<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 12, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
DIGITAL RIVER, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7375 41-1901640
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
5198 WEST 76TH STREET
EDINA, MINNESOTA 55439
(612) 830-9042
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
JOEL A. RONNING
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DIGITAL RIVER, INC.
5198 WEST 76TH STREET
EDINA, MINNESOTA 55439
(612) 830-9042
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
JEFFREY S. ZIMMAN, ESQ. HOWARD S. ZEPRUN, ESQ.
MICHAEL J. SULLIVAN, ESQ. ROBERT G. DAY, ESQ.
COOLEY GODWARD LLP WILSON SONSINI GOODRICH & ROSATI
ONE MARITIME PLAZA, 20TH FLOOR PROFESSIONAL CORPORATION
SAN FRANCISCO, CA 94111 650 PAGE MILL ROAD
(415) 693-2000 PALO ALTO, CA 94304
(650) 493-9300
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES 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,
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
number 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,
check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common Stock, $0.01 par value $40,250,000 $11,874
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457 under the Securities Act of
1933. Such amount includes $5,250,000 of Common Stock which the Underwriters
have the option to purchase solely to cover over-allotments, if any. In
accordance with Rule 457 under the Securities Act of 1933, the number of
shares being registered and the proposed maximum offering price per share
have not been included in this table.
------------------------
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION
JUNE 12, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SHARES
[LOGO]
COMMON STOCK
---------
All of the shares of Common Stock offered hereby are being sold by
Digital River, Inc. ("Digital River" or the "Company"). Prior to this offering,
there has been no public market for the Common Stock. For factors considered in
determining the initial public offering price, see "Underwriting." It is
currently estimated that the initial public offering price of the Common Stock
will be between $ and $ per share. Application has been made for quotation
of the Common Stock on the Nasdaq National Market under the symbol "DRIV."
----------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share.............................................. $ $ $
Total (3).............................................. $ $ $
</TABLE>
(1) See "Underwriting" for information relating to indemnification of the
Underwriters.
(2) Before deducting expenses of the offering estimated at $700,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
----------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about ,
1998.
----------------
BT ALEX. BROWN BANCAMERICA ROBERTSON STEPHENS
---------
BEAR, STEARNS & CO. INC.
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
PICTORIAL FLOWCHART DEPICTING A PURCHASE OF SOFTWARE
THROUGH THE COMPANY'S CENTRAL NETWORK SERVER
("CNS"), SHOWING THE TRANSACTION PROCESSING AND
OTHER VALUE-ADDED SERVICES PROVIDED BY THE COMPANY.
[ILLUSTRATIONS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK IN
CONNECTION WITH THE OFFERING, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT
COVERING TRANSACTIONS IN SUCH SECURITIES AND THE IMPOSITION OF PENALTY BIDS. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
----------------
Digital River is a registered trademark of the Company. All other trademarks
or service marks appearing in this Prospectus are the property of their
respective owners.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A
FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL
PERFORMANCE OF THE COMPANY. PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH
STATEMENTS ARE ONLY PREDICTIONS, INVOLVE RISKS AND UNCERTAINTIES, AND THAT
ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS,
PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER THE VARIOUS FACTORS
IDENTIFIED IN THIS PROSPECTUS, INCLUDING THE MATTERS SET FORTH UNDER THE CAPTION
"RISK FACTORS," WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.
THE COMPANY
Digital River, Inc. ("Digital River" or the "Company") is a leading provider
of comprehensive electronic commerce outsourcing solutions to software
publishers and online retailers. The Company has developed a technology platform
that allows it to provide a suite of electronic commerce services to its
software publisher and online retailer clients, including electronic software
delivery ("ESD"). The Company also provides data mining and merchandising
services to assist clients in increasing Internet page view traffic to, and
sales through, their Web stores. Rather than maintaining its own branded Web
store that would compete with its clients, Digital River provides an outsourcing
solution that allows its clients to promote their own brands while leveraging
Digital River's investment in infrastructure and technology. As of May 31, 1998,
the Company had contracts with 1,089 software publisher clients and 274 online
retailer clients, including Corel Corporation, Cyberian Outpost, Inc., Lotus
Development Corporation, Micro Warehouse, Inc., Network Associates, Inc. and
Symantec Corporation, and maintained a database of more than 105,000 software
products from its various software publisher clients, including more than 17,000
software titles and more than 88,000 digital images and fonts. Through May 31,
1998, the Company had completed more than 136,000 transactions for more than
105,000 unique end-users.
Digital River's proprietary commerce network server ("CNS") technology
serves as the platform for the Company's solutions. The CNS incorporates custom
software applications that enable ESD, Web store authoring, fraud prevention,
export control, merchandising programs and online registration, and features a
database of more than 105,000 software products. Using its CNS platform, the
Company creates Web stores for its clients that replicate the look and feel of
such clients' own Web sites. End-users can browse for products and make
purchases online, and, once purchases are made, the Company delivers the
products directly to the end-user, primarily through ESD. The Company also
provides transaction processing services and collects and maintains critical
information about end-users. This information can later be used by the Company's
clients to facilitate add-on or upgrade sales and for other direct marketing
purposes. The Company actively manages direct marketing campaigns for its
clients, and also delivers purchase information and Web store traffic statistics
to its clients on a regular basis.
Digital River believes that the market for software sales online will
continue to grow rapidly. Jupiter Communications, LLC, estimates that the market
for software sold online will increase from an estimated $69 million in 1997 to
an estimated $2.3 billion by 2002. The Internet is particularly well-suited for
the distribution of software because software products can be purchased and
delivered quickly, conveniently and cost-effectively to an end-users' home or
office computer through ESD. The Company believes that as Internet bandwidth
increases, ESD will represent a larger share of online software sales and will
be critical to online retailers' success. Unlike established physical
distribution channels for shrink-wrapped software, there is currently no
established, comprehensive electronic distribution source for online retailers.
The distribution of software products through ESD is complex and requires
significant up-front and ongoing investments in secure, reliable and scaleable
systems. Accordingly, the Company believes that a substantial market opportunity
exists for a comprehensive, cost-effective, outsourced electronic commerce
solution that provides software publishers and online retailers with access to a
critical mass of software products and a robust distribution and transaction
network.
3
<PAGE>
The Company provides a number of advantages to software publishers, online
retailers and end-users. By entering into a relationship with the Company,
software publishers can avoid the up-front and ongoing cost and complexity of
operating an electronic commerce infrastructure, offer a full library of their
software products, avoid shipping and packaging costs and offer software
products through their own Web store or the Company's network of online retailer
clients. The Company also provides software publishers with valuable end-user
information and data mining capabilities that can facilitate targeted marketing,
upgrade notification and sophisticated merchandising. Digital River offers
online retailers the ability to access the software products of most of the
Company's software publisher clients without having to negotiate agreements and
arrange the relationship with individual software publishers and without the
cost and risk associated with carrying inventory. End-users who purchase
products over the Company's network benefit from value-added services including
credit card security and upgrade notifications, as well as the protection of the
Company's archiving service through which the Company guarantees replacement of
software products in the event of accidental loss or damage.
Digital River was incorporated in Minnesota in February 1994 and
reincorporated into Delaware in December 1997. Unless the context requires
otherwise, references in this Prospectus to "Digital River" and the "Company"
refer to Digital River, Inc. a Delaware corporation and its subsidiaries. The
Company's executive offices are located at 5198 West 76th Street, Edina,
Minnesota 55439, and its telephone number is (612) 830-9042.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... shares
Common Stock to be outstanding after the shares (1)
offering.....................................
Use of proceeds.............................. For general corporate purposes, including
continued investment in product development,
expansion of sales and marketing activities
and working capital.
Proposed Nasdaq National Market symbol....... DRIV
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales........................................................ $ -- $ 111 $ 2,472 $ 179 $ 2,270
Gross profit................................................. -- 16 420 32 374
Loss from operations......................................... (165) (697) (3,538) (488) (1,597)
Net loss..................................................... (143) (689) (3,485) (480) (1,555)
Basic and diluted net loss per share (2)..................... $ (0.02) $ (0.09) $ (0.31) $ (0.06) $ (0.10)
Shares used in per share computation (2)..................... 8,000 8,000 11,271 8,573 14,919
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
ACTUAL AS ADJUSTED(3)
--------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................ $ 10,057 $
Working capital...................................................................... 8,350
Total assets......................................................................... 11,917
Accumulated deficit.................................................................. (5,880) (5,880)
Total stockholders' equity........................................................... 9,891
</TABLE>
- --------------------------
(1) Based on shares outstanding as of May 31, 1998. Excludes (i) 2,270,100
shares of Common Stock issuable upon exercise of options outstanding as of
May 31, 1998 at a weighted average exercise price of $1.37 per share, (ii)
1,204,524 shares of Common Stock issuable upon exercise of warrants
outstanding as of May 31, 1998 at a weighted average exercise price of $1.70
per share, and (iii) 1,229,900 shares reserved for future grants under the
Company's stock option plan. See "Management--Employee Benefit Plans" and
Notes 4 and 7 of Notes to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method employed to determine the number of shares used to compute per
share amounts.
(3) Adjusted to reflect the sale by the Company of shares of Common Stock
offered hereby at an assumed initial public offering price of $ per
share and the application of the estimated net proceeds therefrom. See "Use
of Proceeds."
EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS PROSPECTUS (I)
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVERALLOTMENT OPTION, (II) REFLECTS A
FOR REVERSE SPLIT OF THE OUTSTANDING COMMON STOCK AND SERIES A PREFERRED
STOCK TO BE EFFECTED PRIOR TO CONSUMMATION OF THIS OFFERING AND (III) REFLECTS
THE AUTOMATIC CONVERSION OF ALL OUTSTANDING SHARES OF SERIES A PREFERRED STOCK
INTO COMMON STOCK UPON THE COMPLETION OF THIS OFFERING.
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES
OF COMMON STOCK OFFERED BY THIS PROSPECTUS. THIS PROSPECTUS CONTAINS CERTAIN
STATEMENTS OF A FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR THE FUTURE
FINANCIAL PERFORMANCE OF THE COMPANY. PROSPECTIVE INVESTORS ARE CAUTIONED THAT
SUCH STATEMENTS ARE ONLY PREDICTIONS, INVOLVE RISKS AND UNCERTAINTIES, AND THAT
ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS,
PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER THE VARIOUS FACTORS
IDENTIFIED IN THIS PROSPECTUS, INCLUDING THE MATTERS SET FORTH BELOW, WHICH
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH
FORWARD-LOOKING STATEMENTS.
