensation of $543,000 in respect of options granted to employees and non-employees during the year. In addition, the Company recognized additional stock-based compensation of $614,000 in the year for 270,000 shares of common stock which the Company bonused to a founder. (See Note 8). Based on the above assumptions, the weighted average fair values per share of options granted were $0.98 and $3.36 for the year ended March 31, 1999 and the three months ended June 30, 1999 respectively. NOTE 7 -- INCOME TAXES: At March 31, 1999, the Company had federal and state net operating loss carryforwards of approximately $2,107,000 available to offset future regular and alternative minimum taxable income. The Company's federal and state net operating loss carryforwards expire in 2005 through 2019. At March 31, 1999, the Company had federal and state research and development and other credits of approximately $34,000 and $26,000, respectively. The research and development credit carryforwards expire in 2019, if not utilized. The Tax Reform Act of 1986 limits the use of net operating loss and tax credit carryforward in certain situations where changes occur in the stock ownership of a company. If the Company should have an ownership change, as defined for tax purposes, utilization of the carryforwards could be restricted. Temporary differences which give rise to significant portions of deferred tax assets and liabilities at March 31, 1998 and 1999 are as follows (in thousands):
MARCH 31, ------------- 1998 1999 ---- ----- Net operating loss carryforwards....................... $ 12 $ 839 Research and development credit carryover.............. -- 51 Capitalized start-up and other......................... 28 37 ---- ----- Total deferred tax assets.............................. 40 927 Less valuation allowance............................... (40) (927) ---- ----- Net deferred tax asset................................. $ -- $ -- ==== =====
The Company has established a 100% valuation allowance at March 31, 1999 as it appears more likely than not that no benefit will be realized for its deferred tax assets. NOTE 8 -- RELATED PARTY TRANSACTION: On February 11, 1999, the Board of Directors approved the contribution of 270,000 shares of common stock from one of the founders to the Company. The Company then issued these shares to another founder as a bonus. The fair value of the shares on February 11, 1999 was determined to be $2.27 per share. The Company recognized $614,000 in stock-based compensation in connection with this transaction for the year ended March 31, 1999. F-18 86 DIGITAL IMPACT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- UNAUDITED PRO FORMA NET LOSS PER COMMON SHARE AND PRO FORMA STOCKHOLDERS' EQUITY: Upon the closing of the Company's initial public offering, all outstanding Series A, Series B and Series C convertible preferred stock (See Note 10) will be converted automatically into common stock. The pro forma effect of this conversion has been presented as a separate column in the Company's balance sheet, assuming, that the Series C convertible preferred stock had been issued and this conversion had occurred as of June 30, 1999. Pro forma basic and diluted net loss per common share have been computed to give effect to common equivalent shares from preferred stock that will automatically convert upon the closing of the Company's initial public offering (using the as-if-converted method) for the years ended March 31, 1999 and the three months ended June 30, 1999. A reconciliation of the numerator and denominator used in the calculation of pro forma basic and fully diluted net loss per common share follows (in thousands except per share data):
THREE MONTHS YEAR ENDED ENDED MARCH 31, JUNE 30, 1999 1999 1999 ----------- ------------- (UNAUDITED) (UNAUDITED) Numerator Net loss........................................... $(3,240) $(3,160) ------- ------- Denominator: Shares used in computing basic and diluted net loss per share....................................... 1,133 2,497 Adjusted to reflect the effect of the assumed conversion of convertible preferred stock from the date of issuance: Series A convertible preferred stock............ 5,592 5,596 Series B convertible preferred stock............ 1,645 4,448 Series C convertible preferred stock............ -- -- ------- ------- Weighted average shares used in computing pro forma basic and diluted net loss per share............... 8,370 12,541 ------- ------- Pro forma basic and diluted net loss per share....... $ (0.39) $ (0.25) ======= =======
F-19 87 DIGITAL IMPACT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 10 -- SUBSEQUENT EVENTS: OFFICE LEASE On May 28, 1999, the Company entered into a lease agreement to lease additional office space. The Company is required to make monthly payments which are due as follows (in thousands):
YEAR ENDING MARCH 31, ----------- 2000......................................... $ 362 2001......................................... 770 2002......................................... 782 2003......................................... 793 ------ $2,707 ======
1998 STOCK OPTION PLAN On July 1, 1999, the board of directors authorized an increase in the number of shares reserved under the 1998 stock option plan of 1,000,000 shares of common stock. SERIES C FINANCING On June 30, 1999, the Company received a $500,000 bridge loan from one of its existing investors. On July 7, 1999, the Company issued 2,228,000 shares of Series C convertible preferred stock for $4.785 per share for total cash proceeds of $10,160,000 and the conversion of the $500,000 bridge loan. The holders of Series C convertible preferred stock are entitled to receive dividends of $0.3825 per share per annum when declared by the board of directors and $4.785 per share upon liquidation. Each share of Series C convertible preferred stock converts automatically into one share of common stock upon the closing of a firm commitment underwritten public offering. STOCK SPLIT AND AMENDMENT TO ARTICLES OF INCORPORATION On July 8, 1999, the board of directors approved a 2-for-1 forward split of its preferred and common stock. All common stock data and common stock option plan information in this report has been restated to reflect the split. In addition, the conversion prices of the Company's Series A, Series B and Series C convertible preferred stock have also been adjusted to reflect the effect of the split. Additionally, on August 16, 1999 the board of directors amended the Articles of Incorporation to increase the number of common shares authorized to 54,000,000 and the number of preferred shares authorized to 16,000,000. REINCORPORATION On September 16, 1999, the Company authorized the reincorporation of the Company in the State of Delaware. Following the reincorporation, the Company will be authorized to issue 54,000,000 shares of $0.001 par value common stock and 16,000,000 shares of $0.001 par F-20 88 DIGITAL IMPACT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) value preferred stock. The board of directors has the authority to issue the undesignated preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. AMENDED AND RESTATED 1998 STOCK PLAN On September 16, 1999, the board of directors amended the 1998 stock option plan, which provides for the grant of incentive stock options to employees and non-statutory stock options to non-employees, directors and consultants. A total of 8,795,000 shares of common stock has been reserved under the plan. 1999 DIRECTOR OPTION PLAN On September 16, 1999, the Company adopted the 1999 director option plan under which 500,000 shares have been reserved for issuance of common stock. EMPLOYEE STOCK PURCHASE PLAN On September 16, 1999, the board of directors adopted the employee stock purchase plan under which 700,000 shares have been reserved for issuance and approved for issuance. The 1999 employee stock purchase plan contains successive six-month offering periods and the price of stock purchased under the plan is 85% of the lower of the fair value of the common stock either at the beginning of the period or at the end. STOCK-BASED COMPENSATION In connection with certain stock option grants to employees and non-employees during the three months ended June 30, 1999, the Company recorded unearned stock-based compensation totalling $3,699,000, which is being amortized over the vesting periods of the related options which is generally four years. Amortization of stock-based compensation recognized during the three months ended June 30, 1999 totalled approximately $977,000. The Company also anticipates recognizing substantial additional stock-based compensation based on options granted in July and August 1999. The Company expects to record an additional $4.5 million of unearned stock-based compensation for these option grants. The total unamortized unearned stock-based compensation recorded for all option grants through August 31, 1999 will be amortized as follows: $4.0 million for the remainder of the year ending March 31, 2000; $2.7 million for the year ending March 31, 2001; $1.3 million for the year ending March 31, 2002; $472,000 for the year ending March 31, 2003 and thereafter. INITIAL PUBLIC OFFERING On September 16, 1999, the board of directors approved the filing of a registration statement for an underwritten public offering of the Company's common stock whereupon the authorized number of shares of common stock will be increased to 100,000,000 and the authorized number of shares of undesignated preferred stock will be reduced to 5,000,000. F-21 89 DESCRIPTION OF GRAPHICS Page 38: [Graphical diagram consisting of a set of labeled boxes and stylized illustrations, connected to each other by arrows. In the center of the diagram is a box labeled "Data Warehouse," which is connected by bi-directional arrows to three other boxes positioned to the left, right, and above the "Data Warehouse" box. These three boxes are labeled "Client Information," Assembly and Delivery Engine," and "Campaign Management." The "Campaign Management" box contains three smaller boxes, labeled from left to right "Data Mining," "Campaign Configuration," and "Reporting." The box labeled "Assembly and Delivery Engine" has three outbound arrows which are connected to three identical stylized envelopes, each labeled "email." Each of these stylized envelopes has an outbound arrow connecting it to a stylized drawing of a person, and from there to a box labeled "Response Handler." This box is connected using an outbound arrow to the box labeled "Data Warehouse."] 90 [LOGO] 91 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all expenses, other than the underwriting discounts and commissions, payable by the Registrant in connection with the sale of the securities being registered. All amounts shown are estimates except for the SEC registration fee and the NASD filing fee. SEC registration fee........................................ $18,100 NASD filing fee............................................. 7,000 NASDAQ National Market Fees................................. * Blue Sky qualification fees and expenses.................... * Printing and engraving expenses............................. * Accountant's fees and expenses.............................. * Legal fees and expenses..................................... * Miscellaneous............................................... * ------- Total..................................................... $ * =======
- --------------- * To be supplied by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law permits a corporation to include in its charter documents, and in agreements between the corporation and its directors and officers, provisions expanding the scope of indemnification beyond that specifically provided by the current law. Article VIII of the Registrant's Restated Certificate of Incorporation provides for the indemnification of directors to the fullest extent permissible under Delaware law. Article VI of the Registrant's Bylaws provides for the indemnification of officers, directors and third parties acting on behalf of the Registrant if such person acted in good faith and in a manner reasonably believed to be in and not opposed to the best interest of the Registrant, and, with respect to any criminal action or proceeding, the indemnified party had no reason to believe his or her conduct was unlawful. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. (a) Since October 1997, the Registrant has issued and sold (without payment of any selling commission to any person) the following unregistered securities: (1) In March 1998, the Registrant completed a ten-for-one stock split of its outstanding common stock in which each outstanding share of its common stock was split into ten shares of common stock. (2) In November 1998, the Registrant completed a three-for-one stock split of its outstanding common and preferred stock in which each outstanding share of common stock was split into three shares of common stock, and each share of preferred stock was split into three shares of preferred stock. (3) In August 1999, the Registrant completed a two-for-one stock split of its outstanding common and preferred stock in which each outstanding share of common II-1 92 stock was split into two shares of common stock, and each outstanding share of preferred stock was split into two shares of preferred stock. (4) In July 1999, the Registrant issued and sold shares of series C preferred stock convertible into an aggregate of 2,227,794 shares of common stock to a total of 8 investors for an aggregate purchase price of $10,659,995. (5) In November 1998, the Registrant issued and sold shares of its series B preferred stock convertible into an aggregate of 4,448,264 shares of common stock to a total of 8 investors for an aggregate purchase price of $5,375,060. (6) In March 1998, the Registrant issued and sold shares of its series A preferred stock convertible into an aggregate of 5,592,000 shares of common stock to a total of 11 investors for an aggregate purchase price of $1,165,000.00. (7) As of June 30, 1999, 6,172,571 shares of common stock had been issued upon exercise of options or pursuant to restricted stock purchase agreements and 2,911,208 shares of common stock were issuable upon exercise of outstanding options under the Registrant's 1998 stock plan. (b) There were no underwritten offering employed in connection with any of the transactions set forth in Item 15(a). The issuances described in Items 15(a)(1), 15(a)(2) and 15(a)(3) were or will be exempt from registration under Section 2(3) of the Securities Act on the basis that such transaction did not involve a "sale" of securities. The issuances described in Items 15(a)(4), 15(a)(5), and 15(a)(6) were deemed to be exempt from registration under the Securities Act Section 4(2) thereof as transactions by an issuer not involving any public offering. The issuances described in Item 15(a)(7) were deemed to be exempt from registration under the Securities Act in reliance upon Rule 701 promulgated thereunder in that they were offered and sold either pursuant to written compensatory benefit plans or pursuant to a written contract relating to compensation, as provided by Rule 701. In addition, such issuances were deemed to be exempt from registration under Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering. The recipients of securities in each such transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in such transactions. All recipients had adequate access, through their relationships with the Registrant, to information about the Registrant. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS.
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION OF DOCUMENT PAGE NO. - ------- ----------------------- ---------- 1.1* Form of Underwriting Agreement.............................. 3.1* Certificate of Incorporation of Digital Impact.............. 3.2* Form of Amended and Restated Certificate of Incorporation of the Registrant to be filed promptly after the closing of the offering.................................................... 3.3* Bylaws of the Registrant.................................... 4.1* Specimen Common Stock Certificate........................... 4.2 Amended and Restated Investor Rights Agreement..............
II-2 93
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION OF DOCUMENT PAGE NO. - ------- ----------------------- ---------- 5.1 Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.................................... 10.1 Form of Amended and Restated 1998 Stock Plan and form of agreements thereunder....................................... 10.2 Form of 1999 Employee Stock Purchase Plan and form of agreements thereunder....................................... 10.3* 1999 Director Option Plan and form of agreements thereunder.................................................. 10.4 Employment Agreement by and between Registrant and David Oppenheimer................................................. 10.5 Employment Agreement by and between Registrant and Alan Flohr....................................................... 10.6 Starter Kit Loan and Security Agreement by and between Registrant and Imperial Bank................................ 10.7* Digital Impact Solutions Provider Reseller Agreement by and between Registrant and Harte-Hanks Response Management/Austin, Inc. .................................... 10.8* Master Lease Agreement by and between Registrant and Comdisco, Inc. ............................................. 10.9* Standard Form Lease by and between Registrant and Casiopea Venture Corporation......................................... 10.10* Sublease Agreement by and Registrant and Legato Systems, Inc. ....................................................... 10.11* Form of Indemnification Agreement by and between Registrant and each of its directors and officers...................... 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants................................................. 23.2 Consent of Counsel (see Exhibit 5.1)........................ 24.1 Power of Attorney (see page II-6)........................... 27.1 Financial Data Schedules....................................