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; EXPECTATION OF FUTURE
LOSSES. The Company was incorporated in February 1994 and was considered a
development stage company through August 1996. The Company conducted its first
online sale through a client's Web store in August 1996 and is still in the
early stages of development. Accordingly, the Company has a limited operating
history upon which investors may evaluate its business and prospects. Since
inception, the Company has incurred significant losses, and as of March 31,
1998, had an accumulated deficit of approximately $5.9 million. The Company
intends to expend significant financial and management resources on the
development of additional services, sales and marketing, technology and
operations to support larger-scale operations and greater service offerings. As
a result, the Company expects to incur additional losses and continued negative
cash flow from operations for the foreseeable future, and such losses are
anticipated to increase significantly from current levels. There can be no
assurance that the Company's sales will increase or even continue at their
current level or that the Company will achieve or maintain profitability or
generate cash from operations in future periods. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as electronic commerce. To
address these risks, the Company must, among other things, maintain existing and
develop new relationships with software publishers and online retailers,
implement and successfully execute its business and marketing strategy, continue
to develop and upgrade its technology and transaction-processing systems,
provide superior customer service and order fulfillment, respond to competitive
developments, and attract, retain and motivate qualified personnel. There can be
no assurance that the Company will be successful in addressing such risks, and
the failure to do so would have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's current
and future expense levels are based largely on its planned operations and
estimates of future sales. Sales and operating results generally depend on the
volume and timing of orders received, which are difficult to forecast. The
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, any significant shortfall in
sales would have an immediate adverse effect on the Company's business,
financial condition and results of operations. In view of the rapidly evolving
nature of the Company's business and its limited operating history, the Company
is unable to accurately forecast its sales and believes that period-to-period
comparisons of its operating results are not necessarily meaningful and should
not be relied upon as an indication of future performance.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's quarterly and
annual operating results are likely to fluctuate significantly in the future due
to a variety of factors, many of which are outside the Company's control.
Factors that will influence the Company's operating results include: (i) the
Company's ability to retain existing software publishers and online retailers as
clients, to attract new software publishers and online retailers as clients at a
steady rate and to maintain software publisher, online retailer and end-user
satisfaction; (ii) the announcement or introduction of new Web sites, Web
stores, services and products by the Company and its competitors; (iii) price
competition and margin erosion; (iv) the level of use of the Internet and
consumer acceptance of the Internet for the purchase of consumer products such
as those offered by the Company; (v) the Company's ability to upgrade and
develop its systems and
6
<PAGE>
infrastructure, in particular its CNS; (vi) the termination of any strategic
accounts such as Corel Corporation, from which the Company derives a significant
portion of its sales; (vii) technical difficulties or system downtime; (viii)
the Company's ability to attract new personnel in a timely and effective manner;
(ix) the mix of sales generated through software publisher client Web stores
compared to online retailer Web stores; (x) the failure of Internet bandwidth to
increase over time and/or an increase in the cost to end-users of obtaining or
utilizing Internet bandwidth; (xi) the amount and timing of operating costs and
capital expenditures relating to expansion of the Company's business, operations
and infrastructure; (xii) certain U.S. and foreign government regulations; and
(xiii) economic conditions specific to the Internet, electronic commerce and the
software industry, and economic conditions in general. The Company also may, as
inducement to obtain certain strategic contracts, offer certain economic terms
to software publishers and online retailers which will reduce its gross margins.
As a result, the Company believes that it will continue to incur operating
losses in the future. Due to the foregoing factors, the Company's annual or
quarterly operating results may fall below the expectations of securities
analysts and investors. In such event, the trading price of the Common Stock
would likely be materially adversely affected.
CLIENT CONCENTRATION; LENGTHY SALES CYCLE. Sales initiated through the Web
stores of three software publisher clients collectively accounted for
approximately 29% and 38% of the Company's sales in 1997 and the three months
ended March 31, 1998, respectively. The Company expects that a small percentage
of clients will continue to account for a substantial portion of the Company's
sales for the foreseeable future. Contracts with these clients are generally
short term in nature. In the event that any one of these contracts is not
renewed or is otherwise terminated, the Company's business, financial condition
and results of operations could be materially adversely affected.
The Company markets its services directly to software publishers and online
retailers. The Company's Strategic Sales Group focuses on larger software
publishers and online retailers with significant online revenue potential. These
sales are typically complex in nature and involve a lengthy sales cycle. Due to
operating procedures in many large organizations, an extended time period may
elapse after key decision makers have selected the Company's electronic commerce
outsourcing solutions and before a contract with the Company can be signed. As a
result, the period between the initial sales call until a contract with a
software publisher or online retailer with significant sales potential is
consummated typically ranges from six to twelve months, and can be longer.
Therefore, the timing of sales from these software publisher and online retailer
clients is difficult to predict. Delays in signing contracts with significant
software publisher or online retailer clients could have a material adverse
effect on the Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH ESD; MARKET ACCEPTANCE OF ESD. The Company's success
will depend in large part on end-user acceptance of ESD as a method of
distributing software. ESD is a relatively new method of distributing software
products and the growth and market acceptance of ESD is highly uncertain and
subject to a number of risks. Factors that will influence market acceptance of
ESD include: the availability of sufficient network bandwidth to enable
purchasers to rapidly download software, the impact of time-based Internet
access fees, the number of software products that are available for purchase
through ESD as compared to those available through physical delivery, the level
of end-user comfort with the process of downloading software via the Internet
and the relative ease of such process and concerns about transaction security.
If ESD does not achieve widespread market acceptance, the Company's business,
financial condition and results of operations would be materially adversely
affected. Even if ESD achieves widespread acceptance, there can be no assurance
that the Company will overcome the substantial existing and future technical
challenges associated with electronically delivering software reliably and
consistently on a long-term basis. The failure by the Company to do so would
materially and adversely affect the Company's business, financial condition and
results of operations.
DEPENDENCE ON THE INTERNET, GROWTH IN ELECTRONIC COMMERCE AND INTERNET
INFRASTRUCTURE DEVELOPMENT. Sales of software products using the Internet do not
currently represent a significant portion of overall
7
<PAGE>
software sales. The Company's future sales and any future profits are
substantially dependent upon the widespread acceptance and use of the Internet
as an effective medium of commerce by end-users. Rapid growth in the use of and
interest in the Internet and other online services is a recent development and
there can be no assurance that acceptance and use will continue to develop or
that a sufficiently broad base of consumers will adopt, and continue to use, the
Internet and other online services as a medium of commerce. The Company relies
on end-users who have historically used traditional means of commerce to
purchase software products. For the Company to be successful, these end-users
must accept and utilize new ways of conducting business and exchanging
information.
In addition, the Internet may not be accepted as a viable commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. To the extent that the
Internet continues to experience significant growth in the number of users,
their frequency of use or an increase in their bandwidth resources, there can be
no assurance that the infrastructure for the Internet will be able to support
the demands placed upon them. In addition, the Internet could lose its viability
due to delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity, or due to increased
governmental regulation. Changes in or insufficient availability of
communications services to support the Internet also could result in slower
response times and adversely affect usage of the Internet. If use of the
Internet does not continue to grow or grows more slowly than expected, if the
infrastructure for the Internet does not effectively support growth that may
occur, or if the Internet does not become a viable commercial marketplace, the
Company's business, financial condition and results of operations would be
materially adversely affected.
DEPENDENCE ON SOFTWARE PUBLISHERS. The Company is entirely dependent upon
the software publishers that supply it with software, and the availability of
such software is unpredictable. The Company's contracts with its software
publisher clients are generally one year in duration, with an automatic renewal
provision for additional one-year periods, unless the Company is provided with a
written notice at least 90 days prior to the termination of the contract. As is
common in the industry, the Company has no long-term or exclusive contracts or
arrangements with any software publisher that guarantees the availability of
software products. There can be no assurance that the software publishers that
currently supply software to the Company will continue to do so or that the
Company will be able to establish new relationships with software publishers. If
the Company is unable to develop and maintain satisfactory relationships with
software publishers on acceptable commercial terms, if the Company is unable to
obtain sufficient quantities of software, if the quality of service provided by
such software publishers falls below a satisfactory standard or if the Company's
level of returns exceeds its clients' expectations, the Company's business,
financial condition and results of operations could be materially adversely
affected.
DEPENDENCE ON ONLINE RETAILERS. The Company's strategy is dependent upon
increasing its sales of software products through online retailers. The Company
has historically generated substantially all of its sales from the sale of
software to end-users that were initiated through its software publisher
clients' Web stores. In 1997 and the three months ended March 31, 1998, less
than 5% of the Company's sales were generated through online retailer clients'
Web stores. While the Company plans to increase its sales and marketing efforts
over time in an effort to generate increased sales from online retailer clients,
there can be no assurance that the Company will be successful in entering into
contractual relationships with additional online retailers or that its current
contractual relationships will be renewed. The Company's failure to enter into
contractual relationships with major online retailers or a substantial number of
smaller online retailers or the failure to renew its existing online retailer
contracts could have a material adverse impact upon the Company's business,
financial condition and results of operations.
RISK OF CAPACITY CONSTRAINTS; LIMITED REDUNDANT SYSTEMS; SYSTEM DEVELOPMENT
RISKS. The Company provides commerce, marketing and delivery services to
software publishers, retailers and end-users through its CNS
transaction-processing and client management systems, including electronic
inventory of products and consumer marketing information. The satisfactory
performance, reliability and availability of
8
<PAGE>
the CNS and the underlying network infrastructure are critical to the Company's
operating results, as well as to its reputation and its ability to attract and
retain clients and maintain adequate customer service levels. The Company's
systems and operations are vulnerable to damage or interruption from fire,
flood, other natural disasters, power loss, telecommunications failure,
break-ins and similar events. The Company presently has limited redundant
systems, no back-up facilities and carries limited business interruption
insurance to compensate it for losses that may occur. Despite the implementation
of network security measures by the Company, its servers are vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions,
which could lead to interruptions, delays, loss of data or the inability to
accept and fulfill end-user orders. Any systems interruptions that result in
reduced order fulfillment performance would reduce the online volume of goods
sold and the attractiveness of the Company's product and service offerings to
software publishers, retailers and end-users, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company has experienced periodic interruptions, affecting all or a
portion of its systems, which it believes will continue to occur from time to
time. The Company periodically enhances and expands its technology and
transaction-processing systems, and network infrastructure and other
technologies to accommodate increases in the volume of traffic on the CNS. There
can be no assurance that the Company will be successful in its efforts to
improve and increase the capacity of its network infrastructure, or that the
Company will be able to accurately project the rate or timing of increases, if
any, in the use of its CNS or expand and upgrade its systems and infrastructure
in a timely manner to accommodate such increases. The Company's inability to add
software and hardware or to develop and upgrade further its existing technology,
transaction-processing systems or network infrastructure to accommodate
increased traffic on its CNS may cause unanticipated system disruptions, slower
response times, degradation in levels of customer service and impaired quality
and speed of order fulfillment, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, there can be no assurance that additional network capacity will be
available from third-party suppliers when it is needed by the Company. There can
be no assurance that the Company's or its suppliers' network will be able to
achieve or maintain in a timely manner a sufficiently high capacity of data
transmission, especially if demands on the CNS increase. The Company's failure
to achieve or maintain high capacity data transmission could significantly
reduce demand for its services, which would have a material adverse effect on
its business, financial condition and results of operations.
ELECTRONIC COMMERCE SECURITY RISKS. The secure transmission of confidential
information over public networks is critical to the acceptance of electronic
commerce. The Company relies on certain encryption and authentication technology
licensed from third parties to provide secure transmission of confidential
information, such as end-user credit card numbers. There can be no assurance
that advances in computer capabilities, new discoveries in the field of
cryptography, or other events or developments will not result in a compromise or
breach of the algorithms used by the Company to protect end-user transaction
data. If any such compromise were to occur, it could have a material adverse
effect on the Company's business, financial condition and results of operations.
A party who is able to circumvent the Company's security measures could
misappropriate proprietary information or cause disruptions in the Company's
operations. The Company may be required to expend significant capital and other
resources to protect against such security breaches or to alleviate problems
caused by such breaches. Concerns over the security of transactions conducted on
the Internet and the privacy of users may also inhibit the growth of the
Internet generally, and electronic commerce in particular. To the extent that
activities of the Company involve the storage and transmission of proprietary
information, such as credit card numbers and end-user profile information,
security breaches could damage the Company's reputation and expose the Company
to a risk of loss or litigation and possible liability. There can be no
assurance that the Company's security measures will prevent security breaches or
that a failure to prevent such security breaches will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
COMPETITION. The electronic commerce market is new, rapidly evolving and
intensely competitive, and the Company expects competition to intensify in the
future, particularly in the area of electronic sale
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and distribution of software products. The Company currently competes directly
with other providers of electronic commerce solutions, including CyberSource
Corporation, Preview Software Corporation, Release Software Corporation and
TechWave, Inc. The Company also competes indirectly with software companies that
offer tools and services for electronic commerce, including companies that
provide a broad range of Internet and server solutions such as Microsoft
Corporation and Netscape Communications Corporation, as well as a large number
of companies that provide tools and services enabling one or more of the
transaction processing functions of electronic commerce, such as transaction
control, data security, customer interaction and database marketing. In addition
to direct competition with other transaction processing providers and enablers
and indirect competition with other providers of electronic commerce software
and systems, the Company also competes with companies that sell and distribute
software products via the Internet, including online retailers such as CNET,
Inc., Ingram Micro Inc. and software.net Corporation, as well as companies such
as AltaVista (a subsidiary of Digital Equipment Corporation), America Online,
Inc., Excite, Inc., Infoseek Corporation, Lycos, Inc. and Yahoo! Inc., which
specialize in electronic commerce or derive a substantial portion of their
revenues from electronic commerce and may themselves offer, or provide means for
others to offer, software products.
The Company believes that the principal competitive factors in its market
are breadth of product offerings, software publisher and online retailer
relationships, brand recognition, system capacity, reliability, price,
selection, speed and accessibility, customer service, quality of site content,
convenience and speed of fulfillment. There can be no assurance that the online
retailers and the other companies listed above will not compete directly with
the Company by adopting a similar business model. Moreover, while certain of
these companies are also clients or potential clients of the Company, they may
compete with the Company's electronic commerce outsourcing solution to the
extent that they develop electronic commerce systems or acquire such systems
from other software vendors or service providers.
Many of the Company's current and potential competitors have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than the Company.
In addition, larger, well-established and well-financed entities may acquire,
invest in or form joint ventures with online competitors as the use of the
Internet and other online services increases. In addition, new technologies and
the expansion of existing technologies, such as price comparison programs that
select specific titles from a variety of Internet Web sites may direct end-users
to online retailers that compete with the Company, which would increase
competitive pressures on the Company. Increased competition may result in
reduced operating margins, as well as a loss of market share. Further, as a
strategic response to changes in the competitive environment, the Company may
from time to time make certain pricing, service or marketing decisions or
acquisitions that could have a material adverse effect on its business,
financial condition and results of operations. There can be no assurance that
the Company will be able to compete successfully against current and future
competitors, and any inability to do so could have a material adverse effect on
the Company's business, financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE. To remain competitive, the Company must
continue to enhance and improve the responsiveness, functionality and features
of the CNS and the underlying network infrastructure. The Internet and the
electronic commerce industry are characterized by rapid technological change,
changes in user and client requirements and preferences, frequent new product
and service introductions embodying new technologies and the emergence of new
industry standards and practices that could render the Company's existing CNS
technology and systems obsolete. The Company's success will depend, in part, on
its ability to both license and internally develop leading technologies useful
in its business, enhance its existing services, develop new services and
technology that address the increasingly sophisticated and varied needs of its
clients, and respond to technological advances and emerging industry standards
and practices on a cost-effective and timely basis. The development of the CNS
technology and other proprietary technology entails significant technical and
business risks. There can be no assurance that the Company will successfully use
new technologies effectively or adapt its proprietary technology and
transaction-processing systems to customer requirements or emerging industry
standards. If the Company
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is unable, for technical, legal, financial or other reasons, to adapt in a
timely manner to changing market conditions, client requirements or emerging
industry standards, its business, financial condition and results of operations
could be materially adversely affected.
MANAGEMENT OF POTENTIAL GROWTH; NEW MANAGEMENT TEAM; LIMITED EXECUTIVE
OFFICER RESOURCES. The Company has rapidly and significantly expanded its
operations and anticipates that further significant expansion will be required
to address potential growth in its client base and market opportunities. From
January 1, 1997 to May 31, 1998, the Company has increased its number of
employees from 11 to 75. This expansion has placed, and is expected to continue
to place, a significant strain on the Company's managerial, operational and
financial resources. The majority of the Company's existing senior management
personnel joined the Company within the last 13 months, including the Company's
Chief Financial Officer, who joined the Company in April 1998. Joel A. Ronning,
the Company's President and Chief Executive Officer also serves as the Chairman
of the Board, Chief Executive Officer, Chief Financial Officer and Secretary of
Tech Squared, Inc. ("Tech Squared"), a principal stockholder of the Company,
and, accordingly, does not devote all of his time solely to the management of
the Company. The Company's new employees include a number of key managerial,
technical and operations personnel who have not yet been fully integrated into
the Company, and the Company expects to add additional key personnel in the near
future. In particular, there are currently three senior management positions
available, including Vice President of Sales, Vice President of Operations and
Vice President of Merchandising, for which the Company is currently recruiting
candidates. The Company also expects to hire additional direct sales and
marketing personnel. To manage the expected growth of its operations and
personnel, the Company will be required to improve existing and implement new
operational, financial and management controls, reporting systems and
procedures, to install new management information and control systems and to
train, motivate and manage its employees. There can be no assurance that the
Company will install such management information and control systems in an
efficient and timely manner, or that the Company's current or planned personnel,
systems, procedures and controls will be adequate to support the Company's
future operations. In addition, there can be no assurance that management will
be able to hire, train, retain, motivate and manage required personnel or that
the Company's management will be able to successfully identify, manage and
exploit existing and potential market opportunities. If the Company is unable to
manage growth effectively, its business, financial condition and results of
operations would be materially adversely affected.
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL. The Company's
performance is substantially dependent on the continued services and on the
performance of its senior management, particularly Joel A. Ronning, the
Company's President and Chief Executive Officer and Kelly J. Wical, the
Company's Chief Technology Officer. The Company's performance also depends on
its ability to retain and motivate its other executive officers and key
employees. The loss of the services of any of its executive officers or other
key employees could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company has a long-term
employment agreement only with Mr. Ronning. See "Management--Employment
Agreement." Also, the Company only maintains a "key person" life insurance
policy on Mr. Ronning. The Company's future success also depends on its ability
to identify, attract, hire, train, retain and motivate other highly skilled
technical, managerial, operations, merchandising, sales and marketing and
customer service personnel. Competition for such personnel is intense, and there
can be no assurance that the Company will be able to successfully attract,
assimilate or retain sufficiently qualified personnel. The failure to retain and
attract the necessary technical, managerial, merchandising, sales and marketing
and customer service personnel could have a material adverse effect on the
Company's business, financial condition and results of operations.
INTELLECTUAL PROPERTY. The Company regards trademarks, copyrights, trade
secrets and other intellectual property as critical to its success, and relies
on trademark, trade secret protection and confidentiality and/or license
agreements with its employees, clients, partners and others to protect its
proprietary rights. The Company's policy is to seek to protect its proprietary
position by, among other methods, filing United States and foreign patent
applications related to its proprietary technology, inventions and improvements
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that are important to the development of its business. Proprietary rights
relating to the Company's technologies will be protected from unauthorized use
by third parties only to the extent that they are covered by valid and
enforceable patents or are effectively maintained as trade secrets. While the
Company currently has twelve patent applications pending in the United States,
none have yet been issued and there can be no assurance that any pending patent
applications now or hereafter filed by, or licensed to, the Company will result
in patents being issued. The Company has filed certain petitions to correct
certain fee deficiencies for its pending patent applications and there can be no
assurance that such petitions can be granted or that the Company will elect to
pursue these applications. In addition, the laws of certain foreign countries do
not protect the Company's intellectual property rights to the same extent as do
the laws of the United States. The patent position of high technology companies
involves complex legal and factual questions and, therefore, their validity and
enforceability cannot be predicted with certainty. There can be no assurance
that any of the Company's patent applications, if issued, will not be
challenged, invalidated, held unenforceable or circumvented, or that the rights
granted thereunder will provide proprietary protection or competitive advantages
to the Company against competitors with similar technology. Furthermore, there
can be no assurance that others will not independently develop similar
technologies or duplicate any technology developed by the Company. The Company
has one registered trademark for "Digital River." Effective trademark and trade
secret protection may not be available in every country in which the Company's
products and services are made available online. There can be no assurance that
the steps taken by the Company to protect its proprietary rights will be
adequate or that third parties will not infringe or misappropriate the Company's
trade secrets, trademarks, trade dress and similar proprietary rights. In
addition, there can be no assurance that others will not independently develop
substantially equivalent intellectual property. A failure by the Company to
protect its intellectual property in a meaningful manner could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, litigation may be necessary in the future to enforce
the Company's intellectual property rights, to protect the Company's trade
secrets or to determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and diversion of
management and technical resources, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
In addition, there can be no assurance that other parties will not assert
infringement claims against the Company. From time to time, the Company may
receive notice of claims of infringement of other parties' proprietary rights.