- ------------------------- + The omitted portions have been separately filed with the Commission. * To be filed by amendment. (b) FINANCIAL STATEMENT SCHEDULES. Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, II-3 94 unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 95 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto, duly authorized, in the City of San Mateo, California, on September 17, 1999. DIGITAL IMPACT, INC. By: /s/ WILLIAM PARK ----------------------------------- William Park Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William Park and David Oppenheimer, and each of them his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendment or post-effective amendment to this Registration Statement on Form S-1 or abbreviated registration statement (including, without limitation, any additional registration filed pursuant to Rule 462 under the Securities Act of 1933) with respect hereto and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ WILLIAM PARK Chief Executive Officer and September 17, 1999 - ----------------------------- Chairman of the Board of William Park Directors (Principal Executive Officer) /s/ DAVID OPPENHEIMER Vice President and Chief September 17, 1999 - ----------------------------- Financial Officer, Treasurer David Oppenheimer and Secretary (Principal Financial and Accounting Officer) /s/ GERARDO CAPIEL Director September 17, 1999 - ----------------------------- Gerardo Capiel /s/ RUTHANN QUINDLEN Director September 17, 1999 - ----------------------------- Ruthann Quindlen
II-5 96
SIGNATURE TITLE DATE --------- ----- ---- /s/ WARREN PACKARD Director September 17, 1999 - ----------------------------- Warren Packard /s/ MICHAEL BROWN Director September 17, 1999 - ----------------------------- Michael Brown
II-6 97 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 1.1* Form of Underwriting Agreement 3.1* Certificate of Incorporation of Digital Impact 3.2* Form of Amended and Restated Certificate of Incorporation of the Registrant to be filed promptly after the closing of the offering 3.3* Bylaws of the Registrant 4.1* Specimen Common Stock Certificate 4.2 Amended and Restated Investor Rights Agreement 5.1 Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation 10.1 Form of Amended and Restated 1998 Stock Plan and form of agreements thereunder 10.2 Form of 1999 Employee Stock Purchase Plan and form of agreements thereunder 10.3* 1999 Director Option Plan and form of agreements thereunder 10.4 Employment Agreement by and between Registrant and David Oppenheimer 10.5 Employment Agreement by and between Registrant and Alan Flohr 10.6 Starter Kit Loan and Security Agreement by and between Registrant and Imperial Bank 10.7* Digital Impact Solutions Provider Reseller Agreement by and between Registrant and Harte-Hanks Response Management/Austin, Inc. 10.8* Master Lease Agreement by and between Registrant and Comdisco, Inc. 10.9* Standard Form Lease by and between Registrant and Casiopea Venture Corporation 10.10* Sublease Agreement by and Registrant and Legato Systems, Inc. 10.11* Form of Indemnification Agreement by and between Registrant and each of its directors and officers 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants 23.2 Consent of Counsel (see Exhibit 5.1) 24.1 Power of Attorney (see page II-6) 27.1 Financial Data Schedules
- ------------------------- + The omitted portions have been separately filed with the Commission. * To be filed by amendment. EX-4.2 2 AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT 1 (i) if Form S-3 (or any successor or similar form) is not available for such offering by the Holders; or (ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public of less than two million dollars ($2,000,000); or (iii) if within (30) days of receipt of a written request from Initiating Holders pursuant to Section 3.2(a), the Company gives notice to the Holders of the Company's intention to make a public offering within sixty (60) days; (iv) if the Company shall furnish to the Holders a certificate signed by the Chairman of the Board of Directors of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such Form S-3 registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than ninety (90) days after receipt of the request of the Holder or Holders under this Section 3.4; provided, that such right to delay a request shall be exercised by the Company not more than once in any twelve (12) month period; or (v) if the Company has, within the twelve (12) month period preceding the date of such request, already effected two (2) registrations on Form S-3 for the Holders pursuant to this Section 3.4; or (vi) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance; or (vii) after the Company has effected three (3) registrations pursuant to this Section 3.4, and such registration have been declared or ordered effective. (c) Subject to the foregoing, the Company shall file a Form S-3 registration statement covering the registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. Registrations effected pursuant to this Section 3.4 shall not be counted as demands for registration or registrations effected pursuant to Sections 3.2 or 3.3, respectively. 3.5 EXPENSES OF REGISTRATION. Except as specifically provided herein, all Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Section 3.2 or any registration under Section 3.3 or Section 3.4 herein shall be borne by the Company. All Selling Expenses incurred in connection with any registrations hereunder, shall be born by the holders of the securities so registered pro rata on the basis of the number of shares so registered. The Company shall not, however, be required to pay for expenses of any registration proceeding begun pursuant to Section 3.2 or 3.4, the request of which has been subsequently withdrawn by the Initiating Holders unless (a) the withdrawal is based upon material adverse information concerning the Company of which the Initiating Holders were not aware at the time of such request or (b) the Holders of a majority of Registrable Securities agree 8. 2 to forfeit their right to one requested registration pursuant to Section 3.2 or Section 3.4, as applicable, in which event such right shall be forfeited by all Holders). If the Holders are required to pay the Registration Expenses, such expenses shall be borne by the holders of securities (including Registrable Securities) requesting such registration in proportion to the number of shares for which registration was requested. If the Company is required to pay the Registration Expenses of a withdrawn offering pursuant to clause (a) above, then the Holders shall not forfeit their rights pursuant to Section 3.2 or Section 3.4 to a demand registration. 3.6 OBLIGATIONS OF THE COMPANY. Whenever required to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use all reasonable efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to ninety (90) days or, if earlier, until the Holder or Holders have completed the distribution related thereto. The Company shall not be required to file, cause to become effective or maintain the effectiveness of any registration statement that contemplates a distribution of securities on a delayed or continuous basis pursuant to Rule 415 under the Securities Act. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement for the period set forth in paragraph (a) above. (c) Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its reasonable best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder or Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits 9. 3 to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (g) Use its best efforts to furnish, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, (i) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and (ii) a letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering addressed to the underwriters. 3.7 TERMINATION OF REGISTRATION RIGHTS. All registration rights granted under this Section 3 shall terminate and be of no further force and effect five (5) years after the date of the Company's Initial Offering. In addition, a Holder's registration rights shall expire if (a) the Company has completed its Initial Offering and is subject to the provisions of the Exchange Act, (b) such Holder (together with its affiliates, partners and former partners) holds less than 1% of the Company's outstanding Common Stock (treating all shares of convertible Preferred Stock on an as converted basis) and (c) all Registrable Securities held by and issuable to such Holder (and its affiliates, partners, former partners, members and former members) may be sold under Rule 144 during any ninety (90) day period. 3.8 DELAY OF REGISTRATION; FURNISHING INFORMATION. (a) No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 3. (b) It shall be a condition precedent to the obligations of the Company to take any action pursuant to Section 3.2, 3.3 or 3.4 that the selling Holders shall furnish to the Company such information regarding themselves, the Registrable Securities held by them and the intended method of disposition of such securities as shall be required to effect the registration of their Registrable Securities. (c) The Company shall have no obligation with respect to any registration requested pursuant to Section 3.2 or Section 3.4 if, due to the operation of subsection 3.2(b), the number of shares or the anticipated aggregate offering price of the Registrable Securities to be included in the registration does not equal or exceed the number of shares or the anticipated aggregate offering price required to originally trigger the Company's obligation to initiate such registration as specified in Section 3.2 or Section 3.4, whichever is applicable. 3.9 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under Sections 3.2, 3.3 or 3.4: a. To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners, officers and directors of each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, 10. 4 claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation") by the Company: (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law in connection with the offering covered by such registration statement; and the Company will pay as incurred to each such Holder, partner, officer, director, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided however, that the indemnity agreement contained in this Section 3.9(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Holder, partner, officer, director, underwriter or controlling person of such Holder. (b) To the extent permitted by law, each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration qualifications or compliance is being effected, indemnify and hold harmless the Company, each of its directors, its officers and each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter and any other Holder selling securities under such registration statement or any of such other Holder's partners, directors or officers or any person who controls such Holder, against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, underwriter or other such Holder, or partner, director, officer or controlling person of such other Holder may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder under an instrument duly executed by such Holder and stated to be specifically for use in connection with such registration; and each such Holder will pay as incurred any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or other Holder, or partner, officer, director or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability or action if it is judicially determined that there was such a Violation; provided, however, that the indemnity agreement contained in this Section 3.9(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, further, that in no event shall any indemnity under this Section 3.9 exceed the net proceeds from the offering received by such Holder. 11. 5 (c) Promptly after receipt by an indemnified party under this Section 3.9 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 3.9, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 3.9, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 3.9. (d) If the indemnification provided for in this Section 3.9 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any losses, claims, damages or liabilities referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall to the extent permitted by applicable law contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the Violation(s) that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by a court of law by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, that in no event shall any contribution by a Holder hereunder exceed the proceeds from the offering received by such Holder. (e) The obligations of the Company and Holders under this Section 3.9 shall survive completion of any offering of Registrable Securities in a registration statement and the termination of this agreement. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. 3.10 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Section 3 may be assigned by a Holder to a transferee or assignee of Registrable Securities which (a) is a subsidiary, parent, general partner, limited partner, retired partner, member or retired member of a Holder, (b) is a Holder's family member or trust for the benefit of an individual Holder, (c) acquires at least fifteen percent (15%) of the 12. 6 Registrable Securities then outstanding (as adjusted for stock splits and combinations), or (d) acquires all of the Registrable Securities held by such holder and its affiliates; provided, however, (i) the transferor shall, within ten (10) days after such transfer, furnish to the Company written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned and (ii) such transferee shall agree to be subject to all restrictions set forth in this Agreement. 3.11 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Section 3 may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Holders of at least two-thirds (2/3) of the Registrable Securities then outstanding. Any amendment or waiver effected in accordance with this Section 3.11 shall be binding upon each Holder and the Company. By acceptance of any benefits under this Section 3, Holders of Registrable Securities hereby agree to be bound by the provisions hereunder. 3.12 LIMITATION ON SUBSEQUENT REGISTRATION RIGHTS. After the date of this Agreement, the Company shall not, without the prior written consent of the Holders of at least two-thirds (2/3) of the Registrable Securities then outstanding, enter into any agreement with any holder or prospective holder of any securities of the Company that would grant such holder registration rights senior to those granted to the Holders hereunder. 3.13 "MARKET STAND-OFF" AGREEMENT; AGREEMENT TO FURNISH INFORMATION. Each Holder hereby agrees that such Holder shall not sell or otherwise transfer or dispose of any Common Stock (or other securities) of the Company held by such Holder (other than those included in the registration) for a period specified by the representative of the underwriters of Common Stock (or other securities) of the Company not to exceed one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Securities Act; provided that, such agreement shall apply only to the Company's Initial Offering. Each Holder agrees to execute and deliver such other agreements as may be reasonably requested by the Company or the underwriter which are consistent with the foregoing or which are necessary to give further effect thereto. In addition, if requested by the Company or the representative of the underwriters of Common Stock (or other securities) of the Company, each Holder shall provide, within ten (10) days of such request, such information as may be required by the Company or such representative in connection with the completion of any public offering of the Company's securities pursuant to a registration statement filed under the Securities Act. The obligations described in this Section 3.13 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-4 or similar forms that may be promulgated in the future. The Company may impose stop-transfer instructions with respect to the shares of Common Stock (or other securities) subject to the foregoing restriction until the end of said one hundred eighty (180) day period. 3.14 RULE 144 REPORTING. With a view to making available to the Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its best efforts to: 13. 7 (a) Make and keep public information available, as those terms are understood and defined in SEC Rule 144 or any similar or analogous rule promulgated under the Securities Act, at all times after the effective date of the first registration filed by the Company for an offering of its securities to the general public; (b) File with the SEC, in a timely manner, all reports and other documents required of the Company under the Exchange Act; and (c) So long as a Holder owns by Registrable Securities, furnish to such Holder forthwith upon request: a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 of the Securities Act, and of the Exchange Act (at any time after it has become subject to such reporting requirements): a copy of the most recent annual or quarterly report of the Company; and such other reports and documents as a Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing it to sell any such securities without registration. SECTION 4. COVENANTS OF THE COMPANY 4.1 BASIC FINANCIAL INFORMATION AND REPORTING. (a) The Company will maintain true books and records of account in which full and correct entries will be made of all its business transactions pursuant to a system of accounting established in accordance with generally accepted accounting principles consistently applied, and will set aside on its books all such proper accruals and reserves as shall be required under generally accepted accounting principles consistently applied. (b) As soon as practicable after the end of each fiscal year of the Company, and in any event within one hundred twenty (120) days thereafter, the Company will furnish each Investor a balance sheet of the Company, as at the end of such fiscal year and a statement of income and a statement of cash flows of the Company, for such year, all prepared in accordance with generally accepted accounting principles consistently applied and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail. Such financial statements shall be accompanied by a report and opinion thereon by independent public accountants of national standing selected by the Company's Board of Directors. (c) The Company will furnish each Investor, as soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, and in any event within forty-five (45) days thereafter, a balance sheet of the Company as of the end of each such quarterly period, and a statement of income and a statement of cash flows of the Company for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles, with the exception that no notes need be attached to such statements and year-end audit adjustments may not have been made. (d) So long as an Investor (with its affiliates) shall own not less than ten percent (10%) of Registrable Securities then outstanding (as adjusted for stock splits and combinations) (a "Major Investor"), the Company will furnish each such Major Investor (i) at least thirty (30) days prior to the beginning of each fiscal year an annual budget and operating plans for such fiscal year (and as soon as available, any subsequent revisions thereto); and (ii) as 14. 8 soon as practicable after the end of each month, and in any event within twenty (20) days thereafter, a balance sheet of the Company as of the end of each such month, and a statement of income and a statement of cash flows of the Company for such month and for the current fiscal year to date, including a comparison to plan figures for such period, prepared in accordance with generally accepted accounting principles consistently applied, with the exception that no notes need be attached to such statements and year-end audit adjustments may not have been made. 4.2 INSPECTION RIGHTS. Each Major Investor shall have the right to visit and inspect any of the properties of the Company or any of its subsidiaries, and to discuss the affairs, finances and accounts of the Company or any of its subsidiaries with its officers, and to review such information as is reasonably requested all at such reasonable times and as often as may be reasonably requested; provided, however, that the Company shall not be obligated under this Section 4.2 with respect to a competitor of the Company or with respect to information which the Board of Directors determines in good faith is confidential and should not, therefore, be disclosed. 4.3 CONFIDENTIALITY OF RECORDS. Each Investor agrees to use, and to use its best efforts to insure that its authorized representatives use, the same degree of care as such Investor uses to protect its own confidential information to keep confidential any information furnished to it which the Company identifies as being confidential or proprietary (as long as such information is not in the public domain), except that such Investor may disclose such proprietary of confidential information to any partner, subsidiary or parent of such Investor for the purpose of evaluating its investment in the Company as long as such partner, subsidiary or parent is advised of the confidentiality provisions of this Section 4.3. 