There can be no assurance that such claims will not be asserted or prosecuted
against the Company in the future or that any past or future assertions or
prosecutions will not materially adversely affect the Company's business,
financial condition and results of operations. The defense of any such claims,
whether such claims are with or without merit, could be time-consuming, result
in costly litigation and diversion of technical and management personnel, cause
product shipment delays or require the Company to develop non-infringing
technology or enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company, or at all. In the event of a successful claim of infringement
against the Company and the failure or inability of the Company to develop
non-infringing technology or license the infringed or similar technology on a
timely basis, the Company's business, financial condition and results of
operations could be materially adversely affected.
LIABILITY FOR SOFTWARE PRODUCTS CONTENT. Claims may be made against the
Company for negligence, copyright or trademark infringement or other theories
based on the nature and content of software products that are delivered
electronically and subsequently distributed to others. Although the Company
carries general liability insurance, the Company's insurance may not cover
potential claims of this type or may not be adequate to cover all costs incurred
in defense of potential claims or to indemnify the Company for all liability
that may be imposed. Any costs or imposition of liability that is not covered by
insurance or in excess of insurance coverage could have a material adverse
effect on the Company's business, financial condition and results of operations.
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FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company
requires substantial working capital to fund its business. The Company has
experienced negative cash flow from operations since inception and expects to
continue to experience significant negative cash flow from operations for the
foreseeable future. The Company expects to use the net proceeds of this offering
primarily to fund continued operations, to expand sales and marketing activities
and for the continued investment in product development. The Company believes
that such proceeds, together with its existing capital resources, will be
sufficient to meet the Company's capital requirements for the foreseeable
future. However, the Company's capital requirements depend on several factors,
including the rate of market acceptance, the ability to expand the Company's
client base, the level of expansion of sales and marketing and other factors. If
capital requirements vary materially from those currently planned, the Company
may require additional financing sooner than anticipated. If additional funds
are raised through the issuance of equity securities, the percentage ownership
of the stockholders of the Company will be reduced, stockholders may experience
additional dilution, or such equity securities may have rights, preferences or
privileges senior to those of the holders of the Company's Common Stock. There
can be no assurance that additional financing will be available when needed on
terms favorable to the Company or at all. If adequate funds are not available or
are not available on acceptable terms, the Company may be unable to develop or
enhance its services, take advantage of future opportunities or respond to
competitive pressures, which could have a material adverse effect on the
Company's business, financial condition or operating results.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES. The Company is not currently
subject to direct regulation by any domestic or foreign governmental agency,
other than regulations applicable to businesses generally, export control laws
and laws or regulations directly applicable to electronic commerce. However, due
to the increasing popularity and use of the Internet, it is possible that a
number of laws and regulations may be adopted with respect to the Internet
covering issues such as user privacy, pricing, content, copyrights, distribution
and characteristics and quality of products and services. Furthermore, the
growth and development of the market for electronic commerce may prompt calls
for more stringent consumer protection laws that may impose additional burdens
on those companies conducting business online. The adoption of certain
additional laws or regulations may decrease the growth of the Internet or other
online services, which could, in turn, decrease the demand for the Company's
products and services and increase the Company's cost of doing business, or
otherwise have an adverse effect on the Company's business, financial condition
and results of operations.
Applicability to the Internet of existing laws governing issues such as
property ownership, copyrights, encryption and other intellectual property
issues, taxation, libel, export or import matters, obscenity and personal
privacy is uncertain. The vast majority of such laws were adopted prior to the
advent of the Internet and related technologies and, as a result, do not
contemplate or address the unique issues of the Internet and related
technologies. Changes to such laws intended to address these issues, including
some recently proposed changes, could create uncertainty in the Internet
marketplace which could reduce demand for the services of the Company or
increase the cost of doing business as a result of costs of litigation or
increased service delivery costs, or could in some other manner have a material
adverse effect on the Company's business, financial condition and results of
operations.
In addition, as the Company's services are available over the Internet in
multiple states and foreign countries, such jurisdictions may claim that the
Company is required to qualify to do business as a foreign corporation in each
such state or foreign country. The Company is qualified to do business only in
Minnesota, Iowa and Washington, and failure by the Company to qualify as a
foreign corporation in a jurisdiction where it is required to do so could
subject the Company to taxes and penalties for the failure to qualify and could
result in the inability of the Company to enforce contracts in such
jurisdictions. Any such new legislation or regulation, the application of laws
and regulations from jurisdictions whose laws do not currently apply to the
Company's business, or the application of existing laws and regulations to the
Internet and other electronic services could have a material adverse effect on
the Company's business, financial condition and results of operations.
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RISK OF INTERNATIONAL SALES. Although the Company sells software products
to end-users outside the United States, there can be no assurance that the
Company will be able to expand its international presence. Conducting business
outside of the United States is subject to certain risks, including changes in
regulatory requirements and tariffs, reduced protection of intellectual property
rights, difficulties in distribution, the burden of complying with a variety of
foreign laws and political or economic constraints on international trade or
instability. In addition, the export of certain software from the United States
is subject to export restrictions as a result of the encryption technology in
such software and may give rise to liability to the extent the Company violates
such restrictions. There can be no assurance that the Company will be able to
successfully market, sell and distribute its products in local markets or that
one or more of such factors will not have a material adverse effect on the
Company's future international operations, and consequently, on the Company's
business, financial condition and results of operations.
SALES AND OTHER TAXES. The Company does not currently collect sales or
other similar taxes with respect to ESD or shipments of software products into
states other than Minnesota. However, one or more local, state or foreign
jurisdictions may seek to impose sales tax collection obligations on out of
state companies, such as the Company, which engage in electronic commerce. In
addition, any new operation in states outside Minnesota could subject shipments
into such states to state sales taxes under current or future laws. A successful
assertion by one or more states or any foreign country that the Company should
collect sales or other taxes on the sale of merchandise could have a material
adverse effect on the Company's business, financial condition and results of
operations.
CONTROL BY EXISTING STOCKHOLDERS. Upon completion of this offering, the
Company's executive officers, directors and principal stockholders and their
respective affiliates will beneficially own in the aggregate approximately
, or % of the outstanding shares of Common Stock ( % if the
Underwriters' overallotment option is exercised in full). As a result, such
persons may have the ability to effectively control the Company and direct its
affairs and business, including the election of directors and approval of
significant corporate transactions. Such concentration of ownership may also
have the effect of delaying, deferring or preventing a change in control of the
Company, and making certain transactions more difficult or impossible absent the
support of such stockholders, including proxy contests, mergers involving the
Company, tender offers, open-market purchase programs or other purchases of
Common Stock that could give stockholders of the Company the opportunity to
realize a premium over the then prevailing market price for shares of Common
Stock.
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior
to this offering there has been no public market for the Company's Common Stock,
and there can be no assurance that an active market will develop or be
maintained. The initial public offering price was negotiated between the Company
and the Representatives of the Underwriters and may not be indicative of future
market prices. The trading price of the Common Stock is likely to be highly
volatile and could be subject to wide fluctuations in response to factors such
as actual or anticipated variations in quarterly operating results,
announcements of technological innovations, new products or services by the
Company or its competitors, changes in financial estimates by securities
analysts, conditions or trends in the Internet and online commerce industries,
changes in the economic performance and/or market valuations of other Internet,
online service or retail companies, announcements by the Company of significant
acquisitions, strategic partnerships, joint ventures or capital commitments,
additions or departures of key personnel, sales of Common Stock and other events
or factors, many of which are beyond the Company's control. In addition, the
stock market in general, and the Nasdaq National Market and the market for
Internet-related and technology companies in particular, has experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of such companies. The trading prices of many
technology companies' stocks are at or near historical highs and reflect price
earnings ratios substantially above historical levels. There can be no assurance
that these trading prices and price earnings ratios will be sustained. These
broad market and industry factors may materially and adversely affect the market
price of the Common Stock, regardless of the Company's actual operating
performance. In the past, following periods of volatility in the market price of
a company's securities, securities class-action litigation has often been
instituted against such companies. Such litigation, if instituted, could result
in substantial costs and a
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diversion of management's attention and resources, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Sales of significant
amounts of Common Stock in the public market after this offering or the
perception that such sales will occur could materially and adversely affect the
market price of the Common Stock or the future ability of the Company to raise
capital through an offering of its equity securities. Upon the completion of
this offering, the Company will have outstanding shares of Common Stock,
based on the number of shares of Common Stock outstanding as of May 31, 1998,
assuming (i) the issuance by the Company of shares of Common Stock offered
hereby, (ii) no exercise of options, warrants or other obligations to issue
shares after May 31, 1998 and (iii) no exercise of the Underwriters'
over-allotment option to purchase shares of Common Stock, except as
otherwise noted. Of these shares, the shares sold in this offering will
be freely tradable without restriction under the Securities Act. The remaining
20,570,645 shares of Common Stock held by existing stockholders are restricted
securities. Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 or Regulation S as promulgated under the Securities Act.
Holders, including all officers and directors, of 17,566,861 shares of the
Company's Common Stock and an additional 1,923,042 shares issuable upon exercise
of warrants and vested options have agreed with the representatives of the
Underwriters (the "Lock-Up Agreements"), subject to certain exceptions, not to
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock (whether such shares or any such securities are
then owned by such person or are thereafter acquired directly from the Company),
or to enter into any swap or similar arrangement that transfers, in whole or in
part, the economic risks of ownership of the Common Stock, without the prior
written consent of BT Alex. Brown Incorporated for a period of 180 days after
the date of the Prospectus. As a result of such contractual restrictions and the
provisions of Rule 144 and 701 or Regulation S, additional shares will be
available for sale in the public market as follows: (i) 2,262,968 shares of
Common Stock currently outstanding and 87,800 shares of Common Stock issuable
upon exercise of currently outstanding options will be eligible for sale 90 days
after the date of this Prospectus, (ii) 11,599,888 restricted securities will be
eligible for sale 180 days after the date of this Prospectus and (iii) the
remainder of the restricted securities will be eligible for sale from time to
time thereafter upon expiration of their respective one-year holding periods.
After this offering, the holders of approximately 12,122,263 shares of Common
Stock and options and warrants to purchase 1,212,500 shares of Common Stock will
be entitled to certain demand and piggyback registration rights with respect to
registration of such shares under the Securities Act. If such holders, by
exercising their demand or piggyback registration rights, cause a large number
of securities to be registered and sold in the public market, such sales could
have an adverse effect on the market price for the Company's Common Stock. If
the Company were to include in a Company initiated registration shares held by
such holders pursuant to the exercise of their piggyback registration rights,
such sales may have an adverse effect on the Company's ability to raise needed
capital. In addition, after the date of this Prospectus, the Company intends to
file a Form S-8 registration statement under the Securities Act to register all
shares of Common Stock issuable under the Company's 1998 Stock Plan. Such
registration statement is expected to become effective not earlier than 180 days
after the effective date of this offering. Shares covered by such registration
statement will thereupon be eligible for sale in the public markets, subject to
Rule 144 limitations applicable to affiliates.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. Upon completion of this
offering, the Company's Board of Directors will have the authority to issue up
to 5,000,000 shares of Preferred Stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or action by
the Company's stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. While the Company has no
present intention to issue Preferred Stock, any such issuance, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the
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effect of making it more difficult for a third party to acquire a majority of
the outstanding voting stock of the Company and may discourage bids for the
Common Stock at a premium over the market price of the Common Stock and may
affect adversely the market price of and the voting and other rights of the
holders of the Common Stock. In addition, the Company is subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law,
which prohibits the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 could have the effect of delaying or preventing a change of control
of the Company. The Company's Amended and Restated Certificate of Incorporation
("Restated Certificate of Incorporation") also provides for staggered three-year
terms for the members of the Board of Directors. The Company's Restated
Certificate of Incorporation and Bylaws also require that, effective upon the
closing of this offering, any action required or permitted to be taken by
stockholders of the Company must be effected at a duly called annual or special
meeting of the stockholders and may not be effected by a consent in writing. In
addition, special meetings of the stockholders of the Company may be called only
by the Board of Directors, the Chairman of the Board or the Chief Executive
Officer of the Company. These provisions, and other provisions of the Restated
Certificate of Incorporation, the Company's Bylaws and Delaware corporate law,
may have the effect of deterring hostile takeovers or delaying or preventing
changes in control or management of the Company, including transactions in which
stockholders might otherwise receive a premium for their shares over then
current market prices.
NO SPECIFIC PLAN FOR SIGNIFICANT PORTION OF PROCEEDS. The Company currently
has no specific plans for a significant portion of the net proceeds of the
offering. As a consequence, the Company's management will have the discretion to
allocate this portion of the net proceeds of this offering to uses that the
stockholders may not deem desirable, and there can be no assurance that these
proceeds can or will be invested to yield a significant return. Substantially
all of the proceeds of the offering will be invested in short-term,
interest-bearing, investment grade securities for an indefinite period of time.
DILUTION; ABSENCE OF DIVIDENDS. The initial public offering price will be
substantially higher than the book value per share of Common Stock. Investors
purchasing shares of Common Stock in this offering will incur immediate,
substantial dilution of $ per share in the net tangible book value of
Common Stock. Additional dilution will occur upon the exercise of outstanding
options and warrants. The Company has never declared or paid any cash dividends
and does not anticipate paying cash dividends in the foreseeable future. The
Company's loan and security agreement and capital equipment leases prohibit the
payment of dividends without the consent of the respective lenders.
YEAR 2000 COMPLIANCE. The Company uses a significant number of computer
software programs and operating systems in its internal operations. The use of
computer programs that rely on two-digit date programs to perform computations
and decision-making functions may cause computer systems to malfunction in the
year 2000 and lead to significant business delays and disruptions. While the
Company believes that the software applications that it uses or has developed
are year 2000 compliant, to the extent that any of these software applications
contain source code that is unable to appropriately interpret the upcoming
calendar year 2000, some level of modification or possible replacement of such
source code or applications will be necessary. The Company has analyzed the
software applications that it uses or has developed and, as a result, the
Company at this time does not anticipate any significant expense in ensuring
that they are year 2000 compliant. However, until the year 2000 arrives, the
Company cannot be absolutely certain that its analysis is correct. The Company
is currently unable to predict the extent to which the year 2000 issue will
affect its clients or suppliers, or the extent to which it would be vulnerable
to any failure by the clients or suppliers to remediate any year 2000 issues on
a timely basis. The failure of a client or a major supplier subject to the year
2000 to convert its systems on a timely basis or a conversion that is
incompatible with the Company's systems could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition the Company's business, financial condition and results of operations
may be materially adversely affected to the extent its end-users are unable to
use their credit cards due to the year 2000 issues that are not rectified by
their credit card vendors.
16
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the shares of Common Stock offered
hereby, at an assumed initial public offering price of $ per share, are
estimated to be approximately $ ($ if the Underwriters'
over-allotment option is exercised in full), after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company. The Company intends to use the net proceeds for general corporate
purposes, including continued investment in product development, expansion of
sales and marketing activities and working capital. The amounts and timing of
the Company's actual expenditures will depend upon numerous factors, including
the status of the Company's product development efforts, marketing and sales
activities, the amount of cash generated by the Company's operations and
competition. Pending application of the net proceeds as described above, the
Company intends to invest the net proceeds of the offering in short-term,
investment-grade, interest-bearing securities. See "Risk Factors--No Specific
Plans for Significant Portion of Proceeds."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company intends to retain any future earnings to support operations
and to finance the growth and development of the Company's business and does not
anticipate paying cash dividends for the foreseeable future.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998 (i) on an actual basis and (ii) as adjusted to reflect the sale of
shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $ per share and after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity (1)(2):
Common Stock; $0.01 par value; 100,000,000 shares authorized, 18,703,230 shares issued
and outstanding, actual; shares authorized, shares issued and
outstanding, as adjusted.............................................................. $ 187
Additional paid-in-capital.............................................................. 15,584
Accumulated deficit..................................................................... (5,880)
--------- -----------
Total stockholders' equity............................................................ 9,891
--------- -----------
Total capitalization................................................................ $ 9,891 $
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Excludes (i) 1,213,200 shares of Common Stock issuable upon exercise of
options outstanding as of March 31, 1998, at a weighted average exercise
price of $0.84 per share, (ii) 951,892 shares of Common Stock issuable upon
exercise of warrants outstanding as of March 31, 1998, at a weighted average
exercise price of $1.60 per share, and (iii) 2,286,800 shares reserved for
future grants under the Company's stock option plan. See
"Management--Employee Benefit Plans" and Note 4 of Notes to Consolidated
Financial Statements.
(2) Excludes 367,415 shares of Common Stock, 1,500,000 shares of Series A
Preferred Stock, and 252,632 shares of Common Stock issuable upon exercise
of warrants issued subsequent to March 31, 1998. See Note 7 of Notes to
Consolidated Financial Statements.
18
<PAGE>
DILUTION
The net tangible book value of the Company at March 31, 1998 was
approximately $ or $ per share. Net tangible book value per share
represents the amount of the Company's stockholders' equity less intangible
assets divided by the total number of shares of Common Stock outstanding on a
pro forma basis for the period immediately prior to this offering.
Net tangible book value dilution per share represents the difference between
the amount per share paid by purchasers of shares of Common Stock in the
offering made hereby and the pro forma net tangible book value per share of
Common Stock immediately after completion of the offering. After giving effect
to the sale by the Company of the shares of Common Stock offered hereby at
an assumed initial public offering price of $ per share, after deducting
estimated underwriting discounts and commissions and offering expenses, the pro
forma net tangible book value of the Company as of March 31, 1998 would have
been $ , or $ 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
purchasing shares at the assumed initial public offering price. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $
---------
Net tangible book value per share at March 31, 1998....................... $
Increase per share attributable to new investors..........................
---------
Pro forma net tangible book value per share after the offering..............
---------
Net tangible book value dilution per share to new investors................. $
---------
---------
</TABLE>
The following table sets forth as of March 31, 1998, the difference between
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
stockholders and by the new investors at an assumed initial public offering
price of $ per share for shares purchased in this offering, before deducting
estimated underwriting discounts and commissions and offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------- ------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........................... 18,703,230 % $ 16,812,563 % $ 0.90
New investors................................... % % $
------------ --------- ------------- ---------
Total......................................... 100.0% $ 100.0%
------------ --------- ------------- ---------
------------ --------- ------------- ---------
</TABLE>
The foregoing tables assume no exercise of outstanding stock options or
warrants and as of March 31, 1998, excludes (i) options to purchase 1,213,200
shares of Common Stock at a weighted average exercise price of $0.84 per share,
(ii) warrants to purchase 951,892 shares of Common Stock at a weighted average
exercise price of $1.60 per share and (iii) 2,286,800 shares reserved for future
grants under the Company's stock option plan. To the extent that outstanding
options or warrants are exercised, there will be further dilution to new
investors. The foregoing tables also exclude 367,415 shares of Common Stock,
1,500,000 shares of Series A Preferred Stock, and 252,632 shares of Common Stock
issuable upon exercise of warrants issued subsequent to March 31, 1998. See
"Management--Employee Benefit Plans" and Notes 4 and 7 of Notes to Consolidated
Financial Statements.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein. The statement of operations data for the years
ended December 31, 1995, 1996 and 1997 and the balance sheet data as of December
31, 1996 and 1997 have been derived from the audited Consolidated Financial
Statements of the Company included elsewhere in this Prospectus. The statement
of operations data for the period from inception to December 31, 1994 and the
balance sheet data as of December 31, 1994 and 1995 are derived from audited
Financial Statements not included in this Prospectus and contain all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for such
periods. The statement of operations data for the three months ended March 31,
1997 and 1998 and the balance sheet data as of March 31, 1998 are derived from
the Company's unaudited Consolidated Financial Statements also included
elsewhere in this Prospectus. Such unaudited statements have been prepared on
the same basis as the audited Consolidated Financial Statements and in the
opinion of management include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
position and results of operations of the Company for the unaudited interim
periods. The statement of operations data for the interim periods are not
necessarily indicative of results that may be expected for any other interim
period or for the year as a whole.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(FEBRUARY 9, THREE MONTHS ENDED
1994) TO YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------------- --------------------
1994 1995 1996 1997 1997 1998
------------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales................................................. $ -- $ -- $ 111 $ 2,472 $ 179 $ 2,270
Cost of sales......................................... -- -- 95 2,052 147 1,896
------ --------- --------- --------- --------- ---------
Gross profit........................................ -- -- 16 420 32 374
Operating expenses:
Sales and marketing................................. -- 3 68 1,501 270 1,060
Product development and operations.................. -- 130 230 1,528 169 703
General and administrative.......................... 13 32 415 929 81 208
------ --------- --------- --------- --------- ---------
Total operating expenses.......................... 13 165 713 3,958 520 1,971
------ --------- --------- --------- --------- ---------
Loss from operations.................................. (13) (165) (697) (3,538) (488) (1,597)
Interest income, net................................ 5 22 8 53 8 42
------ --------- --------- --------- --------- ---------
Net loss.............................................. $ (8) $ (143) $ (689) $ (3,485) $ (480) $ (1,555)
------ --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- ---------
Basic and diluted net loss per share (1).............. $ (0.00) $ (0.02) $ (0.09) $ (0.31) $ (0.06) $ (0.10)
------ --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- ---------
Shares used in per share computation (1).............. 8,000 8,000 8,000 11,271 8,573 14,919
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------ MARCH 31,
1994 1995 1996 1997 1998
--------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................ $ 679 $ 487 $ 800 $ 2,126 $ 10,057
Working capital (deficit)............................................ 667 478 (451) 1,244 8,350
Total assets......................................................... 783 635 1,202 3,405 11,917
Accumulated deficit.................................................. (8) (152) (840) (4,325) (5,880)
Total stockholders' equity (deficit)................................. 770 627 (58) 2,329 9,891
</TABLE>
- --------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method employed to determine the number of shares used to compute per
share amounts.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE
RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS,
INVOLVE RISKS AND UNCERTAINTIES, AND THAT ACTUAL EVENTS OR RESULTS MAY DIFFER
MATERIALLY. IN EVALUATING SUCH STATEMENTS, PROSPECTIVE INVESTORS SHOULD
SPECIFICALLY CONSIDER THE VARIOUS FACTORS IDENTIFIED IN THIS PROSPECTUS,
INCLUDING THE MATTERS SET FORTH UNDER THE CAPTION "RISK FACTORS," WHICH COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH
FORWARD-LOOKING STATEMENTS.