4.4 RESERVATION OF COMMON STOCK. The Company will at all times reserves and keep available, solely for issuance and delivery upon the conversion of the Preferred Stock, all Common Stock issuable from time to time upon such conversion. 4.5 STOCK VESTING. Unless otherwise approved by the Board of Directors, all stock options and other stock equivalents issued after the date of this Agreement to employees, directors, consultants and other service providers shall be subject to vesting as follows: (a) twenty-five percent (25%) of such stock shall vest at the end of the first year following the earlier of the date of issuance or such person's services commencement date with the company, and (b) seventy-five percent (75%) of such stock shall vest monthly over the remaining three (3) years. With respect to any shares of stock purchased by any such person, the Company's repurchase option shall provide that upon such person's termination of employment or service with the Company, with or without cause, the Company or its assignee (to the extent permissible under applicable securities laws and other laws) shall have the option to purchase at cost any unvested shares of stock held by such person. 4.6 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. The Company shall require all employees and consultants to execute and deliver a Proprietary Information and Inventions Agreement in the form provided to the Investors. 4.7 USE OF PROCEEDS. The proceeds from the issuance and sale of the Series A Stock, the Series B Stock, and the Series C Stock (collectively, the "Proceeds") shall be used by the 15. 9 Company for its growth, modernization or expansion. The Company shall provide each Investor which is a licensed Small Business Investment company (an "SBIC Investor") and the Small business Administration (the "SBA") reasonable access to the Company's books and records for the purpose of confirming the use of Proceeds. 4.8 BRIDGE FINANCINGS. The Company agrees that in the event it (a) issues debt convertible into or exchangeable for any class of equity securities or (b) issues debt with associated warrants or other rights exercisable for any class of equity securities, the Company shall first obtain the approval of a majority of the directors then in office (including one representative designated by either the Series A Stock or series B Stock). 4.9 CHANGE IN AUTHORIZED NUMBER OF BOARD OF DIRECTORS. The Company agrees that in the event that the Board of Directors, pursuant to Section 19 of the Company's Bylaws, as amended, changes the number of directors from seven (7), the Company shall first obtain the approval of a majority of the directors then in office (including the representative designated by the Series B Stock). 4.10 QUALIFIED SMALL BUSINESS. The Company will use reasonable efforts to comply with the reporting and recordkeeping requirements of Section 1202 of the Code, any regulations promulgated thereunder and any similar state laws and regulations. 4.11 TERMINATION OF COVENANTS. All covenants of the Company contained in Section 4 of this Agreement shall expire and terminate as to each Investor upon the earlier of (i) the effective date of the registration statement pertaining to the Initial Offering or (ii) upon (a) the acquisition of all or substantially all of the assets of the Company or (b) an acquisition of the Company by another corporation or entity by consolidation, merger or other reorganization in which the holders of the Company's outstanding voting stock immediately prior to such transaction own, immediately after such transaction, securities representing less than fifty percent (50%) of the voting power of the corporation or other entity surviving such transaction (a "Change in Control"). SECTION 5. RIGHTS OF FIRST REFUSAL 5.1 SUBSEQUENT OFFERINGS. Each Investor shall have a right of first refusal to purchase its pro rata share of all Equity Securities, as defined below, that the Company may, from time to time, propose to sell and issue after the date of this Agreement, other than the Equity Securities excluded by Section 5.6 hereof. Each Investor's pro rata share is equal to the ratio of (a) the number of shares of the Company's Common stock (including all shares of Common Stock issued or issuable upon conversion of the Shares) of which such Investor is deemed to be a holder immediately prior to the issuance of such Equity Securities to (b) the total number of shares of the Company's outstanding Common Stock (including all shares of Common Stock issuable upon conversion of the Shares or upon the exercise of any outstanding warrants or options) immediately prior to the issuance of the Equity Securities. The term "Equity Securities" shall mean (i) any Common Stock, Preferred Stock or other security of the Company, (ii) any security convertible, with or without consideration, into any Common Stock, Preferred Stock or other security (including any option to purchase such a convertible 16. 10 security), (iii) any security carrying any warrant or right to subscribe to or purchase any Common Stock, Preferred Stock or other security or (iv) any such warrant or right. 5.2 EXERCISE OF RIGHTS. If the Company proposes to issue any Equity Securities, it shall give each Investor written notice of its intention, describing the Equity Securities, the price and the terms and conditions upon which the Company proposes to issue the same. Each Investor shall have fifteen (15) days from the giving of such notice to agree to purchase its pro rata share of the Equity Securities for the price and upon the terms and conditions specified in the notice by giving written notice to the Company and stating therein the quantity of Equity Securities to be purchased. Notwithstanding the foregoing, the Company shall not be required to offer or sell such Equity Securities to any Investor who would cause the Company to be in violation of applicable federal securities laws by virtue of such offer or sale. 5.3 ISSUANCE OF EQUITY SECURITIES TO OTHER PERSONS. If the Investors fail to exercise in full the rights of first refusal, the Company shall have one hundred twenty (120) days thereafter to sell the Equity Securities in respect of which the Investor's rights were not exercised, at a price and upon general terms and conditions materially no more favorable to the purchasers thereof than specified in the Company's notice to the Investors pursuant to Section 5.2 hereof. If the Company has not sold such Equity Securities within one hundred twenty (120) days of the notice provided pursuant to Section 5.2, the Company shall not thereafter issue or sell any Equity Securities, without first offering such securities to the Investors in the manner provided above. 5.4 SALE WITHOUT NOTICE. In lieu of giving notice to the Investors prior to the issuance of Equity Securities as provided in Section 5.2, the Company may elect to give notice to the Investors within thirty (30) days after the issuance of Equity Securities. Such notice shall describe the type, price and terms of the Equity Securities. Each Investor shall have fifteen (15) days from the date of receipt of such notice to elect to purchase its pro rata share of Equity Securities (as defined in Section 5.1, and calculated before giving effect to the sale of the Equity Securities to the purchasers thereof). The closing of such sale shall occur within sixty (60) days of the date of notice to the Investors. 5.5 TERMINATION AND WAIVER OF RIGHTS OF FIRST REFUSAL. The rights of first refusal established by this Section 5 shall not apply to, and shall terminate upon the earlier of (i) effective date of the registration statement pertaining to the Company's Initial Public Offering or (ii) a Change in control. The rights of first refusal established by this Section 5 may be amended, or any provision waived with the written consent of Investors holding at least two-thirds (2/3) of the Registrable Securities held by all Investors, or as permitted by Section 6.6. 5.6 TRANSFER OF RIGHTS OF FIRST REFUSAL. The rights of first refusal of each Investor under this Section 5 may be transferred to the same parties, subject to the same restrictions as any transfer of registration rights pursuant to Section 3.10. 5.7 EXCLUDED SECURITIES. The rights of first refusal established by this Section 5 shall have no application to any of the following Equity Securities: 17. 11 (a) shares of Common Stock (and/or options, warrants or other Common Stock purchase rights issued pursuant to such options, warrants or other rights) issued or to be issued to employees, officers or directors of, or consultants or advisors to the Company or any subsidiary, pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board of Directors including one representative designated by either the Series A Stock or Series B Stock; (b) stock issued pursuant to any rights or agreements outstanding as of the date of this Agreement, options and warrants outstanding as of the date of this Agreement; and stock issued pursuant to any such rights or agreements granted after the date of this Agreement; provided that the rights of first refusal established by this Section 5 applied with respect to the initial sale or grant by the Company of such rights or agreements; (c) any Equity Securities issued for consideration other than cash pursuant to a merger, consolidation, acquisition or similar business combination; (d) shares of Common Stock issued in connection with any stock split, stock dividend or recapitalization by the Company; (e) shares of Common Stock issued upon conversion of the Shares; (f) any Equity Securities issued pursuant to any equipment leasing arrangement, or debt financing from a bank or similar financial institution; (g) any Equity Securities that are issued by the Company pursuant to a registration statement filed under the Securities Act; and (h) shares of the Company's Common Stock or Preferred Stock issued in connection with strategic transactions involving the Company and other entities, including, but not limited to, (i) joint ventures, manufacturing, marketing or distribution arrangements or (ii) technology transfer or development arrangements; provided that such strategic transactions and the issuance of shares therein, has been approved by the Company's Board of Directors including one representative designated by either the Series A or Series B Stock. SECTION 6. MISCELLANEOUS 6.1 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 6.2 SURVIVAL. The representations, warranties, covenants, and agreements made herein shall survive any investigation made by any Holder and the closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument. 18. 12 6.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of Registrable Securities from time to time: provided, however, that prior to the receipt by the Company of adequate written notice of the transfer of any Registrable Securities specifying the full name and address of the transferee, the Company may deem and treat the person listed as the holder of such shares in its records as the absolute owner and holder of such shares for all purposes, including the payment of dividends of any redemption price. 6.4 ENTIRE AGREEMENT. This Agreement, the Exhibits and Schedules hereto, the Purchase Agreement and the other documents delivered pursuant thereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 6.5 SEVERABILITY. In case any provision of the Agreement shall be invalid illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. ' 6.6 AMENDMENT AND WAIVER. (a) Except as otherwise expressly provided, this Agreement may be amended or modified only upon the written consent of the Company and the holders of two-thirds (2/3) of the Registrable Securities. (b) Except as otherwise expressly provided, the obligations of the Company and the rights of the Holders under this Agreement may be waived only with the written consent of the holders of at least two-thirds (2/3) of the Registrable Securities. (d) Notwithstanding the foregoing, this Agreement may be amended with only the written consent of the Company to include additional purchasers of Shares as "Investors," "Holders" and parties hereto. 6.7 DELAYS OR OMISSIONS. It is agreed that no delay or omission to exercise any right, power, or remedy accruing to any Holder, upon any breach, default or noncompliance of the Company under this Agreement shall impair any such right, power, or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescense therein, or of any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent, or approval of any kind or character on any Holder's part of any breach, default or noncompliance under the Agreement or any waiver on such Holder's part of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, by law, or otherwise afforded to Holders, shall be cumulative and not alternative. 6.8 NOTICES. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be noticed, (b) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then 19. 13 on the next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the party to be notified at the address as set forth on the signature pages hereof or Exhibits A, B or C hereto or at such other address as such party may designate by ten (10) days advance written notice to the other parties hereto. 6.9 Attorneys' Fees. In the event that any dispute among the parties to this Agreement should result in litigation, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 6.10 Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 6.11 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. [THIS SPACE LEFT BLANK INTENTIONALLY] 14 IN WITNESS WHEREOF, the parties hereto have executed this AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT as of the date set forth in the first paragraph hereof. COMPANY: DIGITAL IMPACT, INC. By: /s/ William C. Park ------------------------------------ Title: Chief Executive Officer --------------------------------- INVESTOR RIGHTS AGREEMENT SIGNATURE PAGE 15 FOUNDERS: /s/ WILLIAM C. PARK - ----------------------------- William C. Park /s/ GERARDO CAPIEL - ----------------------------- Gerardo Capiel 2. 16 INVESTORS: INSTITUTIONAL VENTURE PARTNERS VIII, L.P. By: Institutional Venture Management VIII, L.P. its General Partner By: /s/ RUTHANN QUINDLEN ------------------------------------------- Managing Director IVM INVESTMENT FUND VIII, LLC By: Institutional Venture Management VIII, LLC its Manager By: /s/ RUTHANN QUINDLEN ------------------------------------------- Managing Director IVM INVESTMENT FUND VIII-A, LLC By: Institutional Venture Management VIII, LLC its Manager By: /s/ RUTHANN QUINDLEN ------------------------------------------- Its: Managing Director IVP FOUNDERS FUND I, L.P. By: Institutional Venture Management VI, L.P. its General Partner By: /s/ RUTHANN QUINDLEN ------------------------------------------- General Partner INVESTOR RIGHTS AGREEMENT SIGNATURE PAGE 3. 17 DRAPER FISHER ASSOCIATES FUND IV, L.P. By: /s/ TIMOTHY DRAPER ---------------------------------- Timothy Draper Its: Director DRAPER FISHER PARTNERS IV, L.L.C. By: /s/ TIMOTHY DRAPER ---------------------------------- Timothy Draper Its: Director DRAPER RICHARDS L.P. By: Draper Richards Management Company By: ---------------------------------- William H. Draper III Its: President LABRADOR VENTURES II, L.P. By: ---------------------------------- Lawrence Kubal Its: Partner GC&H INVESTMENTS By: ---------------------------------- Its: HARTE-HANKS By: ---------------------------------- Jacques Kerrest Its: Chief Financial Officer INVESTOR RIGHTS AGREEMENT SIGNATURE PAGE 4. 18 DRAPER FISHER ASSOCIATES FUND IV, L.P. By: ---------------------------------- Timothy Draper Its: Director DRAPER FISHER PARTNERS IV, L.L.C. By: ---------------------------------- Timothy Draper Its: Director DRAPER RICHARDS L.P. By: Draper Richards Management Company By: /s/ William H. Draper III ---------------------------------- William H. Draper III Its: President LABRADOR VENTURES II, L.P. By: ---------------------------------- Lawrence Kubal Its: Partner GC&H INVESTMENTS By: ---------------------------------- Its: HARTE-HANKS By: ---------------------------------- Jacques Kerrest Its: Chief Financial Officer INVESTOR RIGHTS AGREEMENT SIGNATURE PAGE 4. 19 DRAPER FISHER ASSOCIATES FUND IV, L.P. By: /s/ TIMOTHY DRAPER ---------------------------------- Timothy Draper Its: Director DRAPER FISHER PARTNERS IV, L.L.C. By: /s/ TIMOTHY DRAPER ---------------------------------- Timothy Draper Its: Director DRAPER RICHARDS L.P. By: Draper Richards Management Company By: ---------------------------------- William H. Draper III Its: President LABRADOR VENTURES II, L.P. By: /s/ LAWRENCE KUBAL ---------------------------------- Lawrence Kubal Its: Managing Director GC&H INVESTMENTS By: ---------------------------------- Its: HARTE-HANKS By: ---------------------------------- Jacques Kerrest Its: Chief Financial Officer INVESTOR RIGHTS AGREEMENT SIGNATURE PAGE 4. 20 DRAPER FISHER ASSOCIATES FUND IV, L.P. By: ---------------------------------- Timothy Draper Its: Director DRAPER FISHER PARTNERS IV, L.L.C. By: ---------------------------------- Timothy Draper Its: Director DRAPER RICHARDS L.P. By: Draper Richards Management Company By: ---------------------------------- William H. Draper III Its: President LABRADOR VENTURES II, L.P. By: ---------------------------------- Lawrence Kubal Its: Partner GC&H INVESTMENTS By: /s/ JOHN L. CARDOZA ---------------------------------- John L. Cardoza Its: Executive Partner INVESTOR RIGHTS AGREEMENT SIGNATURE PAGE 4. 21 HARTE-HANKS, INC. By: /s/ JACQUES KERREST ---------------------------------- Jacques Kerrest Its: Chief Financial Officer --------------------------------------- Eugene DeRose --------------------------------------- Avinash Mehrotra --------------------------------------- John J. Park --------------------------------------- John L. Barnum --------------------------------------- Richard R. Keenly --------------------------------------- Ariel Poler WALTON INVESTMENT PARTNERSHIP II, LTD. By: ----------------------------------- 5. 22 HARTE-HANKS, INC. By: ---------------------------------- Jacques Kerrest Its: Chief Financial Officer /s/ EUGENE DeROSE --------------------------------------- Eugene DeRose --------------------------------------- Avinash Mehrotra --------------------------------------- John J. Park --------------------------------------- John L. Barnum --------------------------------------- Richard R. Keenly --------------------------------------- Ariel Poler WALTON INVESTMENT PARTNERSHIP II, LTD. By: ----------------------------------- 5. 23 HARTE-HANKS, INC. By: ---------------------------------- Jacques Kerrest Its: Chief Financial Officer --------------------------------------- Eugene DeRose --------------------------------------- Avinash Mehrotra --------------------------------------- John J. Park /s/ JOHN L. BARNUM --------------------------------------- John L. Barnum --------------------------------------- Richard R. Keenly --------------------------------------- Ariel Poler WALTON INVESTMENT PARTNERSHIP II, LTD. By: ----------------------------------- 5. 24 HARTE-HANKS, INC. By: ---------------------------------- Jacques Kerrest Its: Chief Financial Officer --------------------------------------- Eugene DeRose --------------------------------------- Avinash Mehrotra --------------------------------------- John J. Park --------------------------------------- John L. Barnum /s/ RICHARD R. KEENLY --------------------------------------- Richard R. Keenly --------------------------------------- Ariel Poler WALTON INVESTMENT PARTNERSHIP II, LTD. By: ----------------------------------- 5. 