OVERVIEW
The Company is a leading provider of comprehensive electronic commerce
outsourcing solutions to software publishers and online retailers. The Company
was incorporated in February 1994 and commenced offering products for sale
through its clients' Web stores in August 1996. From inception through August
1996, the Company had no sales, and its activities related primarily to the
development of its CNS technology related to electronic commerce. In 1996, the
Company began to focus its business development efforts on building its
inventory of software products through contracts with software publishers and
had contracts with a total of 953 and 1,089 software publishers as of December
31, 1997 and May 31, 1998, respectively. In 1997, the Company began to develop
distribution relationships and had contracts with a total of 105 and 274 online
retailers as of December 31, 1997 and May 31, 1998, respectively. During the
five months ended May 31, 1998, the Company completed transactions for 689
software publishers and 70 online retailers.
The Company derives its revenue primarily from sales of third-party
software. The Company has contractual relationships with its software publisher
and online retailer clients which obligate the Company to pay to the client a
specified percentage of each sale. Revenues from the sale of software products,
net of estimated returns, are recognized upon either delivery through ESD or
shipment of the physical product to the end-user. The amount payable to the
software publisher or online retailer is reported as cost of sales. The Company
bears full credit risk with respect to most sales. Sales of software products
that are delivered through ESD accounted for 72% of sales for the three months
ended March 31, 1998. The Company maintains a supply of packaged software to
meet the physical delivery requirements of its clients, which supply is
primarily held on consignment.
The Company has a limited operating history upon which investors may
evaluate its business and prospects. Since inception, the Company has incurred
significant losses, and as of March 31, 1998, had an accumulated deficit of
approximately $5.9 million. The Company intends to expend significant financial
and management resources on the development of additional services, sales and
marketing, technology and operations to support larger-scale operations and
greater service offerings. As a result, the Company expects to incur additional
losses and continued negative cash flow from operations for the foreseeable
future, and such losses are anticipated to increase significantly from current
levels. There can be no assurance that the Company's sales will increase or even
continue at their current level or that the Company will achieve or maintain
profitability or generate cash from operations in future periods. The Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets such as electronic
commerce. To address these risks, the Company must, among other things, maintain
existing and develop new relationships with software publishers and online
retailers, implement and successfully execute its business and marketing
strategy, continue to develop and upgrade its technology and
transaction-processing systems, provide superior customer service and order
fulfillment, respond to competitive developments, and attract, retain and
motivate qualified personnel. There can be no assurance that the Company will be
successful in addressing such risks, and the failure to do so would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's current and future expense levels are based
largely on its planned operations and
21
<PAGE>
estimates of future sales. Sales and operating results generally depend on the
volume and timing of orders received, which are difficult to forecast. The
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, any significant shortfall in
sales would have an immediate adverse effect on the Company's business,
financial condition and results of operations. In view of the rapidly evolving
nature of the Company's business and its limited operating history, the Company
is unable to accurately forecast its sales and believes that period-to-period
comparisons of its operating results are not necessarily meaningful and should
not be relied upon as an indication of future performance.
RESULTS OF OPERATIONS
The following table sets forth consolidated statement of operations data for
the periods indicated as a percentage of revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales.................................................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................................................... 85.6 83.0 82.1 83.5
--------- --------- --------- ---------
Gross profit......................................................... 14.4 17.0 17.9 16.5
Operating expenses:
Sales and marketing.................................................. 61.1 60.7 150.8 46.7
Product development and operations................................... 207.2 61.8 94.4 31.0
General and administrative........................................... 374.0 37.6 45.3 9.2
--------- --------- --------- ---------
Total operating expenses........................................... 642.3 160.1 290.5 86.9
--------- --------- --------- ---------
Loss from operations................................................... (627.9) (143.1) (272.6) (70.4)
Interest income, net................................................. 7.2 2.1 4.4 1.9
--------- --------- --------- ---------
Net loss............................................................... (620.7)% (141.0)% (268.2)% (68.5)%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
SALES. The Company derives its revenue primarily from sales of third-party
software. The Company recognizes revenue from the sale of software products upon
delivery through ESD or shipment of the physical product to the end-user. Sales
are comprised of the gross selling price of software sold by the Company, net of
estimated returns, plus any outbound shipping and handling charges, as well as
gross revenue generated by certain merchandising activities. The Company bears
credit risk with respect to most sales. Sales increased from $179,000 for the
three months ended March 31, 1997 to $2.3 million for the three months ended
March 31, 1998 primarily as a result of significant growth in the number of the
Company's software publisher and online retailer clients as well as increasing
market acceptance of ESD. International sales represented approximately 30% and
32% of sales for the three months ended March 31, 1997 and March 31, 1998,
respectively.
GROSS PROFIT. Cost of sales consists primarily of the amount payable to the
software publishers and online retailers for product sold to the end-user and
outbound and inbound shipping and distribution costs for physical product. Cost
of sales increased from $147,000 in the three months ended March 31, 1997 to
$1.9 million in the three months ended March 31, 1998, reflecting the Company's
growth in sales. The Company's gross profit margin decreased from 17.9% in the
three months ended March 31, 1997 to 16.5% in the three months ended March 31,
1998, as a result of the addition of certain lower margin software publisher
clients during the second half of 1997. The Company has historically generated
higher gross margins on sales through online retailer client Web stores compared
to sales through software publisher client Web stores. There can be no
assurance, however, that the Company will continue to generate higher
22
<PAGE>
gross margins on sales through online retailer client Web stores. In each of the
three months ended March 31, 1997 and 1998, less than 5% of the Company's sales
were generated through online retailer client Web stores. The Company expects
that an increasing percentage of its sales will be generated through online
retailers. The Company believes that Internet commerce and related services will
become more competitive in the near future. Accordingly, the Company may reduce
or alter its pricing structure and policies in the future and any such change
would reduce gross margins.
SALES AND MARKETING. Sales and marketing expense consists primarily of
personnel and related expenses, advertising and promotional expenses, bad debt
expense and credit card transaction fees. Sales and marketing expense increased
from $270,000 in the three months ended March 31, 1997 to $1.1 million in the
three months ended March 31, 1998. The increase resulted from expanding the
sales and marketing infrastructure required to increase the number of and
provide support to software publisher and online retailer clients. As a
percentage of sales, such expenses decreased from 150.8% in the three months
ended March 31, 1997 to 46.7% in the three months ended March 31, 1998,
primarily reflecting the Company's growth in sales. The Company expects that
sales and marketing expense will continue to increase in absolute dollars as the
Company continues to build its sales and marketing infrastructure and to develop
marketing programs.
PRODUCT DEVELOPMENT AND OPERATIONS. Product development and operations
expense consists primarily of personnel and related expenses and consulting
associated with developing, enhancing and maintaining the Company's CNS and
related facilities, internal systems and telecommunications infrastructure as
well as customer service. Product development and operations expense increased
from $169,000 in the three months ended March 31, 1997 to $703,000 in the three
months ended March 31, 1998. The increase was primarily related to increased
personnel and consulting costs related to developing, enhancing and maintaining
the Company's CNS and related facilities. As a percentage of sales, such expense
decreased from 94.4% in the three months ended March 31, 1997 to 31.0% in the
three months ended March 31, 1998, primarily reflecting the Company's growth in
sales. The Company believes that continued investment in product development and
operations is critical to attaining its strategic objectives and, and as a
result, expects product development and operations expenses will continue to
increase in absolute dollars. As a percentage of sales, these expenses are
expected to decrease as sales increase.
GENERAL AND ADMINISTRATIVE. General and administrative expense consists
principally of executive, accounting and administrative personnel, professional
fees, and recruiting expense. General and administrative expense increased from
$81,000 in the three months ended March 31, 1997 to $208,000 in the three months
ended March 31, 1998. The increase was due to increased personnel and related
expenses and increased professional fees and patent amortization expense. As a
percentage of sales, such expense decreased from 45.3% in the three months ended
March 31, 1997 to 9.2% in the three months ended March 31, 1998, primarily
reflecting the Company's growth in sales. The Company expects general and
administrative expense to increase in absolute dollars in the future,
particularly as the Company continues to build infrastructure to support growth
and incurs costs associated with being a public company. As a percentage of
sales, these expenses are expected to decrease as sales increase.
INTEREST INCOME, NET. Interest income consists of earnings on the Company's
cash and cash equivalents, net of interest expense. Interest income increased
from $8,000 in the three months ended March 31, 1997 to $42,000 in three months
ended March 31, 1998. The increase was attributable to interest received on
higher average cash and cash equivalent balances. The Company expects interest
income to increase as a result of the net proceeds from this offering.
INCOME TAXES. The Company paid no income taxes in the three months ended
March 31, 1997 or the three months ended March 31, 1998. The Company has
incurred a net loss for each period since inception. As of March 31, 1998, the
Company had approximately $5.9 million of net operating loss carryforwards for
federal income tax purposes, which expire beginning in 2009. Due to the
uncertainty of future profitability, a valuation allowance equal to the deferred
tax asset has been recorded. Certain changes in ownership
23
<PAGE>
resulting from the sale of the Common Stock offered hereby will limit the future
annual realization of the tax net operating loss carryforwards to a specified
percentage of the Company under Section 382 of the Internal Revenue Code.