25 HARTE-HANKS, INC. By: ---------------------------------- Jacques Kerrest Its: Chief Financial Officer --------------------------------------- Eugene DeRose --------------------------------------- Avinash Mehrotra --------------------------------------- John J. Park --------------------------------------- John L. Barnum --------------------------------------- Richard R. Keenly --------------------------------------- Ariel Poler WALTON INVESTMENT PARTNERSHIP II, LTD. By: /s/ [Signature Illegible] ----------------------------------- 5. EX-5.1 3 FORM OF OPINION OF WILSON SONSINI 1 EXHIBIT 5.1 WILSON SONSINI GOODRICH & ROSATI Professional Corporation 650 Page Mill Road Palo Alto, CA 94304-1050 www.wsgr.com , 1999 Digital Impact, Inc. 177 Bovet Road, Suite 200 San Mateo, CA 94402 Re: Registration Statement on Form S-1 Ladies and Gentlemen: We have examined the Registration Statement on Form S-1 (File No. 333- ) to be filed by you with the Securities and Exchange Commission on , 1999 (the "Registration Statement") in connection with the registration under the Securities Act of 1933, as amended, of shares (including shares issuable upon exercise of the underwriters' over-allotment option) of Common Stock of Digital Impact, Inc. (the "Shares"). As your counsel in connection with this transaction, we have examined the proceedings proposed to be taken in connection with such sale and issuance of the Shares. It is our opinion that, upon completion of the proceedings being taken or contemplated by us, as your counsel, to be taken prior to the issuance of the Shares, and upon completion of the proceedings being taken in order to permit such transactions to be carried out in accordance with the securities laws of various states, where required, the Shares when issued and sold in the manner referred to in the Registration Statement will be legally and validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement, and further consent to the use of our name wherever appearing in the Registration Statement, including the prospectus constituting a part thereof, and any amendment thereto. Very truly yours, WILSON SONSINI GOODRICH & ROSATI Professional Corporation EX-10.1 4 FORM OF AMENDED AND RESTATED 1998 STOCK PLAN 1 EXHIBIT 10.1 DIGITAL IMPACT, INC. 1998 STOCK PLAN (AS AMENDED AND RESTATED EFFECTIVE AS OF THE DATE OF OBTAINING STOCKHOLDER APPROVAL IN _____ 1999) 1. Purposes of the Plan. The purposes of this 1998 Stock Plan are: - to attract and retain the best available personnel for positions of substantial responsibility, - provide additional incentive to Employees, Directors and Consultants, and - To promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan. (b) "Applicable Laws" means the requirements relating to the administration of stock option plans under U. S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options or Stock Purchase Rights are, or will be, granted under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means a committee of Directors appointed by the Board in accordance with Section 4 of the Plan. (f) "Common Stock" means the common stock of the Company. (g) "Company" means Digital Impact, Inc., a Delaware corporation. (h) "Consultant" means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity. 2 (i) "Director" means a member of the Board. (j) "Disability" means total and permanent disability as defined in Section 22(e)(3) of the Code. (k) "Employee" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (m) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i)If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (n) "IPO Effective Date" means the date upon which the Securities and Exchange Commission declares the initial public offering of the Company's common stock as effective. (o) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. -2- 3 (p) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (q) "Notice of Grant" means a written or electronic notice evidencing certain terms and conditions of an individual Option or Stock Purchase Right grant. The Notice of Grant is part of the Option Agreement. (r) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (s) "Option" means a stock option granted pursuant to the Plan. (t) "Option Agreement" means an agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (u) "Option Exchange Program" means a program whereby outstanding Options are surrendered in exchange for Options with a lower exercise price. (v) "Optioned Stock" means the Common Stock subject to an Option or Stock Purchase Right. (w) "Optionee" means the holder of an outstanding Option or Stock Purchase Right granted under the Plan. (x) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (y) "Plan" means this 1998 Stock Plan. (z) "Restricted Stock" means shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under Section 11 of the Plan. (aa) "Restricted Stock Purchase Agreement" means a written agreement between the Company and the Optionee evidencing the terms and restrictions applying to stock purchased under a Stock Purchase Right. The Restricted Stock Purchase Agreement is subject to the terms and conditions of the Plan and the Notice of Grant. (bb) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (cc) "Section 16(b)" means Section 16(b) of the Exchange Act. (dd) "Service Provider" means an Employee, Director or Consultant. -3- 4 (ee) "Share" means a share of the Common Stock, as adjusted in accordance with Section 13 of the Plan. (ff) "Stock Purchase Right" means the right to purchase Common Stock pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant. (gg) "Subsidiary" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is [+4,000,000] Shares, plus an annual increase to be added on January 1 of each year, beginning in 2001, equal to the lesser of (i) 1,500,000 shares, (ii) 4% of the outstanding shares on such date or (iii) a lesser amount determined by the Board. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided, however, that Shares that have actually been issued under the Plan, whether upon exercise of an Option or Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. Administration of the Plan. (a) Procedure. (i)Multiple Administrative Bodies. The Plan may be administered by different Committees with respect to different groups of Service Providers. (ii) Section 162(m). To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more "outside directors" within the meaning of Section 162(m) of the Code. (iii) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. -4- 5 (iv) Other Administration. Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value; (ii) to select the Service Providers to whom Options and Stock Purchase Rights may be granted hereunder; (iii) to determine the number of shares of Common Stock to be covered by each Option and Stock Purchase Right granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to reduce the exercise price of any Option or Stock Purchase Right to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option or Stock Purchase Right shall have declined since the date the Option or Stock Purchase Right was granted; (vii) to institute an Option Exchange Program; (viii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (x) to modify or amend each Option or Stock Purchase Right (subject to Section 15(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; -5- 6 (xi) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; (xii) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option or Stock Purchase Right previously granted by the Administrator; (xiii) to make all other determinations deemed necessary or advisable for administering the Plan. (c) Effect of Administrator's Decision. The Administrator's decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options or Stock Purchase Rights. 5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may be granted to Service Providers. Incentive Stock Options may be granted only to Employees. 6. Limitations. (a) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (b) Neither the Plan nor any Option or Stock Purchase Right shall confer upon an Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such relationship at any time, with or without cause. (c) The following limitations shall apply to grants of Options: (i) No Service Provider shall be granted, in any fiscal year of the Company, Options to purchase more than 1,000,000 Shares. -6- 7 (ii) In connection with his or her initial service, a Service Provider may be granted Options to purchase up to an additional 1,000,000 Shares which shall not count against the limit set forth in subsection (i) above. (iii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 13. (iv) If an Option is cancelled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 13), the cancelled Option will be counted against the limits set forth in subsections (i) and (ii) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 7. Term of Plan. Subject to Section 19 of the Plan, the amendment and restatement of the Plan shall become effective upon the date of stockholder approval of the Plan in ____ 1999; provided, however, that amendments that would cause the Plan or Options granted hereunder to fail to comply with applicable California "blue sky" securities laws shall not be effective until the IPO Effective Date. It shall continue in effect for a term of ten (10) years from the date of obtaining stockholder approval of the Plan in ______, 1999, unless terminated earlier under Section 15 of the Plan. 8. Term of Option. The term of each Option shall be stated in the Option Agreement. In the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Option Agreement. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. 9. Option Exercise Price and Consideration. (a) Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. -7- 8 (B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. In the case of a Nonstatutory Stock Option intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a merger or other corporate transaction. (b) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions which must be satisfied before the Option may be exercised. (c) Form of Consideration. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (v) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) any combination of the foregoing methods of payment; or -8- 9 (viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 10. Exercise of Option. (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 13 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Relationship as a Service Provider. If an Optionee ceases to be a Service Provider, other than upon the Optionee's death or Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of -9- 10 termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. If an Optionee dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Option is vested on the date of death (unless otherwise provided for in the Notice of Grant). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. The Option may be exercised by the executor or administrator of the Optionee's estate or, if none, by the person(s) entitled to exercise the Option under the Optionee's will or the laws of descent or distribution. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares an Option previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 11. Stock Purchase Rights. (a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically, by means of a Notice of Grant, of the terms, conditions and restrictions related to the offer, including the number of Shares that the offeree shall be entitled to purchase, the price to be paid, and the time within which the offeree must accept such offer. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator. (b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original price paid by the purchaser and may be paid by -10- 11 cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at a rate determined by the Administrator. (c) Other Provisions. The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. (d) Rights as a Shareholder. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 13 of the Plan. 12. Non-Transferability of Options and Stock Purchase Rights. Unless determined otherwise by the Administrator, an Option or Stock Purchase Right may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option or Stock Purchase Right transferable, such Option or Stock Purchase Right shall contain such additional terms and conditions as the Administrator deems appropriate. 13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option and Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior -11- 12 to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option or Stock Purchase Right, the Optionee shall fully vest in and have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option or Stock Purchase Right shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 14. Date of Grant. The date of grant of an Option or Stock Purchase Right shall be, for all purposes, the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. -12- 13 15. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. (b) Shareholder Approval. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. 16. Conditions Upon Issuance of Shares. (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 17. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 18. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 19. Shareholder Approval. The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under Applicable Laws. -13- 14 DIGITAL IMPACT, INC. 1998 STOCK PLAN STOCK OPTION AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. I. NOTICE OF STOCK OPTION GRANT [Optionee's Name and Address] You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Grant Number ____________________________________ Date of Grant ____________________________________ Vesting Commencement Date ____________________________________ Exercise Price per Share $___________________________________ Total Number of Shares Granted ____________________________________ Total Exercise Price $___________________________________ Type of Option: _____ Incentive Stock Option _____ Nonstatutory Stock Option Term/Expiration Date: ____________________________________ Vesting Schedule: This Option may be exercised, in whole or in part, in accordance with the following schedule: 25% of the Shares subject to the Option shall vest twelve months after the Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall vest each month thereafter, subject to the Optionee continuing to be a Service Provider on such dates. Notwithstanding anything to the contrary, upon the Optionee's ceasing to be a Service Provider due to death, the Shares subject to the Option shall immediately vest as to that number of Shares which would have become vested 15 and exercisable, pursuant to the vesting schedule listed above, if Optionee had continued to be a Service Provider until the date one year following the Optionee's death. Termination Period: This Option may be exercised for three (3) months after Optionee ceases to be a Service Provider. Upon the death or Disability of the Optionee, this Option may be exercised for one (1) year after Optionee ceases to be a Service Provider. In no event shall this Option be exercised later than the Term/Expiration Date as provided above. II. AGREEMENT 1. Grant of Option. The Plan Administrator of the Company hereby grants to the Optionee named in the Notice of Grant attached as Part I of this Agreement (the "Optionee") an option (the "Option") to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "Exercise Price"), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 15(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail. If designated in the Notice of Grant as an Incentive Stock Option ("ISO"), this Option is intended to qualify as an Incentive Stock Option under Section 422 of the Code. However, if this Option is intended to be an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonstatutory Stock Option ("NSO"). 2. Exercise of Option. (a) Right to Exercise. This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this Option Agreement. (b) Method of Exercise. This Option is exercisable by delivery of an exercise notice, in the form attached as Exhibit A (the "Exercise Notice"), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the "Exercised Shares"), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be completed by the Optionee and delivered to the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of this Option unless such issuance and exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the -2- 16 Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares. 3. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: (a) cash; or (b) check; or (c) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan. 4. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 5. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement. 6. Tax Consequences. Some of the federal tax consequences relating to this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) Exercising the Option. (i) Nonstatutory Stock Option. The Optionee may incur regular federal income tax liability upon exercise of a NSO. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price. If the Optionee is an Employee or a former Employee, the Company will be required to withhold from his or her compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. (ii) Incentive Stock Option. If this Option qualifies as an ISO, the Optionee will have no regular federal income tax liability upon its exercise, although the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price -3- 17 will be treated as an adjustment to alternative minimum taxable income for federal tax purposes and may subject the Optionee to alternative minimum tax in the year of exercise. In the event that the Optionee ceases to be an Employee but remains a Service Provider, any Incentive Stock Option of the Optionee that remains unexercised shall cease to qualify as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option on the date three (3) months and one (1) day following such change of status. (b) Disposition of Shares. (i) NSO. If the Optionee holds NSO Shares for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. (ii) ISO. If the Optionee holds ISO Shares for at least one year after exercise and two years after the grant date, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. If the Optionee disposes of ISO Shares within one year after exercise or two years after the grant date, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the excess, if any, of the lesser of (A) the difference between the Fair Market Value of the Shares acquired on the date of exercise and the aggregate Exercise Price, or (B) the difference between the sale price of such Shares and the aggregate Exercise Price. Any additional gain will be taxed as capital gain, short-term or long-term depending on the period that the ISO Shares were held. (c) Notice of Disqualifying Disposition of ISO Shares. If the Optionee sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on or before the later of (i) two years after the grant date, or (ii) one year after the exercise date, the Optionee shall immediately notify the Company in writing of such disposition. The Optionee agrees that he or she may be subject to income tax withholding by the Company on the compensation income recognized from such early disposition of ISO Shares by payment in cash or out of the current earnings paid to the Optionee. 7. Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. This agreement is governed by the internal substantive laws, but not the choice of law rules, of California. 8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS -4- 18 CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. By your signature and the signature of the Company's representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and Option Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated below. OPTIONEE: DIGITAL IMPACT, INC. - ------------------------------------- -------------------------------------- Signature By - ------------------------------------- -------------------------------------- Print Name Title - ------------------------------------- Residence Address - ------------------------------------- -5- 19 CONSENT OF SPOUSE The undersigned spouse of Optionee has read and hereby approves the terms and conditions of the Plan and this Option Agreement. In consideration of the Company's granting his or her spouse the right to purchase Shares as set forth in the Plan and this Option Agreement, the undersigned hereby agrees to be irrevocably bound by the terms and conditions of the Plan and this Option Agreement and further agrees that any community property interest shall be similarly bound. The undersigned hereby appoints the undersigned's spouse as attorney-in-fact for the undersigned with respect to any amendment or exercise of rights under the Plan or this Option Agreement. ----------------------------------- Spouse of Optionee 20 EXHIBIT A DIGITAL IMPACT, INC. 1998 STOCK PLAN EXERCISE NOTICE Digital Impact, Inc. 177 Bovet Road, Suite 200 San Mateo, California 94402 Attention: [Title] 1. Exercise of Option. Effective as of today, ________________, 199__, the undersigned ("Purchaser") hereby elects to purchase ______________ shares (the "Shares") of the Common Stock of Digital Impact, Inc. (the "Company") under and pursuant to the 1998 Stock Plan (the "Plan") and the Stock Option Agreement dated, 19___ (the "Option Agreement"). The purchase price for the Shares shall be $_____, as required by the Option Agreement. 2. Delivery of Payment. Purchaser herewith delivers to the Company the full purchase price for the Shares. 3. Representations of Purchaser. Purchaser acknowledges that Purchaser has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions. 4. Rights as Shareholder. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date of issuance, except as provided in Section 13 of the Plan. 5. Tax Consultation. Purchaser understands that Purchaser may suffer adverse tax consequences as a result of Purchaser's purchase or disposition of the Shares. Purchaser represents that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice. 21 6. Entire Agreement; Governing Law. The Plan and Option Agreement are incorporated herein by reference. This Agreement, the Plan and the Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Purchaser with respect to the subject matter hereof, and may not be modified adversely to the Purchaser's interest except by means of a writing signed by the Company and Purchaser. This agreement is governed by the internal substantive laws, but not the choice of law rules, of California. Submitted by: Accepted by: PURCHASER: DIGITAL IMPACT, INC. - --------------------------------- ---------------------------------------- Signature By - --------------------------------- ---------------------------------------- Print Name Its Address: Address: - --------------------------------- Digital Impact, Inc. - --------------------------------- 177 Bovet Road, Suite 200 San Mateo, California 94402 ------------------------------------- Date Received -2- 22 DIGITAL IMPACT, INC. 1998 STOCK PLAN NOTICE OF GRANT OF STOCK PURCHASE RIGHT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Notice of Grant. [Grantee's Name and Address] You have been granted the right to purchase Common Stock of the Company, subject to the Company's Repurchase Option and your ongoing status as a Service Provider (as described in the Plan and the attached Restricted Stock Purchase Agreement), as follows: Grant Number ________________________________ Date of Grant ________________________________ Price Per Share $_______________________________ Total Number of Shares Subject ________________________________ to This Stock Purchase Right Expiration Date: ________________________________ YOU MUST EXERCISE THIS STOCK PURCHASE RIGHT BEFORE THE EXPIRATION DATE OR IT WILL TERMINATE AND YOU WILL HAVE NO FURTHER RIGHT TO PURCHASE THE SHARES. By your signature and the signature of the Company's representative below, you and the Company agree that this Stock Purchase Right is granted under and governed by the terms and conditions of the 1998 Stock Plan and the Restricted Stock Purchase Agreement, attached hereto as Exhibit A-1, both of which are made a part of this document. You further agree to execute the attached Restricted Stock Purchase Agreement as a condition to purchasing any shares under this Stock Purchase Right. GRANTEE: DIGITAL IMPACT, INC. -------------------------------- - ---------------------------------------- --------------------------------- Signature By - ---------------------------------------- --------------------------------- Print Name Title 23 EXHIBIT A-1 DIGITAL IMPACT, INC. 1998 STOCK PLAN RESTRICTED STOCK PURCHASE AGREEMENT Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Restricted Stock Purchase Agreement. WHEREAS the Purchaser named in the Notice of Grant, (the "Purchaser") is an Service Provider, and the Purchaser's continued participation is considered by the Company to be important for the Company's continued growth; and WHEREAS in order to give the Purchaser an opportunity to acquire an equity interest in the Company as an incentive for the Purchaser to participate in the affairs of the Company, the Administrator has granted to the Purchaser a Stock Purchase Right subject to the terms and conditions of the Plan and the Notice of Grant, which are incorporated herein by reference, and pursuant to this Restricted Stock Purchase Agreement (the "Agreement"). NOW THEREFORE, the parties agree as follows: 1. Sale of Stock. The Company hereby agrees to sell to the Purchaser and the Purchaser hereby agrees to purchase shares of the Company's Common Stock (the "Shares"), at the per Share purchase price and as otherwise described in the Notice of Grant. 2. Payment of Purchase Price. The purchase price for the Shares may be paid by delivery to the Company at the time of execution of this Agreement of cash, a check, or some combination thereof. 3. Repurchase Option. (a) In the event the Purchaser ceases to be a Service Provider for any or no reason (including death or disability) before all of the Shares are released from the Company's Repurchase Option (see Section 4), the Company shall, upon the date of such termination (as reasonably fixed and determined by the Company) have an irrevocable, exclusive option (the "Repurchase Option") for a period of sixty (60) days from such date to repurchase up to that number of shares which constitute the Unreleased Shares (as defined in Section 4) at the original purchase price per share (the "Repurchase Price"). The Repurchase Option shall be exercised by the Company by delivering written notice to the Purchaser or the Purchaser's executor (with a copy to the Escrow Holder) AND, at the Company's option, (i) by delivering to the Purchaser or the Purchaser's executor a check in the amount of the aggregate Repurchase Price, or (ii) by cancelling an amount of the Purchaser's 24 indebtedness to the Company equal to the aggregate Repurchase Price, or (iii) by a combination of (i) and (ii) so that the combined payment and cancellation of indebtedness equals the aggregate Repurchase Price. Upon delivery of such notice and the payment of the aggregate Repurchase Price, the Company shall become the legal and beneficial owner of the Shares being repurchased and all rights and interests therein or relating thereto, and the Company shall have the right to retain and transfer to its own name the number of Shares being repurchased by the Company. (b) Whenever the Company shall have the right to repurchase Shares hereunder, the Company may designate and assign one or more employees, officers, directors or shareholders of the Company or other persons or organizations to exercise all or a part of the Company's purchase rights under this Agreement and purchase all or a part of such Shares. If the Fair Market Value of the Shares to be repurchased on the date of such designation or assignment (the "Repurchase FMV") exceeds the aggregate Repurchase Price of such Shares, then each such designee or assignee shall pay the Company cash equal to the difference between the Repurchase FMV and the aggregate Repurchase Price of such Shares. 4. Release of Shares From Repurchase Option. (a) Twenty-five percent (25%) of the Shares shall be released from the Company's Repurchase Option one year after the Date of Grant and 1/48th percent of the Shares at the end of each month thereafter, provided that the Purchaser does not cease to be a Service Provider prior to the date of any such release. Notwithstanding anything to the contrary, upon the Optionee's ceasing to be a Service provider due to death, the Shares shall be released from the Company's Repurchase Option as to that number of Shares which would have been released if Optionee had continued to be a Service Provider until the date one year following the date of death. (b) Any of the Shares that have not yet been released from the Repurchase Option are referred to herein as "Unreleased Shares." (c) The Shares that have been released from the Repurchase Option shall be delivered to the Purchaser at the Purchaser's request (see Section 6). 5. Restriction on Transfer. Except for the escrow described in Section 6 or the transfer of the Shares to the Company or its assignees contemplated by this Agreement, none of the Shares or any beneficial interest therein shall be transferred, encumbered or otherwise disposed of in any way until such Shares are released from the Company's Repurchase Option in accordance with the provisions of this Agreement, other than by will or the laws of descent and distribution. 6. Escrow of Shares. (a) To ensure the availability for delivery of the Purchaser's Unreleased Shares upon repurchase by the Company pursuant to the Repurchase Option, the Purchaser shall, upon execution of this Agreement, deliver and deposit with an escrow holder designated by the Company -2- 25 (the "Escrow Holder") the share certificates representing the Unreleased Shares, together with the stock assignment duly endorsed in blank, attached hereto as Exhibit A-2. The Unreleased Shares and stock assignment shall be held by the Escrow Holder, pursuant to the Joint Escrow Instructions of the Company and Purchaser attached hereto as Exhibit A-3, until such time as the Company's Repurchase Option expires. As a further condition to the Company's obligations under this Agreement, the Company may require the spouse of Purchaser, if any, to execute and deliver to the Company the Consent of Spouse attached hereto as Exhibit A-4. (b) The Escrow Holder shall not be liable for any act it may do or omit to do with respect to holding the Unreleased Shares in escrow while acting in good faith and in the exercise of its judgment. (c) If the Company or any assignee exercises the Repurchase Option hereunder, the Escrow Holder, upon receipt of written notice of such exercise from the proposed transferee, shall take all steps necessary to accomplish such transfer. (d) When the Repurchase Option has been exercised or expires unexercised or a portion of the Shares has been released from the Repurchase Option, upon request the Escrow Holder shall promptly cause a new certificate to be issued for the released Shares and shall deliver the certificate to the Company or the Purchaser, as the case may be. (e) Subject to the terms hereof, the Purchaser shall have all the rights of a shareholder with respect to the Shares while they are held in escrow, including without limitation, the right to vote the Shares and to receive any cash dividends declared thereon. If, from time to time during the term of the Repurchase Option, there is (i) any stock dividend, stock split or other change in the Shares, or (ii) any merger or sale of all or substantially all of the assets or other acquisition of the Company, any and all new, substituted or additional securities to which the Purchaser is entitled by reason of the Purchaser's ownership of the Shares shall be immediately subject to this escrow, deposited with the Escrow Holder and included thereafter as "Shares" for purposes of this Agreement and the Repurchase Option. 7. Legends. The share certificate evidencing the Shares, if any, issued hereunder shall be endorsed with the following legend (in addition to any legend required under applicable state securities laws): THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. 8. Adjustment for Stock Split. All references to the number of Shares and the purchase price of the Shares in this Agreement shall be appropriately adjusted to reflect any stock split, stock -3- 26 dividend or other change in the Shares which may be made by the Company after the date of this Agreement. 9. Tax Consequences. The Purchaser has reviewed with the Purchaser's own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. The Purchaser is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. The Purchaser understands that the Purchaser (and not the Company) shall be responsible for the Purchaser's own tax liability that may arise as a result of the transactions contemplated by this Agreement. The Purchaser understands that Section 83 of the Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary income the difference between the purchase price for the Shares and the Fair Market Value of the Shares as of the date any restrictions on the Shares lapse. In this context, "restriction" includes the right of the Company to buy back the Shares pursuant to the Repurchase Option. The Purchaser understands that the Purchaser may elect to be taxed at the time the Shares are purchased rather than when and as the Repurchase Option expires by filing an election under Section 83(b) of the Code with the IRS within 30 days from the date of purchase. The form for making this election is attached as Exhibit A-5 hereto. THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON THE PURCHASER'S BEHALF. 10. General Provisions. (a) This Agreement shall be governed by the internal substantive laws, but not the choice of law rules of California. This Agreement, subject to the terms and conditions of the Plan and the Notice of Grant, represents the entire agreement between the parties with respect to the purchase of the Shares by the Purchaser. Subject to Section 15(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Agreement, the terms and conditions of the Plan shall prevail. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Agreement. (b) Any notice, demand or request required or permitted to be given by either the Company or the Purchaser pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. mail, First Class with postage prepaid, and addressed to the parties at the addresses of the parties set forth at the end of this Agreement or such other address as a party may request by notifying the other in writing. Any notice to the Escrow Holder shall be sent to the Company's address with a copy to the other party hereto. -4- 27 (c) The rights of the Company under this Agreement shall be transferable to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company's successors and assigns. The rights and obligations of the Purchaser under this Agreement may only be assigned with the prior written consent of the Company. (d) Either party's failure to enforce any provision of this Agreement shall not in any way be construed as a waiver of any such provision, nor prevent that party from thereafter enforcing any other provision of this Agreement. The rights granted both parties hereunder are cumulative and shall not constitute a waiver of either party's right to assert any other legal remedy available to it. (e) The Purchaser agrees upon request to execute any further documents or instruments necessary or desirable to carry out the purposes or intent of this Agreement. (f) PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO SECTION 4 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED OR PURCHASING SHARES HEREUNDER). PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE PURCHASER'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. By Purchaser's signature below, Purchaser represents that he or she is familiar with the terms and provisions of the Plan, and hereby accepts this Agreement subject to all of the terms and provisions thereof. Purchaser has reviewed the Plan and this Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understands all provisions of this Agreement. Purchaser agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Agreement. Purchaser further agrees to notify the Company upon any change in the residence indicated in the Notice of Grant. DATED: --------------------- PURCHASER: DIGITAL IMPACT, INC. - --------------------------------- ---------------------------------------- Signature By - --------------------------------- ---------------------------------------- Print Name Title -5- 28 EXHIBIT A-2 ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED I, __________________________, hereby sell, assign and transfer unto (__________) shares of the Common Stock of Digital Impact, Inc., standing in my name of the books of said corporation represented by Certificate No. _____ herewith and do hereby irrevocably constitute and appoint to transfer the said stock on the books of the within named corporation with full power of substitution in the premises. This Stock Assignment may be used only in accordance with the Restricted Stock Purchase Agreement (the "Agreement") between________________________ and the undersigned dated ______________, 19__. Dated: _______________, 19 Signature:_________________________________ INSTRUCTIONS: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Company to exercise the Repurchase Option, as set forth in the Agreement, without requiring additional signatures on the part of the Purchaser. 29 EXHIBIT A-3 JOINT ESCROW INSTRUCTIONS ______, 19___ Corporate Secretary Digital Impact, Inc. 177 Bovet Road, Suite 200 San Mateo, California 94402 Dear: As Escrow Agent for both Digital Impact, Inc., a Delaware corporation (the "Company"), and the undersigned purchaser of stock of the Company (the "Purchaser"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Restricted Stock Purchase Agreement ("Agreement") between the Company and the undersigned, in accordance with the following instructions: 1. In the event the Company and/or any assignee of the Company (referred to collectively as the "Company") exercises the Company's Repurchase Option set forth in the Agreement, the Company shall give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Company. Purchaser and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 2. At the closing, you are directed (a) to date the stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Company or its assignee, against the simultaneous delivery to you of the purchase price (by cash, a check, or some combination thereof) for the number of shares of stock being purchased pursuant to the exercise of the Company's Repurchase Option. 3. Purchaser irrevocably authorizes the Company to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as defined in the Agreement. Purchaser does hereby irrevocably constitute and appoint you as Purchaser's attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated, including but not limited to the filing with any applicable state blue sky authority of any required applications for consent to, or notice of transfer of, the securities. Subject to the provisions of this paragraph 3, Purchaser shall exercise all rights and privileges of a shareholder of the Company while the stock is held by you. 30 4. Upon written request of the Purchaser, but no more than once per calendar year, unless the Company's Repurchase Option has been exercised, you shall deliver to Purchaser a certificate or certificates representing so many shares of stock as are not then subject to the Company's Repurchase Option. Within 90 days after Purchaser ceases to be a Service Provider, you shall deliver to Purchaser a certificate or certificates representing the aggregate number of shares held or issued pursuant to the Agreement and not purchased by the Company or its assignees pursuant to exercise of the Company's Repurchase Option. 5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Purchaser, you shall deliver all of the same to Purchaser and shall be discharged of all further obligations hereunder. 6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You shall not be liable for the outlawing of any rights under the statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. You shall be entitled to employ such legal counsel and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. -2- 31 12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be an officer or agent of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company shall appoint a successor Escrow Agent. 13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 15. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties thereunto entitled at the following addresses or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto. COMPANY: Digital Impact, Inc. 177 Bovet Road, Suite 200 San Mateo, California 94402 PURCHASER: ----------------------------- ----------------------------- ----------------------------- ESCROW AGENT: Corporate Secretary Digital Impact, Inc. 177 Bovet Road, Suite 200 San Mateo, California 94402 16. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. -3- 32 18. These Joint Escrow Instructions shall be governed by, and construed and enforced in accordance with, the internal substantive laws, but not the choice of law rules, of California. Very truly yours, DIGITAL IMPACT, INC. ---------------------------- By ---------------------------- Title PURCHASER: ---------------------------- Signature ---------------------------- Print Name ESCROW AGENT: - -------------------------------- Corporate Secretary -4- 33 EXHIBIT A-4 CONSENT OF SPOUSE I, ____________________, spouse of ___________________, have read and approve the foregoing Restricted Stock Purchase Agreement (the "Agreement"). In consideration of the Company's grant to my spouse of the right to purchase shares of Digital Impact, Inc., as set forth in the Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights in said Agreement or any shares issued pursuant thereto under the community property laws or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement. Dated: _______________, 19___ ---------------------------- Signature of Spouse 34 EXHIBIT A-5 ELECTION UNDER SECTION 83(b) OF THE INTERNAL REVENUE CODE OF 1986 The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income for the current taxable year the amount of any compensation taxable to taxpayer in connection with his or her receipt of the property described below: 1. The name, address, taxpayer identification number and taxable year of the undersigned are as follows: NAME: TAXPAYER: SPOUSE: ADDRESS: IDENTIFICATION NO.: TAXPAYER: SPOUSE: TAXABLE YEAR: 2. The property with respect to which the election is made is described as follows: shares (the "Shares") of the Common Stock of Digital Impact, Inc. (the "Company"). 3. The date on which the property was transferred is: , 19__. 4. The property is subject to the following restrictions: The Shares may be repurchased by the Company, or its assignee, upon certain events. This right lapses with regard to a portion of the Shares based on the continued performance of services by the taxpayer over time. 5. The fair market value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: $---------------. 6. The amount (if any) paid for such property is: $---------------. The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned's receipt of the above-described property. The transferee of such property is the person performing the services in connection with the transfer of said property. The undersigned understands that the foregoing election may not be revoked except with the consent of the Commissioner. Dated:___________________, 19____ _____________________________________________ Taxpayer The undersigned spouse of taxpayer joins in this election. Dated:___________________, 19____ _____________________________________________ Spouse of Taxpayer -2- EX-10.2 5 FORM OF 1999 EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.2 DIGITAL IMPACT, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN 1. Purpose. The purpose of the Plan is to provide employees of the Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. (a) "Board" shall mean the Board of Directors of the Company. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. (c) "Common Stock" shall mean the common stock of the Company. (d) "Company" shall mean Digital Impact, Inc. and any Designated Subsidiary of the Company. (e) "Compensation" shall mean all base straight time gross earnings and commissions, exclusive of payments for overtime, shift premium, incentive compensation, incentive payments, bonuses and other compensation. (f) "Designated Subsidiary" shall mean any Subsidiary which has been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (g) "Employee" shall mean any individual who is an Employee of the Company for tax purposes whose customary employment with the Company is at least twenty (20) hours per week and more than five (5) months in any calendar year. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated on the 91st day of such leave. (h) "Enrollment Date" shall mean the first Trading Day of each Offering Period. (i) "Exercise Date" shall mean the last Trading Day of each Purchase Period. (j) "Fair Market Value" shall mean, as of any date, the value of Common Stock determined as follows: 2 (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day on the date of such determination, as reported in The Wall Street Journal or such other source as the Board deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean of the closing bid and asked prices for the Common Stock on the date of such determination, as reported in The Wall Street Journal or such other source as the Board deems reliable; (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board; or (iv) For purposes of the Enrollment Date of the first Offering Period under the Plan, the Fair Market Value shall be the initial price to the public as set forth in the final prospectus included within the registration statement in Form S-1 filed with the Securities and Exchange Commission for the initial public offering of the Company's Common Stock (the "Registration Statement"). (k) "Offering Periods" shall mean the periods of approximately twelve (12) months during which an option granted pursuant to the Plan may be exercised, commencing on the first Trading Day on or after June 1 and December 1 of each year and terminating on the last Trading Day in the periods ending twelve months later; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or before November 30, 2000. The duration and timing of Offering Periods may be changed pursuant to Section 4 of this Plan. (l) "Plan" shall mean this 1999 Employee Stock Purchase Plan. (m) "Purchase Period" shall mean the approximately six month period commencing after one Exercise Date and ending with the next Exercise Date, except that the first Purchase Period of any Offering Period shall commence on the Enrollment Date and end with the next Exercise Date. (n) "Purchase Price" shall mean 85% of the Fair Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower; provided however, that the Purchase Price may be adjusted by the Board pursuant to Section 20. (o) "Reserves" shall mean the number of shares of Common Stock covered by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. 3 (p) "Subsidiary" shall mean a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. (q) "Trading Day" shall mean a day on which national stock exchanges and the Nasdaq System are open for trading. 3. Eligibility. (a) Any Employee who shall be employed by the Company on a given Enrollment Date shall be eligible to participate in the Plan. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) to the extent that, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own capital stock of the Company and/or hold outstanding options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value of all classes of the capital stock of the Company or of any Subsidiary, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by consecutive, overlapping Offering Periods with a new Offering Period commencing on the first Trading Day on or after June 1 and December 1 each year, or on such other date as the Board shall determine, and continuing thereafter until terminated in accordance with Section 20 hereof; provided, however, that the first Offering Period under the Plan shall commence with the first Trading Day on or after the date on which the Securities and Exchange Commission declares the Company's Registration Statement effective and ending on the last Trading Day on or before November 30, 2000. The Board shall have the power to change the duration of Offering Periods (including the commencement dates thereof) with respect to future offerings without shareholder approval if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected thereafter. 5. Participation. (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deductions in the form of Exhibit A to this Plan and filing it with the Company's payroll office fifteen days prior to the applicable Enrollment Date. (b) Payroll deductions for a participant shall commence on the first payroll following the Enrollment Date and shall end on the last payroll in the Offering Period to which such authorization is applicable, unless sooner terminated by the participant as provided in Section 10 hereof. 4 6. Payroll Deductions. (a) At the time a participant files his or her subscription agreement, he or she shall elect to have payroll deductions made on each pay day during the Offering Period in an amount not exceeding fifteen percent (15%) of the Compensation which he or she receives on each pay day during the Offering Period. (b) All payroll deductions made for a participant shall be credited to his or her account under the Plan and shall be withheld in whole percentages only. A participant may not make any additional payments into such account. (c) A participant may discontinue his or her participation in the Plan as provided in Section 10 hereof, or may increase or decrease the rate of his or her payroll deductions during the Offering Period by completing or filing with the Company a new subscription agreement authorizing a change in payroll deduction rate. The Board may, in its discretion, limit the number of participation rate changes during any Offering Period. The change in rate shall be effective with the first full payroll period following five (5) business days after the Company's receipt of the new subscription agreement unless the Company elects to process a given change in participation more quickly. A participant's subscription agreement shall remain in effect for successive Offering Periods unless terminated as provided in Section 10 hereof. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's payroll deductions may be decreased to zero percent (0%) at any time during a Purchase Period. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Purchase Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10 hereof. (e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Employee. 7. Grant of Option. On the Enrollment Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on each Exercise Date during such Offering Period (at the applicable Purchase Price) up to a number of shares of the Company's Common Stock determined by dividing such Employee's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the applicable Purchase Price; provided that in no event shall an Employee be permitted to purchase during each Purchase Period more than 5,000 shares of the Company's Common Stock (subject to any adjustment pursuant to Section 19), and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 12 hereof. The Board may, for future 5 Offering Periods, increase or decrease, in its absolute discretion, the maximum number of shares of the Company's Common Stock an Employee may purchase during each Purchase Period of such Offering Period. Exercise of the option shall occur as provided in Section 8 hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The option shall expire on the last day of the Offering Period. 8. Exercise of Option. (a) Unless a participant withdraws from the Plan as provided in Section 10 hereof, his or her option for the purchase of shares shall be exercised automatically on the Exercise Date, and the maximum number of full shares subject to option shall be purchased for such participant at the applicable Purchase Price with the accumulated payroll deductions in his or her account. No fractional shares shall be purchased; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full share shall be retained in the participant's account for the subsequent Purchase Period or Offering Period, subject to earlier withdrawal by the participant as provided in Section 10 hereof. Any other monies left over in a participant's account after the Exercise Date shall be returned to the participant. During a participant's lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. (b) If the Board determines that, on a given Exercise Date, the number of shares with respect to which options are to be exercised may exceed (i) the number of shares of Common Stock that were available for sale under the Plan on the Enrollment Date of the applicable Offering Period, or (ii) the number of shares available for sale under the Plan on such Exercise Date, the Board may in its sole discretion (x) provide that the Company shall make a pro rata allocation of the shares of Common Stock available for purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Exercise Date, and continue all Offering Periods then in effect, or (y) provide that the Company shall make a pro rata allocation of the shares available for purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Exercise Date, and terminate any or all Offering Periods then in effect pursuant to Section 20 hereof. The Company may make pro rata allocation of the shares available on the Enrollment Date of any applicable Offering Period pursuant to the preceding sentence, notwithstanding any authorization of additional shares for issuance under the Plan by the Company's shareholders subsequent to such Enrollment Date. 9. Delivery. As promptly as practicable after each Exercise Date on which a purchase of shares occurs, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his or her option. 10. Withdrawal. (a) A participant may withdraw all but not less than all the payroll deductions credited to his or her account and not yet used to exercise his or her option under the Plan at any 6 time by giving written notice to the Company in the form of Exhibit B to this Plan. All of the participant's payroll deductions credited to his or her account shall be paid to such participant promptly after receipt of notice of withdrawal and such participant's option for the Offering Period shall be automatically terminated, and no further payroll deductions for the purchase of shares shall be made for such Offering Period. If a participant withdraws from an Offering Period, payroll deductions shall not resume at the beginning of the succeeding Offering Period unless the participant delivers to the Company a new subscription agreement. (b) A participant's withdrawal from an Offering Period shall not have any effect upon his or her eligibility to participate in any similar plan which may hereafter be adopted by the Company or in succeeding Offering Periods which commence after the termination of the Offering Period from which the participant withdraws. 11. Termination of Employment. Upon a participant's ceasing to be an Employee, for any reason, he or she shall be deemed to have elected to withdraw from the Plan and the payroll deductions credited to such participant's account during the Offering Period but not yet used to exercise the option shall be returned to such participant or, in the case of his or her death, to the person or persons entitled thereto under Section 15 hereof, and such participant's option shall be automatically terminated. The preceding sentence notwithstanding, a participant who receives payment in lieu of notice of termination of employment shall be treated as continuing to be an Employee for the participant's customary number of hours per week of employment during the period in which the participant is subject to such payment in lieu of notice. 12. Interest. No interest shall accrue on the payroll deductions of a participant in the Plan. 13. Stock. (a) Subject to adjustment upon changes in capitalization of the Company as provided in Section 19 hereof, the maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be 700,000 shares, plus an annual increase to be added on each anniversary date of the adoption of the Plan equal to the lesser of (i) 700,000 shares, (ii) 2% of the outstanding shares on such date or (iii) a lesser amount determined by the Board. (b) The participant shall have no interest or voting right in shares covered by his option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan shall be registered in the name of the participant or in the name of the participant and his or her spouse. 14. Administration. The Plan shall be administered by the Board or a committee of members of the Board appointed by the Board. The Board or its committee shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine 7 eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Board or its committee shall, to the full extent permitted by law, be final and binding upon all parties. 15. Designation of Beneficiary. (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such participant of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to exercise of the option. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 16. Transferability. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 15 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds from an Offering Period in accordance with Section 10 hereof. 17. Use of Funds. All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 18. Reports. Individual accounts shall be maintained for each participant in the Plan. Statements of account shall be given to participating Employees at least annually, which statements shall set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. 19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the Reserves, the maximum number of shares each participant may purchase each Purchase Period (pursuant to Section 7), as well as the price per share and the number of shares of 8 Common Stock covered by each option under the Plan which has not yet been exercised shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and shall terminate immediately prior to the consummation of such proposed dissolution or liquidation, unless provided otherwise by the Board. The New Exercise Date shall be before the date of the Company's proposed dissolution or liquidation. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. (c) Merger or Asset Sale. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the option, any Purchase Periods then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date") and any Offering Periods then in progress shall end on the New Exercise Date. The New Exercise Date shall be before the date of the Company's proposed sale or merger. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. 20. Amendment or Termination. (a) The Board of Directors of the Company may at any time and for any reason terminate or amend the Plan. Except as provided in Section 19 hereof, no such termination can affect options previously granted, provided that an Offering Period may be terminated by the Board of Directors on any Exercise Date if the Board determines that the termination of the Offering Period or the Plan is in the best interests of the Company and its shareholders. Except as provided in Section 19 and this Section 20 hereof, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. To the extent necessary to 9 comply with Section 423 of the Code (or any successor rule or provision or any other applicable law, regulation or stock exchange rule), the Company shall obtain shareholder approval in such a manner and to such a degree as required. (b) Without shareholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. (c) In the event the Board determines that the ongoing operation of the Plan may result in unfavorable financial accounting consequences, the Board may, in its discretion and, to the extent necessary or desirable, modify or amend the Plan to reduce or eliminate such accounting consequence including, but not limited to: (i) altering the Purchase Price for any Offering Period including an Offering Period underway at the time of the change in Purchase Price; (ii) shortening any Offering Period so that Offering Period ends on a new Exercise Date, including an Offering Period underway at the time of the Board action; and (iii) allocating shares. Such modifications or amendments shall not require stockholder approval or the consent of any Plan participants. 21. Notices. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 22. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. 10 As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 23. Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the shareholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 20 hereof. 24. Automatic Transfer to Low Price Offering Period. To the extent permitted by any applicable laws, regulations, or stock exchange rules if the Fair Market Value of the Common Stock on any Exercise Date in an Offering Period is lower than the Fair Market Value of the Common Stock on the Enrollment Date of such Offering Period, then all participants in such Offering Period shall be automatically withdrawn from such Offering Period immediately after the exercise of their option on such Exercise Date and automatically re-enrolled in the immediately following Offering Period as of the first day thereof. 11 EXHIBIT A DIGITAL IMPACT, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT _____ Original Application Enrollment Date: ___________ _____ Change in Payroll Deduction Rate _____ Change of Beneficiary(ies) 1. ____________________ hereby elects to participate in the Digital Impact, Inc. 1999 Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and subscribes to purchase shares of the Company's Common Stock in accordance with this Subscription Agreement and the Employee Stock Purchase Plan. 2. I hereby authorize payroll deductions from each paycheck in the amount of ____% of my Compensation on each payday (up to 20%) during the Offering Period in accordance with the Employee Stock Purchase Plan. (Please note that no fractional percentages are permitted.) 3. I understand that said payroll deductions shall be accumulated for the purchase of shares of Common Stock at the applicable Purchase Price determined in accordance with the Employee Stock Purchase Plan. I understand that if I do not withdraw from an Offering Period, any accumulated payroll deductions will be used to automatically exercise my option. 4. I have received a copy of the complete Employee Stock Purchase Plan. I understand that my participation in the Employee Stock Purchase Plan is in all respects subject to the terms of the Plan. I understand that my ability to exercise the option under this Subscription Agreement is subject to shareholder approval of the Employee Stock Purchase Plan. 5. Shares purchased for me under the Employee Stock Purchase Plan should be issued in the name(s) of (Employee or Employee and Spouse only): 6. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Enrollment Date (the first day of the Offering Period during which I purchased such shares) or one year after the Exercise Date, I will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were purchased by me over the price which I paid for the shares. I hereby agree to notify the Company in writing 12 within 30 days after the date of any disposition of my shares and I will make adequate provision for Federal, state or other tax withholding obligations, if any, which arise upon the disposition of the Common Stock. The Company may, but will not be obligated to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by me. If I dispose of such shares at any time after the expiration of the 2-year and 1-year holding periods, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares, or (2) 15% of the fair market value of the shares on the first day of the Offering Period. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gain. 7. I hereby agree to be bound by the terms of the Employee Stock Purchase Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Employee Stock Purchase Plan. 8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Employee Stock Purchase Plan: NAME: (Please print)___________________________________________________________ (First) (Middle) (Last) _____________________________ _____________________________ Relationship _____________________________ (Address) 13 Employee's Social Security Number: ------------------------------------ Employee's Address: ------------------------------------ ------------------------------------ ------------------------------------ I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME. Dated: ------------------------------ ----------------------------------- Signature of Employee ----------------------------------- Spouse's Signature (If beneficiary other than spouse) 14 EXHIBIT B DIGITAL IMPACT, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL The undersigned participant in the Offering Period of the Digital Impact, Inc. 1999 Employee Stock Purchase Plan which began on ____________, ______ (the "Enrollment Date") hereby notifies the Company that he or she hereby withdraws from the Offering Period. He or she hereby directs the Company to pay to the undersigned as promptly as practicable all the payroll deductions credited to his or her account with respect to such Offering Period. The undersigned understands and agrees that his or her option for such Offering Period will be automatically terminated. The undersigned understands further that no further payroll deductions will be made for the purchase of shares in the current Offering Period and the undersigned shall be eligible to participate in succeeding Offering Periods only by delivering to the Company a new Subscription Agreement. Name and Address of Participant: -------------------------------- -------------------------------- -------------------------------- Signature: -------------------------------- Date: --------------------------- EX-10.4 6 EMPLOYMENT AGREEMENT WITH DAVID OPPENHEIMER 1 EXHIBIT 10.4 DIGITAL IMPACT, INC. July 29, 1999 David Oppenheimer 35 Oak Valley Drive Novato, CA 94947 Re: Employment Agreement Dear David: Digital Impact, Inc. and/or its affiliates (collectively, the "Company") is pleased to offer you the position of Chief Financial Officer on the terms set forth below (the "Agreement"), beginning on August 2, 1999. As Chief Financial Officer, your initial responsibilities will include external financing and investor relations, mergers and acquisitions, financial planning and budgeting, treasury and cash management, human resources and administration, and such other duties as may be assigned to you by the Company. You will initially report to William Park, in his capacity as CEO. As a Company employee, you will be expected to abide by all of the Company's policies and procedures, and acknowledge in writing that you have received and read the Company's employee handbook. Your initial base salary will be two hundred and twenty-five thousand dollars ($225,000.00) per year, less payroll deductions and withholdings. As an exempt employee, you will be paid on a salary, not hourly, basis. Therefore, you will be "exempt" from overtime pay. You will be paid semi-monthly. In addition, the Company will also provide you with sick leave, personal time, ten (10) days of paid vacation time, and medical, dental, and other benefits coverage consistent with Company policy for exempt employees. Of course, the Company reserves the right to modify your job duties, compensation and benefits from time to time, as it deems necessary. In compliance with all applicable regulatory requirements, and subject to approval by the Board of Directors, you will also receive an incentive stock option to purchase two hundred and seventy-five thousand (275,000) shares (post 2-1 split) of Common Stock of the Company (the "Option"). The shares subject to the Option will vest over a four (4) year period, with 6.25% of such shares vesting at the end of the first three (3) months of employment, and the remaining shares vesting monthly thereafter in accordance with the Company's standard policy. The exercise price of the Option will be the fair market value of the Common Stock on the date of grant as determined in good faith by the Board of Directors. As a Company employee, you will be expected to abide by the Company rules and regulations, acknowledge in writing that you have read the Company's Employee Handbook, and sign and comply with the Proprietary Information and Inventions Agreement (attached hereto as -1- 2 Exhibit A), which prohibits unauthorized use or disclosure of Company proprietary information and which PROHIBITS, WITHOUT THE COMPANY'S EXPRESS WRITTEN CONSENT, ENGAGEMENT IN ANY EMPLOYMENT OR BUSINESS ACTIVITY OTHER THAN FOR THE COMPANY. Your employment with the Company is at-will. This means that you may resign your employment at any time simply by notifying the Company. Likewise, the Company may terminate your employment relationship at any time and for any reason whatsoever, with or without cause or advanced notice, simply by notifying you. This at-will employment relationship cannot be changed except in writing signed by a duly authorized officer of the Company. If the Company terminates your employment without Cause (as defined below) during the first year of your employment, you will receive, as severance, continued payment of your base salary and health care benefits for a period of three (3) months. In the event (a) the Company undergoes a Change of Control (as defined below) and (b) within twelve (12) months of the Change of Control either your employment is terminated without Cause or you terminate your employment with Good Reason (as defined below), then 50% of the unvested shares subject to the Option shall have their vesting accelerated in full so as to become one hundred percent (100%) vested and immediately exercisable in full as of the date of any such termination. In the event of such termination without Cause or with Good Reason, you will not be entitled to any additional compensation or benefits beyond what is provided in this paragraph. If you resign without Good Reason or your employment is terminated for Cause, all compensation and benefits will cease immediately, and you will receive no severance benefits. For the purposes of this Agreement, "Cause" shall mean misconduct, including: (i) conviction of any felony or any crime involving moral turpitude or dishonesty; (ii) participation in a fraud or act of dishonesty against the Company; (iii) willful breach of the Company's policies; (iv) intentional damage to the Company's property; (v) material breach of this Agreement or your Proprietary Information and Inventions Agreement; or (vi) conduct by you which in the good faith and reasonable determination of the Company's Board of Directors demonstrates unacceptable job performance or gross unfitness to serve provided that you have had fair notice of such cause and do not substantially cure or mitigate its consequences to the reasonable satisfaction of the Company as determined by the Company's Board of Directors within thirty (30) days after the Company notifies you in writing of the cause. For the purposes of this Agreement, "Good Reason" shall mean: (i) reduction of your rate of salary compensation as in effect immediately prior to a Change of Control; (ii) change in your responsibilities, authority, title or office resulting in diminution of position, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith which is remedied by the Company promptly after notice thereof is given by you, provided that following a Change of Control, your continuation as Chief Financial Officer of a division or subsidiary of the surviving corporation shall be deemed a diminution of position; (iii) request that you relocate to a worksite that is more than 35 miles from your prior worksite, unless you accept such relocation opportunity; or (iv) failure or refusal of a successor company to assume the Company's obligations under this Agreement. - 2 - 3 For purposes of this Agreement, a "Change of Control" will mean: (a) any reorganization, consolidation or merger of the Company in which the Company is not the surviving corporation or pursuant to which shares of the Company's voting stock would be converted into cash, securities or other property, in either case other than a merger of the Company in connection with a re-incorporation transaction or other reorganization transaction as a result of which the holders of the Company's voting stock immediately prior to the merger have the same proportionate ownership of voting stock of the surviving corporation or other surviving entity immediately after the merger; (b) the sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company; (c) approval by the stockholders of the Company of a plan or proposal for the liquidation or dissolution of the Company; or (d) any "person" (as defined in Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 50% or more of the Company's outstanding voting stock; provided, however, that "person" will not include any holder of shares of the Company's preferred stock on the date of this Agreement. This Agreement, including Exhibit A, constitutes the complete, final and exclusive embodiment of the entire agreement between you and the Company with respect to the terms and conditions of your employment. This Agreement is entered into without reliance upon any promise, warranty or representation, written or oral, other than those expressly contained herein, and it supersedes any other such promises, warranties, representations or agreements. It may not be amended or modified except by a written instrument signed by you and a duly authorized officer of the Company. If any provision of this Agreement is determined to be invalid or unenforceable, in whole or in part, this determination will not affect any other provision of this Agreement. This Agreement shall be construed and interpreted in accordance with the laws of the State of California. As required by law, this offer of employment is subject to satisfactory proof of your right to work in the United States. To indicate your acceptance of our offer under the terms described above, please sign below and return this letter to me. We look forward to your favorable reply, and to a productive and enjoyable work relationship. Very truly yours, DIGITAL IMPACT, INC. By: /s/ WILLIAM C. PARK --------------------------------- William C. Park, CEO Accepted by: /s/ DAVID OPPENHEIMER ------------------------ -3- EX-10.5 7 EMPLOYMENT AGREEMENT WITH ALAN FLOHR 1 EXHIBIT 10.5 March 12, 1999 Alan Flohr 22 Brae Burn Glastonbury, CT 06033 Re: Employment Agreement Dear Al: Digital Impact, Inc. and/or its affiliates (collectively, the "Company") is pleased to offer you the position of Vice President of Sales on the terms set forth below (the "Agreement"), beginning on April 1, 1999. As Vice President of Sales, your initial responsibilities will be to manage and grow the Sales department, develop and implement sales strategies, accomplish sales objectives and revenue targets, and such other duties as may be assigned to you by the Company. You will initially report to William Park, in his capacity as President. As a Company employee, you will be expected to abide by all of the Company's policies and procedures, and acknowledge in writing that you have received and read the Company's employee handbook. Your initial base salary will be one hundred and sixty-five thousand dollars ($165,000.00) per year, less payroll deductions and withholdings. As an exempt employee, you will be paid on a salary, not hourly basis. Therefore, you will be "exempt" from overtime pay. You will be paid two times per month. In addition, the Company will also provide you with sick leave, personal time, ten (10) days of paid vacation time, and medical, dental, and other benefits coverage consistent with Company policy for exempt employees. Of course, the Company reserves the right to modify your job duties, compensation and benefits from time to time, as it deems necessary. In addition to your base salary, you will be eligible to participate in the Company's standard sales commission program as outlined in the attached Schedule A. Under the terms of the attached schedule, you may receive a sales commission of eighty-five thousand dollars ($85,000.00) upon achieving your sales quota. Sales commissions will be paid quarterly based on all sales collected in that quarter. The sales commission schedule may be adjusted at the Company's discretion on a quarterly basis. In compliance with all applicable regulatory requirements, you will receive an incentive stock option to purchase one hundred and fifty thousand (150,000) shares of Common Stock of the Company. The shares subject to the option will vest over a four-year period with 12.5% of such shares vesting at the end of six months and 1/42 of the remaining shares vesting monthly thereafter in accordance with the Company's standard policy. The exercise price of the option will be the fair market value of the Common Stock on the date of grant as determined in good faith by the Board of Directors. In the event that your employment is discontinued without "Cause", you will be entitled to a severance package of six (6) months base salary. For this purpose, "Cause" shall mean: -1- 2 (i) commission of any criminal act involving moral turpitude or dishonesty, (ii) any willful act or omission that causes material injury to the Company, (iii) habitual abuse of chemical substance or alcohol, (iv) inability to perform your duties to the reasonable expectation of the President, CEO or the Board of Directors, (v) willful and material breach of the Company's policies, or (vii) material breach of your Proprietary Information and Inventions Assignment Agreement. In addition, we are extending additional financial support for your relocation to the Bay Area. The relocation benefits available to you are described below: 1. At the Company's option, the Company will (i) guarantee a loan of up to two hundred thousand dollars ($200,000.00) with an agreed-upon bank or lending institution. 2. Moving of typical and customary household goods to your primary residence in California, including one automobile up to six thousand dollars ($6,000.00). 3. Reimbursement for any points, closing costs, commission, for your relocation as needed up to a maximum of twenty-five thousand dollars ($25,000.00). 4. Storage of household goods for up to ninety (90) days. 5. Temporary living accommodations for a period of up to ninety (90) days at accommodations selected by the Company. 6. Substitute automotive transportation for a period of up to thirty (30) days or until your personal vehicle arrives, whichever is sooner. 7. Payment of reasonable expenses related to two house-hunting trips to the Bay Area with your spouse. This would include round-trip airfare, rental car, and per diem meal expenses. Should you voluntarily terminate your employment with Digital Impact, or should you be terminated by Digital Impact for cause within one year of the date you start your employment with the Company, you will be responsible for the repayment to Digital Impact of all payments made on your behalf as listed above. As a Company employee, you will be expected to abide by the Company rules and regulations, acknowledge in writing that you have read the Company's Employee Handbook, and sign and comply with a Proprietary Information and Inventions Agreement which prohibits unauthorized use or disclosure of Company proprietary information and, which prohibits, without the Company's express written consent, engagement in any employment or business activity other than for the Company. Your employment with the Company is at-will. This means that you may resign your employment at any time simply by notifying the Company. Likewise, the Company may terminate your employment relationship at any time and for any reason whatsoever, with or without cause or advanced notice, simply by notifying you. This at-will employment relationship cannot be changed except in a writing signed by a duly authorized officer of the Company. This Agreement, including the attachments, constitutes the complete, final and exclusive embodiment of the entire agreement between you and the Company with respect to the terms and conditions of your employment. This Agreement is entered into without reliance upon any promise, warranty or representation, written or oral, other than those expressly contained herein, and it -2- 3 supersedes any other such promises, warranties, representations or agreements. It may not be amended or modified except by a written instrument signed by you and a duly authorized officer of the Company. If any provision of this Agreement is determined to be invalid or unenforceable, in whole or in part, this determination will not affect any other provision of this Agreement. This Agreement shall be construed and interpreted in accordance with the laws of the State of California. As required by law, this offer of employment is subject to satisfactory proof of your right to work in the United States. To indicate your acceptance of our offer under the terms described above, please sign below and return this letter to me within 72 hours. We look forward to your favorable reply, and to a productive and enjoyable work relationship. Very truly yours, DIGITAL IMPACT, INC. By: /s/ RUTHANN QUINDLEN ------------------------------ RUTHANN QUINDLEN, Director Accepted by: ________________________ Date:____________________, 19 ____ -3- EX-10.6 8 STARTER KIT LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.6 [IMPERIAL BANK LOGO] STARTER KIT LOAN AND SECURITY AGREEMENT Borrower: Digital Impact, Inc. Address: 1730 South Amphlett Blvd. Date: June 12, 1998 San Mateo, CA 94402 THIS LOAN AND SECURITY AGREEMENT ("Agreement") is made and entered into on the above date between IMPERIAL BANK ("Bank"), whose address is 226 Airport Parkway, San Jose,California 95110-1024, and the party(ies) name above (jointly and severally, "Borrower"), whose chief executive office is located at the above address ("Borrower's Address"). 1. LOANS. Bank will make loans to Borrower (the "Loans") up to the amount (the "Credit Limit") shown on the Schedule to this Agreement (the "Schedule"), provided no Event of Default and no event which, with notice or passage of time or both, would constitute an Event of Default has occurred and is continuing. All Loans and other monetary Obligations will bear interest at the rate shown on the Schedule. Interest will be payable monthly, on the date shown on the monthly billing from Bank. Bank may, in its discretion, charge Borrower's deposit accounts maintained with Bank for any amounts coming due under this Agreement. 2. SECURITY INTEREST. As security for all present and future indebtedness, guarantees, liabilities, and other obligations, of Borrower to Bank (collectively, the "Obligations"), Borrower hereby grants Bank a continuing security interest in all of Borrower's right title and interest in and to any property excluding intellectual property now or hereafter described in an security agreement executed by Borrower to Bank as well as the following types of property, whether now owned or hereafter acquired, and wherever located (collectively, the "Collateral"): All "accounts", "general intangibles," "chattel paper," "documents," "letters of credit," "instruments," "deposit accounts," "inventory," "farm products," "fixtures" and "equipment," as such terms are defined in Division 9 of the California Uniform Commercial Code in effect on the date hereof, and all products, proceeds and insurance proceeds of the foregoing, provided, however, in no event shall this Agreement cover any intellectual property or any rights or interests therein, including any licenses or sublicenses. 3. REPRESENTATIONS AND AGREEMENTS OF BORROWER. Borrower represents to Bank as follows, and Borrower agrees that the following representations will continue to be true, and that Borrower will comply with all of the following agreements throughout the term of this Agreement: 3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is and will continue to be, duly authorized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. The execution, delivery and performance by Borrower of this Agreement, and all other documents contemplated hereby have been duly and validly authorized, and do not violate any law or any provision of and are not grounds for acceleration under, any agreement or instrument which is binding upon Borrower. 3.2 NAME: PLACES OF BUSINESS. The name of Borrower set forth in this Agreement is its correct name. Borrower shall give Bank 15 days' prior written notice before changing its name. The address set forth in the heading to this Agreement is Borrower's chief executive office. In addition, Borrower has places of business and Collateral is located only at the locations set forth on the Schedule. Borrower will give Bank at least 15 days prior written notice before changing its chief executive office or locating the Collateral at any other location. 3.3 COLLATERAL. Bank has and will at all times continue to have a first-priority perfected security interest in all of the Collateral other than specific equipment identified in existing filed or to be filed Financing Statements. Borrower will immediately advise Bank in writing of any material loss or damage to the Collateral. 3.4 FINANCIAL CONDITION AND STATEMENTS. All financial statements now or in the future delivered to Bank have been, and will be prepared in conformity with generally accepted accounting principles. Since the last date covered by any such statement, there has been no material adverse change in the financial condition or business of Borrower. Borrower will provide Bank: (i) within 30 days after the end of each month, a monthly financial statement prepared by Borrower, and such other information as Bank shall reasonably request; (ii) within 120 days 2 following the end of Borrower's Fiscal year, complete annual financial statements, certified by independent certified public accountants acceptable to Bank and accompanied by the unqualified report thereon by said independent certified public accountants: and (iii) other financial information reasonably requested by Bank from time to time. 3.5 TAXES: COMPLIANCE WITH LAW. Borrower has filed, and will file, when due, all tax returns and reports required by applicable law, and Borrower has paid, and will pay, when due, all taxes, assessments, deposits and contributions required by applicable law now or in the future owed by Borrower unless diligently contested in good faith in proper proceedings, proper reserves for tax liability are established in Borrower's financial statements according to GAAP, and a stay of enforcement is in effect with respect to lien arising from or securing the non-payment thereof. Borrower has complied, and will comply, in all material respects, with all applicable laws, rules and regulations. 