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
SALES. The Company had no sales in 1995, as it was still developing its
technology related to electronic commerce. The Company's sales increased from
$111,000 for the year ended December 31, 1996 to $2.5 million for the year ended
December 31, 1997 as a result of significant growth in the number of the
Company's software publisher and online retailer clients as well as the
increasing market acceptance of ESD. International sales accounted for 32% and
31% of total sales in the years ended December 31, 1996 and 1997, respectively.
GROSS PROFIT. Cost of sales increased substantially during 1997, reflecting
the Company's growth in sales. The Company's gross margin increased from 14.4%
for the year ended December 31, 1996 to 17.0% for the year ended December 31,
1997.
SALES AND MARKETING. Sales and marketing expense increased from $3,000 to
$68,000 to $1.5 million for the years ended December 31, 1995, 1996 and 1997,
respectively, resulting from additional sales and marketing personnel and
related expenses, increased advertising and promotional expense, increased bad
debt expense and increased credit card transaction fees due to the increased
sales. As a percentage of sales, sales and marketing expense decreased from
61.1% in the year ended December 31, 1996 to 60.7% for the year ended December
31, 1997, primarily reflecting the Company's growth in sales.
PRODUCT DEVELOPMENT AND OPERATIONS. Product development and operations
expense increased from $130,000 to $230,000 to $1.5 million for the years ended
December 31, 1995, 1996 and 1997, respectively. The increase was primarily
related to increased personnel and consulting costs related to developing,
enhancing and maintaining the Company's CNS and related facilities. As a
percentage of sales, the expenses decreased from 207.2% in the year ended
December 31, 1996 to 61.8% for the year ended December 31, 1997, primarily
reflecting the Company's growth in sales.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased
from $32,000 to $415,000 to $929,000, for the years ended December 31, 1995,
1996 and 1997, respectively, primarily due to increased personnel related
expense and professional fees. As a percentage of sales, general and
administrative expense decreased from 374.0% in the year ended December 31, 1996
to 37.6% for the year ended December 31, 1997, primarily reflecting the
Company's growth in sales.
INTEREST INCOME, NET. Interest income decreased from $22,000 to $8,000 and
increased to $53,000 for the years ended December 31, 1995, 1996 and 1997,
respectively, resulting from changes in average cash and cash equivalent
balances.
INCOME TAXES. The Company paid no income taxes in the years ended December
31, 1995, 1996 and 1997.
24
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited consolidated quarterly
statement of operations data for the seven quarters ended March 31, 1998. In the
opinion of management, this information has been prepared substantially on the
same basis as the audited Consolidated Financial Statements appearing elsewhere
in this Prospectus, and all necessary adjustments, consisting only of normal
recurring adjustments, have been included in the amounts stated below to present
fairly the unaudited consolidated quarterly results of operations. The
consolidated quarterly data should be read in conjunction with the audited
Consolidated Financial Statements of the Company and the Notes thereto appearing
elsewhere in this Prospectus. The results of operations for any quarter are not
necessarily indicative of the results of operations for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1996 1996 1997 1997 1997 1997 1998
------------- ------------ --------- -------- ------------- ------------ ---------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales............................ $ 25 $ 86 $ 179 $ 282 $ 683 $ 1,328 $ 2,270
Cost of sales.................... 21 74 147 232 561 1,112 1,896
----- ----- --------- -------- ------------- ------------ ---------
Gross profit................... 4 12 32 50 122 216 374
Operating expenses:
Sales and marketing............ 25 38 270 359 246 626 1,060
Product development and
operations................... 55 118 169 246 530 583 703
General and administrative..... 112 241 81 152 294 402 208
----- ----- --------- -------- ------------- ------------ ---------
Total operating expenses..... 192 397 520 757 1,070 1,611 1,971
----- ----- --------- -------- ------------- ------------ ---------
Loss from operations............. (188) (385) (488) (707) (948) (1,395) (1,597)
Interest income, net........... 3 1 8 11 26 8 42
----- ----- --------- -------- ------------- ------------ ---------
Net loss......................... $(185) $(384) $(480) $(696) $ (922) $(1,387) $(1,555)
----- ----- --------- -------- ------------- ------------ ---------
----- ----- --------- -------- ------------- ------------ ---------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1996 1996 1997 1997 1997 1997 1998
------------- ------------ --------- -------- ------------- ------------ ---------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................... 84.0 86.0 82.1 82.3 82.1 83.7 83.5
------------- ------------ --------- -------- ------------- ------------ ---------
Gross profit................... 16.0 14.0 17.9 17.7 17.9 16.3 16.5
Operating expenses:
Sales and marketing............ 100.0 44.2 150.8 127.3 36.0 47.1 46.7
Product development and
operations................... 220.0 137.2 94.4 87.2 77.7 43.9 31.0
General and administrative..... 448.0 280.2 45.3 53.9 43.0 30.3 9.2
------------- ------------ --------- -------- ------------- ------------ ---------
Total operating expenses..... 768.0 461.6 290.5 268.4 156.7 121.3 86.9
------------- ------------ --------- -------- ------------- ------------ ---------
Loss from operations............. (752.0) (447.6) (272.6) (250.7) (138.8) (105.0) (70.4)
Interest income, net........... 12.0 1.1 4.4 3.9 3.8 0.6 1.9
------------- ------------ --------- -------- ------------- ------------ ---------
Net loss......................... (740.0)% (446.5)% (268.2)% (246.8)% (135.0)% (104.4)% (68.5)%
------------- ------------ --------- -------- ------------- ------------ ---------
------------- ------------ --------- -------- ------------- ------------ ---------
</TABLE>
The Company's sales increased in each of the quarters presented as a result
of an increase in the number of the Company's software publisher and online
retailer clients as well as an increase in the market acceptance of ESD. Most
operating expense categories generally increased in absolute dollars over the
quarters presented, reflecting the increased spending on personnel and related
expenses, advertising and marketing, and developing, enhancing and maintaining
the Company's CNS and related facilities. Gross margin for the three months
ended December 31, 1997 and March 31, 1998 were lower than gross margins in the
first nine months of 1997 primarily as a result of the addition of certain lower
margin software publisher clients. Sales and marketing expenses for the three
months ended September 30, 1997 were lower than the generally increasing quarter
to quarter trend, primarily as a result of reduced advertising and
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promotional expenses. General and administrative expenses have varied widely in
the periods indicated due to the timing and amounts of professional fees and
transactions costs.
The Company's quarterly and annual operating results are likely to fluctuate
significantly in the future due to a variety of factors, many of which are
outside the Company's control. Factors that will influence the Company's
operating results include: (i) the Company's ability to retain existing software
publishers and online retailers as clients, to attract new software publishers
and online retailers as clients at a steady rate and to maintain software
publisher, online retailer and end-user satisfaction; (ii) the announcement or
introduction of new Web sites, Web stores, services and products by the Company
and its competitors; (iii) price competition and margin erosion; (iv) the level
of use of the Internet and consumer acceptance of the Internet for the purchase
of consumer products such as those offered by the Company; (v) the Company's
ability to upgrade and develop its systems and infrastructure, in particular its
CNS; (vi) the termination of any strategic accounts such as Corel Corporation,
from which the Company derives a significant portion of its sales; (vii)
technical difficulties or system downtime; (viii) the Company's ability to
attract new personnel in a timely and effective manner; (ix) the mix of sales
generated through software publisher client Web stores compared to online
retailer Web stores; (x) the failure of Internet bandwidth to increase over time
and/or an increase in the cost to end-users of obtaining or utilizing Internet
bandwidth; (xi) the amount and timing of operating costs and capital
expenditures relating to expansion of the Company's business, operations and
infrastructure; (xii) certain U.S. and foreign government regulations; and
(xiii) economic conditions specific to the Internet, electronic commerce and the
software industry, and economic conditions in general. The Company also may, as
inducement to obtain certain strategic contracts, offer certain economic terms
to software publishers and online retailers which will reduce its gross margins.
As a result, the Company believes that it will continue to incur operating
losses in the future. Due to the foregoing factors, the Company's annual or
quarterly operating results may fall below the expectations of securities
analysts and investors. In such event, the trading price of the Common Stock
would likely be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
the private placement of equity securities, which yielded an aggregate of $19.2
million of net proceeds through June 10, 1998.
Net cash used in operating activities in the years ended December 31, 1995,
1996 and 1997 and in the three months ended March 31, 1998 was $142,000,
$409,000, $2.6 million and $626,000, respectively. Net cash used for operating
activities in each of these periods was primarily the result of net losses,
offset in part by increases in accounts payable, accrued expenses and
depreciation and amortization.
Net cash used in investing activities in the years ended December 31, 1995,
1996 and 1997 and the three months ended March 31, 1998 was $50,000, $133,000,
$984,000 and $611,000, respectively. Net cash used in investing activities in
each of these periods was related to the purchases of property and equipment and
patent acquisition costs. The property and equipment purchased consisted
primarily of computer hardware and software and facilities improvements.
Net cash provided by financing activities in the years ended December 31,
1995, 1996 and 1997 and in the three months ended March 31, 1998 was $0,
$855,000, $4.9 million and $9.1 million, respectively. The cash provided by
financing activity was the result of proceeds from the sale of convertible
debentures (subsequently converted into shares of Common Stock) and sales of the
Company's Common Stock in 1996, 1997 and in the first three months of 1998.
Subsequent to March 31, 1998, the Company sold equity securities for an
aggregate of $3.4 million of net proceeds through June 10, 1998.
As of March 31, 1998 the Company had approximately $10.1 million of cash and
cash equivalents. The Company's principal commitments consisted of obligations
outstanding under operating leases. Although the Company has no material
commitments for capital expenditures, it anticipates an increase in the rate of
capital expenditures consistent with its anticipated growth in operations,
infrastructure and personnel. The Company anticipates that it will continue to
add computer hardware resources, deploy additional commerce servers worldwide,
and relocate its primary office facility during the next twelve months. The
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Company may also use cash to acquire or license technology, products or
businesses related to the Company's current business. The Company also
anticipates that it will continue to experience significant growth in its
operating expenses for the foreseeable future and that its operating expenses
will be a material use of the Company's cash resources.
The Company believes that the net proceeds from this offering, together with
existing cash and cash equivalents will be sufficient to meet its anticipated
cash needs for working capital and capital expenditures for the foreseeable
future, although the Company may seek to raise additional capital during that
period. The sale of additional equity or convertible debt securities could
result in additional dilution to the Company's stockholders. There can be no
assurance that financing will be available in amounts or on terms acceptable to
The Company, if at all. See "Risk Factors--Future Capital Needs; Uncertainty of
Additional Funding."