3.6 INSURANCE. Borrower will at all times adequately insure all of the tangible personal property Collateral and carry such other business insurance as is customary in Borrower's industry. Bank will be designated as Loss Payee on all such insurance. 3.7 ACCESS TO COLLATERAL AND BOOKS AND RECORDS. At reasonable times but no more than twice annually (and at any time when an Event of Default exists), on one business day's notice, Bank, or its agents, shall have the right to inspect the Collateral, and the right to audit and copy Borrower's books and records, provided that Bank shall keep all such information confidential except as required by law. 3.8 BANKING RELATIONSHIP AND OPERATING ACCOUNTS. Borrower shall maintain its primary operating deposit accounts with Bank. Borrower shall at all times maintain its primary banking relationship with Bank. 3.9 ADDITIONAL AGREEMENTS. Borrower shall not, without Bank's prior written consent, do any of the following: (i) enter into any transaction outside the ordinary course of business except for the sale of capital stock to venture investors, provided that Borrower promptly delivers written notification to Bank of any such stock sale;(ii) sell or transfer any Collateral, except in the ordinary course of business; (iii) pay or declare any dividends on Borrower's stock (except for dividends payable solely in stock of Borrower): or (iv) redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's stock other than the repurchase of up to five percent (5%) of Borrower's then issued stock in any fiscal year from Borrower's employees or directors pursuant to written agreements with Borrower. 4. TERM. This Agreement shall continue in effect until the maturity date set forth on the Schedule (the "Maturity Date"). This Agreement may be terminated, without penalty, prior to the Maturity Date as follows: (i) by Borrower, effective three business days after written notice of termination is given to Bank: or (ii) by Bank at any time after the occurrence of an Event of Default, without notice, effective immediately. On the Maturity Date or on any earlier effective date of termination, Borrower shall pay all Obligations in full, whether or not such Obligations are otherwise then due and payable. No termination shall in any way affect or impair any security interest or other right or remedy of Bank, nor shall any such termination relieve Borrower of any Obligation to Bank, until all of the Obligations have been paid and performed in full. 5. EVENTS OF DEFAULT AND REMEDIES. The occurrence of any of the following events shall constitute an "Event of Default" under this Agreement: (a) Any representation, statement, report or certificate given to Bank by Borrower or any of its officers, employees or agents, now or in the future, is untrue or misleading in a material respect; or (b) Borrower fails to pay when due any Loan or any interest thereon or any other monetary Obligation; or (c) the total Obligations outstanding at any time exceed the Credit Limit; or (d) Borrower fails to perform any other non-monetary Obligation, which failure is not cured within 15 business days after the date due; or (e) Dissolution, termination of existence, insolvency or business failure of Borrower or appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by or against Borrower under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, which proceeding is not dismissed within sixty (60) days in the event of a proceeding commenced against Borrower; or (f) a material adverse change in the business, operations, or financial or other condition of Borrower. If an Event of Default occurs, Bank shall have the right to accelerate and declare all of the Obligations to be immediately due and payable, increase the interest rate by an additional five percent per annum, and exercise all rights and remedies recorded by applicable law. If any interest payment, principal payment or principal balance payment due from Borrower is delinquent ten or more days, Borrower agrees to pay Bank a late charge in the amount of 5% of the payment so due and unpaid, in addition to the payment; but nothing in this provision is to be construed as any obligation on the part of Bank to accept payment past due or less than the total unpaid principal 3 balance after maturity. All payments shall be applied first to any late charges owing, then to interest and the remainder, if any, to principal. 6. GENERAL. If any provision of this Agreement is held to be unenforceable, the remainder of this Agreement shall still continue in full force and effect. This Agreement and any other written agreements, documents and instruments executed in connection herewith are the complete agreement between Borrower and Bank and supersede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement. There are no oral understandings, representations or agreements between the parties which are not in this Agreement or in other written agreements signed by the parties in connection this Agreement. The failure of Bank at any time to require Borrower to comply strictly with any of the provisions of this Agreement shall not waive Bank's right later to demand and receive strict compliance. Any waiver of a default shall not waive any other default. None of the provisions of this Agreement may be waived except by a specific written waiver signed by an officer of Bank and delivered to Borrower. The provisions of this Agreement may not be amended, except in a writing signed by Borrower and Bank. Borrower shall reimburse Bank for all reasonable attorney's fees and all other reasonable costs incurred by Bank, in connection with this Agreement (whether or not a lawsuit is filed) including any post petition bankruptcy activities. If Bank or Borrower files any lawsuit against the other predicated on a breach of this Agreement, the prevailing party shall be entitled to recover its reasonable costs and reasonable attorney's fees from the non-prevailing party. Borrower may not assign any rights under this Agreement without Bank's prior written consent. This Agreement shall be governed by the laws of the State of California to the jurisdiction of whose courts Borrower hereby agrees to submit. 7. MUTUAL WAIVER OF JULY TRIAL. BORROWER AND BANK EACH HEREBY WAIVER THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY CONDUCT, ACT OR OMISSION OF BANK OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR AFFILIATES. 8. REFERENCE PROCEEDINGS. a. Each controversy, dispute or claim ("Claim") between the parties arising out of or relating to this Agreement, which is not settled in writing within ten days after the "Claim Date" (defined as the date on which a party gives written notice to all other parties that a controversy, dispute or claim exists), will be settled by a reference proceeding in Los Angeles, California in accordance with the provisions of Section 638 et seq. of the California Code of Civil Procedure, or their successor section ("CCP"), which shall constitute the exclusive remedy for the settlement of any Claim, including whether such Claim is subject to the reference proceeding and the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court of Los Angeles (the "Court"). The referee shall be a retired Judge selected by mutual agreement of the parties, and if they cannot so agree within thirty days after the Claim Date, the referee shall be selected by the Presiding Judge of the Court. The referee shall be appointed to sit as a temporary judge, as authorized by law. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the Claim Date and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgment shall entered pursuant to CCP 644 in the Court. All discovery permitted by this Agreement shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and, request for production or inspection of documents shall be responded to within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. 4 b. The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding which shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties expressly reserve the right to findings of fact, conclusions of law, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision. Borrower: Digital Impact, Inc. By: /s/ [Signature Illegible] -------------------------------------------------- President or Vice President By: /s/ [Signature Illegible] -------------------------------------------------- (Assistant) Secretary or Chief Financial Officer Bank: IMPERIAL BANK By: /s/ ANURAG CHANDRA -------------------------------------------------- Assistant Vice President 5 [IMPERIAL BANK LOGO] SCHEDULE TO STARTER KIT LOAN AND SECURITY AGREEMENT (EQUIPMENT ADVANCES) BORROWER: DIGITAL IMPACT, INC. DATE: JUNE 12, 1998 This Schedule is an integral part of the Loan and Security Agreement between Imperial Bank (""Bank'') and the above-named Borrower of even date. CREDIT LIMIT (EQUIPMENT) (Section 1): $350,000 (such amount to be funded under the aggregate Credit Limit). At no time shall total equipment Advances exceed the Credit Limit. Equipment Advances will be made during two consecutive advance periods identified as Period (1) and Period (2). Period (1) Equipment Advances will be made only on or prior to December 17, 1998 (the "Last Advance Date" for Period (1)) and Period (2) Equipment Advances will be made only during the period beginning December 18, 1998 and on or prior to June 17, 1999 (the "Last Advance Date" for Period (2)), and in either case only for the purpose of purchasing equipment reasonably acceptable to Bank. Borrower must provide invoices for the equipment to Bank on or before the Last Advance Date for Period (1) and/or Period (2). INTEREST RATE (Section 1): The rate equal to Bank's Prime Rate in effect from time to time, plus .25% per annum during each advance period and prime plus .50 after each advance period has ended through maturity. Interest shall be calculated on the basis of a 360 day year for the actual number of days elapsed. The Prime Rate shall be the rate announced from time to time by Bank as its "Prime Rate," as a base rate upon which other rates charged by Bank are based, and it is not necessarily the best rate available at Bank. The interest rate applicable to the Obligations shall change on each date there is a change in the Prime Rate. MATURITY DATE (Section 4): After the Last Advance Date of Period (1) and/or the Last Advance Date of Period (2), the unpaid principal balance of the Equipment Advances advanced during either period shall be repaid in 24 equal monthly installments of principal plus interest. The 24 equal monthly installments shall commence for Period (1) on December 18, 1998 and for Period (2) on June 18, 1999 and shall continue on the same day of each month thereafter until the entire unpaid principal balance of the Equipment Advances and all accrued unpaid interest have been paid (subject to Bank's right to accelerate the Equipment Advances upon the occurrence and during the continuation of an Event of Default). BORROWER: BANK: DIGITAL IMPACT, INC. IMPERIAL BANK By: /s/ WILLIAM C. PARK By: /s/ ANURAG CHANDRA ----------------------------- ------------------------- PRESIDENT OR VICE PRESIDENT ASSISTANT VICE PRESIDENT By: ----------------------------- 6 [IMPERIAL BANK LOGO] MASTER SCHEDULE TO STARTER KIT LOAN AND SECURITY AGREEMENT BORROWER: DIGITAL IMPACT, INC. DATE: JUNE 12, 1998 This Schedule is incorporated into and an integral part of the Starter Kit Loan and Security Agreement between Imperial bank ("Bank") and the above-named Borrower of even date. CREDIT LIMIT (AGGREGATE) (Section 1): $350,000 (includes, without limitation, Equipment, if any) INTEREST RATE (Section 1): The rate equal to Bank's Prime Rate in effect from time to time, plus .25% per year. Interest shall be calculated on the basis of a 360 day year for the actual number of days elapsed. The Prime Rate shall be the rate announced from time to time by Bank as its "Prime Rate;" as a base rate upon which other rates charged by Bank are based, and it is not necessarily the best rate available at Bank. The interest rate applicable to the Obligations shall change on each date there is a change in the Prime Rate MATURITY DATE (Section 4): For working capital loans, December 17, 1999 OTHER LOCATIONS AND ADDRESSES (Section 3.2): ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ BORROWER: BANK: DIGITAL IMPACT, INC. IMPERIAL BANK By: /s/ WILLIAM C. PARK By: /s/ ANURAG CHANDRA -------------------------- ------------------------- President or Vice President Assistant Vice President By: ---------------------------- 7 [IMPERIAL BANK LOGO] RESOLUTION AUTHORIZING CREDIT BORROWER: DIGITAL IMPACT, INC., A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF CALIFORNIA DATE: JUNE 12, 1998 I, the undersigned, officer of the above-named borrower, a corporation organized under the laws of the state set forth above, do hereby certify that the following is a full, true and correct copy of resolutions duly and regularly adopted by the Board of Directors of said corporation as required by law, and by the by-laws, of said corporation, and that said resolutions are still in full force and effect and have not been in any way modified, repealed, rescinded, amended or revoked. RESOLVED, that this corporation borrow from Imperial Bank ("Bank"), from time to time, such sum or sums of money as, in the judgment of the officer or officers authorized hereby, this corporation may require. RESOLVED FURTHER, that any officer of this corporation be, and he or she is hereby authorized, in the name of this corporation, to execute and deliver to Bank the loan agreements, security agreements, notes financing statements, and other documents and instruments providing for such loans and evidencing or securing such loans and said authorized officers are authorized from time to time to execute renewals, extensions and/or amendments of said loan agreements, security agreements, and other documents and instruments. RESOLVED FURTHER, that said authorized officers be and they are hereby authorized, as security for any and all indebtedness of this corporation to Bank, whether arising pursuant to this resolution or otherwise, to grant to but not limited to, any and all real property, accounts, inventory, equipment, general intangibles, instruments documents, chattel paper, notes, money, deposit accounts, furniture, fixtures, goods and other property of every kind, and to execute and deliver to Bank any and all pledge agreements mortgages, deeds of trust, financing statements, security agreements and other agreements, which said instruments and the note or notes and other instruments referred to in the proceeding paragraph may contain such provisions, covenants, recitals and agreements as Bank may require, and said authorized officers may approve, and the execution thereof by said authorized officers shall be conclusive evidence of such approval. RESOLVED FURTHER, that Bank may conclusively rely on a certified copy of these resolutions and a certificate of an officer of this corporation as to the officers of this corporation and their offices and signatures, and continue to conclusively rely on such certified copy of these resolutions and said certificate for all past, present and future transactions until written notice of any change hereto or thereto is given to Bank by this corporation by certified mail, return receipt requested. The undersigned further hereby certified that the following persons are the fully elected and acting officers of the corporation named above as borrower and that the following are their actual signatures. NAMES OFFICE(S) ACTUAL SIGNATURES - ----- --------- ----------------- WILLIAM PARK PRESIDENT/CHAIRMAN WILLIAM PARK - -------------------------- ------------------------ -------------------------- - -------------------------- ------------------------ -------------------------- - -------------------------- ------------------------ -------------------------- IN WITNESS WHEREOF, I have hereunto set my hand as such corporate officer on the date set forth above. X /s/ GERARDO CAPIEL ---------------------------------------------------- Its: Secretary 8 [IMPERIAL BANK LETTERHEAD] IMPERIAL BANK INTERNATIONAL DIVISION 275 BATTERY STREET SUITE 1100 SAN FRANCISCO, CA 94111 Telex: 3730628 (IMPERIAL INW) Tel: (415) 954-5042 FAX: (415) 394-8121 DATE: 12/31/98 DIGITAL IMPACT, INC. 1730 SOUTH AMPHLETT BLVD. SAN MATEO, CA 94402 ATTN: JOAN CUMMINGS DEAR CUSTOMER: AT YOUR REQUEST, WE HEREBY ESTABLISH OUR STANDBY LETTER OF CREDIT NO. 0SF98000522, A COPY OF WHICH IS ATTACHED FOR YOUR INFORMATION. SHOULD YOU HAVE ANY QUESTIONS REGARDING THIS L/C, PLEASE CONTACT OUR INTERNATIONAL BANKING DIVISION AT 415-954-5078. PLEASE REVIEW THE DETAILS OF THE LETTER OF CREDIT. ANY INCONGRUITY MUST BE REPORTED AS SOON AS POSSIBLE OR THE TERMS AND CONDITIONS OF THE LETTER OF CREDIT SHALL BE DEEMED CONCLUSIVELY TO COMPLY WITH THE APPLICATION. THIS L/C IS SUBJECT TO THE U.C.P. 1993 ICC PUBLICATION NO. 500 THIS IS A COMPUTER GENERATED ADVICE WHICH DOES NOT REQUIRE AN AUTHORIZED SIGNATURE. Page 1 9 [IMPERIAL BANK LETTERHEAD] INTERNATIONAL DIVISION, 275 BATTERY STREET, SUITE 1100, SAN FRANCISCO, CA 94111 IRREVOCABLE STANDBY LETTER OF CREDIT NO. OSF98000522 DATED DECEMBER 31, 1998 BENEFICIARY: APPLICANT: CASIOPEA VENTURE CORPORATION DIGITAL IMPACT INC. C/O RIM PACIFIC MANAGEMENT 1730 SOUTH AMPHLETT BLVD. 155 BOVET ROAD, SUITE 460 SAN MATEO, CA 94402 SAN MATEO, CA 94402 EXPIRY DATE AND PLACE: AMOUNT: JANUARY 15, 2002 AT OUR OFFICE $108,229.95 (ONE HUNDRED 275 BATTERY STREET, SUITE 1100 EIGHT THOUSAND TWO SAN FRANCISCO, CA 94111 HUNDRED TWENTY NINE AND 95/100 U.S. DOLLARS)
GENTLEMEN: WE HEREBY ESTABLISH OUR IRREVOCABLE STANDBY LETTER OF CREDIT IN YOUR FAVOR AVAILABLE BY PAYMENT OF YOUR DRAFT(S) DRAWN AT SIGHT ON IMPERIAL BANK, SAN FRANCISCO, CA. DRAFT(S) MUST BE MARKED AS DRAWN UNDER IMPERIAL BANK STANDBY LETTER OF CREDIT NO. 0SF98000522 AND ACCOMPANIED BY THE FOLLOWING DOCUMENT(S): 1. THE ORIGINAL OF THIS STANDBY LETTER OF CREDIT AND AMENDMENTS, IF ANY. 2. YOUR WRITTEN STATEMENT: (A) CERTIFYING THAT TENANT HAS FAILED TO PERFORM A PAYMENT OBLIGATION OR OTHER OBLIGATION UNDER THE TERMS OF ITS LEASE DATED NOVEMBER 30, 1998, FOR REFERENCE PURPOSES, AND COVERING THE PREMISES AT 177 BOVET ROAD, SUITE 300, SAN MATEO, CA ("THE LEASE"), AND THAT AS A RESULT OF SUCH FAILURE, YOU ARE ENTITLED TO DRAW AGAINST AND RECEIVED PROCEEDS UNDER THIS LETTER OF CREDIT IN THE AMOUNT OF $_______, OR (B) SPECIFYING EITHER (I) THAT YOUR DRAW IS BEING MADE AS DEFAULT RELATED DRAW PURSUANT TO SUBSECTION 6.1.2.2 OF THE LEASE, OR (II) THAT YOUR DRAW IS BEING MADE AS AN EXPIRATION RELATED DRAW PURSUANT TO SUBSECTION 6.1.2.4 OR SUBSECTION 6.1.2.6 OF THE LEASE. SPECIAL CONDITIONS: 1. PARTIAL DRAWING ALLOWED. 2. YOU MAY TRANSFER THIS LETTER OF CREDIT TO YOUR TRANSFEREE(S), SUCCESSORS OR ASSIGNS UPON SATISFACTORY DELIVERY AND PRESENTATION TO THE ISSUING BANK OF (1) THE ORIGINAL STANDBY LETTER OF CREDIT AND AMENDMENTS, IF ANY, FOR PROPER ENDORSEMENT (2) A REQUEST FOR TRANSFER ON THE ISSUER'S USUAL TRANSFER FORM (3) VERIFICATION OF SIGNATURE AND AUTHORITY ON SUCH TRANSFER FORM SIGNING FOR THE BENEFICIARY (4) PAYMENT OF A TRANSFER FEE AND (5) ANY OTHER REASONABLE REQUIREMENTS RELATIVE TO THE UCP 500 AND U.S. GOVERNMENT REGULATIONS. 10 [IMPERIAL BANK LETTERHEAD] INTERNATIONAL DIVISION, 275 BATTERY STREET, SUITE 1100, SAN FRANCISCO, CA 94111 IRREVOCABLE STANDBY LETTER OF CREDIT NO. OSF98000522 DATED DECEMBER 31, 1998 PAGE 2 ALL DOCUMENTS DRAWN UNDER THIS LETTER OF CREDIT ARE TO BE DISPATCHED IN ONE LOT BY COURIER TO IMPERIAL BANK, INTERNATIONAL BANKING DIVISION, 275 BATTERY STREET SUITE 1100, SAN FRANCISCO, CA 94111. WE HEREBY ENGAGE WITH YOU THAT ALL DRAFTS DRAWN UNDER AND IN COMPLIANCE WITH THE TERMS OF THIS CREDIT WILL BE DULY HONORED IF DRAWN AND PRESENTED FOR PAYMENT AT THIS OFFICE ON OR BEFORE THE EXPIRATION DATE OF THIS CREDIT. EXCEPT SO FAR AS OTHERWISE EXPRESSLY STATED, THIS CREDIT IS SUBJECT TO THE "UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS" (1993 REVISION) INTERNATIONAL CHAMBER OF COMMERCE (PUBLICATION NO. 500). /s/ [Signature Illegible] /s/ [Signature Illegible] --------------------- --------------------- AUTHORIZED SIGNATURE AUTHORIZED SIGNATURE EX-23.1 9 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated June 16, 1999, except as to items described in Note 10 as to which the date is September 16, 1999, relating to the financial statements of Digital Impact, Inc., which appear in such Registration Statement. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Registration Statement. PricewaterhouseCoopersLLP San Jose, California September 17, 1999 EX-27.1 10 FINANCIAL DATA SCHEDULES
5 1,000 YEAR 3-MOS MAR-31-1999 MAR-31-2000 APR-01-1998 APR-01-1999 MAR-31-1999 JUN-30-1999 2,864 900 0 0 678 1,064 (10) (28) 0 0 3,648 2,063 2,745 3,851 (251) (441) 6,314 5,719 1,245 2,975 699 548 0 0 3 3 1 1 4,366 2,192 6,314 5,719 0 0 1,307 1,385 0 0 674 672 3,944 3,877 10 18 18 16 (3,240) (3,160) 0 0 (3,311) (3,164) 0 0 0 0 0 0 (3,240) (3,160) $(0.39) $(0.25) $(0.39) $(0.25)
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