YEAR 2000 COMPLIANCE
The Company uses a significant number of computer software programs and
operating systems in its internal operations. The use of computer programs that
rely on two-digit date programs to perform computations and decision-making
functions may cause computer systems to malfunction in the year 2000 and lead to
significant business delays and disruptions. While the Company believes that the
software applications that it uses or has developed are year 2000 compliant, to
the extent that any of these software applications contain source code that is
unable to appropriately interpret the upcoming calendar year 2000, some level of
modification or possible replacement of such source code or applications will be
necessary. The Company has analyzed the software applications that it uses or
has developed and, as a result, the Company at this time does not anticipate any
significant expense in ensuring that they are year 2000 compliant. However,
until the year 2000 arrives, the Company cannot be absolutely certain that its
analysis is correct. The Company is currently unable to predict the extent to
which the year 2000 issue will affect its clients or suppliers, or the extent to
which it would be vulnerable to any failure by clients or suppliers to remediate
any year 2000 issues on a timely basis. The failure of a major client or
supplier subject to the year 2000 to convert its systems on a timely basis or a
conversion that is incompatible with the Company's systems could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition the Company's business, financial condition and results
of operations may be materially adversely affected to the extent its end-users
are unable to use their credit cards due to year 2000 issues that are not
rectified by their credit card vendors.
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BUSINESS
Digital River is a leading provider of comprehensive electronic commerce
outsourcing solutions to software publishers and online retailers. The Company
has developed a technology platform that allows it to provide a suite of
electronic commerce services to its software publisher and online retailer
clients, including ESD. The Company also provides data mining and merchandising
services to assist clients in increasing Internet page view traffic to, and
sales through, their Web stores. Rather than maintaining its own branded Web
store that would compete with its clients, Digital River provides an outsourcing
solution that allows its clients to promote their own brands while leveraging
Digital River's investment in infrastructure and technology. As of May 31, 1998,
the Company had contracts with 1,089 software publisher clients and 274 online
retailer clients, including Corel Corporation, Cyberian Outpost, Inc., Lotus
Development Corporation, Micro Warehouse, Inc., Network Associates, Inc. and
Symantec Corporation, and maintained a database of more than 105,000 software
products from its various software publisher clients, including more than 17,000
software titles and more than 88,000 digital images and fonts. Through May 31,
1998, the Company had completed more than 136,000 transactions for more than
105,000 unique end-users.
Digital River's proprietary CNS technology serves as the platform for the
Company's solutions. The CNS incorporates custom software applications that
enable ESD, Web store authoring, fraud prevention, export control, merchandising
programs and online registration, and features a database of more than 105,000
software products. Using its CNS platform, the Company creates Web stores for
its clients that replicate the look and feel of such clients' own Web sites.
End-users can browse for products and make purchases online, and, once purchases
are made, the Company delivers the products directly to the end-user, primarily
through ESD. The Company also provides transaction processing services and
collects and maintains critical information about end-users. This information
can later be used by the Company's clients to facilitate add-on or upgrade sales
and for other direct marketing purposes. The Company actively manages direct
marketing campaigns for its clients, and also delivers purchase information and
Web store traffic statistics to its clients on a regular basis.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND ELECTRONIC COMMERCE.
The Internet has emerged as a significant global communications medium,
enabling millions of people to share information and conduct business
electronically. A number of factors have contributed to the growth of the
Internet and its commercial use, including: (i) the large and growing installed
base of personal computers in homes and businesses; (ii) improvements in network
infrastructure and bandwidth; (iii) easier and cheaper access to the Internet;
(iv) increased awareness of the Internet among consumer and business users; and
(v) the rapidly expanding availability of online content and commerce which
increases the value to users of being connected to the Internet. According to
International Data Corporation ("IDC"), the number of Internet users worldwide
will grow from an estimated 69 million at the end of 1997 to an estimated 320
million by 2002.
The increasing functionality, accessibility and overall usage of the
Internet have made it an attractive commercial medium. Online retailers can
interact directly with end-users and can frequently adjust their featured
selections, shopping interfaces and pricing. The ability to reach and serve a
large and global group of end-users electronically from a central location and
the potential for personalized low-cost customer interaction provide additional
economic benefits for online retailers. Unlike traditional retail channels,
online retailers do not have the burdensome costs of managing and maintaining a
significant physical retail store infrastructure or the continuous printing and
mailing costs of catalog marketing. Because of these advantages, online
retailers have the potential to build large, global customer bases quickly and
to achieve superior economic returns over the long term. An increasingly broad
base of products is being sold successfully online, including computers, travel
services, brokerage services, automobiles and music, as well
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as software products. IDC estimates that the total value of goods and services
purchased over the Web worldwide will increase from an estimated $12.4 billion
in 1997 to an estimated $133.0 billion in 2000.
THE RETAIL SOFTWARE MARKET.
The Company believes that the market for retail software is large and will
continue to grow. Total sales of software by retailers surveyed by PC Data,
which comprise 70% of the domestic market, increased 16.5% to an estimated $3.3
billion in 1997 as compared to an estimated $2.8 billion in 1996. The
traditional channels for the retail sale of software products are highly
fragmented and include regional and national superstore retail chains, catalog
companies and small single location stores. The superstores and catalog
companies carry hundreds to thousands of software products, while the single
location stores generally carry only a limited number.
Traditional sales channels have inherent limitations and disadvantages for
software publishers, retailers and end-users. A significant limitation of
physical retail stores is the limited amount of available shelf space. As a
result, competition for shelf space is intense, and often only the major
software publishers are able to effectively distribute their software products.
Even these publishers usually cannot offer their total available product
offerings in retail stores. In addition, software publishers typically must
grant generous rights of return because of the high cost of inventory and the
risk of inventory obsolescence. As a result, software publishers effectively
bear the risk of any difference between projected and actual sales, creating
uncertainty as to future sales and revenue recognition risks. Physical retailers
must also make significant investments in real estate, personnel and
inventories. Similarly, direct mail distribution is constrained by practical
catalog size limitations, which restrict both the number of products and the
information about those products that can be included in a catalog. Direct mail
distribution also involves printing expenses, mailing costs, inherent delays in
reacting to price and product changes and low response rates. With both physical
retail and direct mail distribution, there is a significant lead time between
the development or upgrading of software and its introduction into the market.
Finally, traditional sales channels are typically characterized by low end-user
registration rates, and provide software publishers little information on end-
user behavior, demographics and product demand.
ADVANTAGES OF ESD
The Internet provides a compelling solution that addresses many of the
limitations of traditional distribution methods. The Internet is particularly
well suited for the distribution of software products because the products can
be quickly and conveniently downloaded in a cost-effective manner to the user's
home or office computer through ESD. In addition, unlike physical retail stores
or catalogs, shelf space on the Internet is virtually unlimited, enabling
software publishers to offer the full range of their software products. ESD
significantly reduces or eliminates many of the costs in the distribution chain,
including manufacturing, packaging, shipping and warehousing costs, such as
costs related to returns and inventory management.
OPPORTUNITY FOR ELECTRONIC COMMERCE OUTSOURCING.
The Company believes that the market for software sales online continues to
grow rapidly. Jupiter Communications, LLC estimates that the market for software
sales online will increase from an estimated $69 million in 1997 to an estimated
$2.3 billion by 2002. However, unlike established physical distribution channels
for shrink-wrapped software, there is currently no established, comprehensive
electronic distribution source for online retailers. The distribution of
software products via ESD is complex and requires significant up-front and
ongoing investments in secure, reliable and scaleable systems. Accordingly, the
Company believes that a substantial market opportunity exists for a
comprehensive, cost-effective, outsourced electronic commerce solution that
provides software publishers and online retailers with access to a critical mass
of software products and a robust distribution and transaction network.
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THE DIGITAL RIVER SOLUTION
The Company has developed a technology platform that enables it to provide a
comprehensive suite of electronic commerce services to its software publisher
and online retailer clients, including ESD. The Company also leverages its
merchandising expertise to increase traffic and sales for its clients. Rather
than maintaining its own branded Web store that would compete with its clients,
Digital River provides an outsourcing solution for ESD and merchandising
services that enables its clients to promote their own brands while leveraging
Digital River's investment in infrastructure. In addition, this approach enables
Digital River to leverage its clients' brand investments and the traffic at its
clients' sites to maximize the number of transactions completed through Digital
River.
The following illustrates the process through which an end-user purchases
software products from a client using the Company's CNS technology platform:
[GRAPHIC]
PICTORIAL FLOWCHART DEPICTING A PURCHASE OF
SOFTWARE THROUGH THE COMPANY'S CENTRAL NETWORK
SERVER ("CNS"), SHOWING THE TRANSACTION PROCESSING
AND OTHER VALUE-ADDED SERVICES PROVIDED BY THE
COMPANY.
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BENEFITS TO SOFTWARE PUBLISHERS. The Company's electronic commerce solution
enables software publishers to offer the complete library of their software
products directly to end-users from their Web stores and through the Company's
network of online retailers. This benefit is particularly significant for
smaller software publishers who have limited market access through traditional
distribution methods. The Company's solution also provides major software
publishers a channel for their underdistributed products permitting them to
offer online their complete product catalog. In addition, through its 100%
end-user registration and data warehousing, Digital River provides software
publishers with valuable end-user information that can facilitate targeted
marketing, upgrade notification and sophisticated merchandising strategies.
Finally, by exploiting the distribution relationships Digital River has
developed with a large network of online retailers, software publishers can
reduce or eliminate the need for multiple retailer relationships, thereby
lowering administrative costs and reducing the number of master copies of their
software in existence for distribution.
BENEFITS TO ONLINE RETAILERS. Online retailers can use Digital River's
robust CNS technology to sell software products online, without having to build
and maintain their own electronic commerce infrastructure. In addition, online
retailers can access virtually all of Digital River's inventory of more than
105,000 software products, without the burden of developing and maintaining
relationships with hundreds of software publishers. Like software publishers,
online retailers enjoy the cost savings from online fulfillment and the database
marketing benefits offered by Digital River. Online retailers can effectively
outsource electronic commerce functionality while building their own brands
online. Online retailers also eliminate the cost and risk associated with
carrying inventory and the risk of inventory obsolescence. The Company also
allows niche market and high traffic Web sites to become online retailers at
minimal cost.
BENEFITS TO END-USERS. Digital River's solution emphasizes convenience by
allowing end-users to purchase and receive software products online distributed
through ESD twenty-four hours a day, seven days a week ("24x7"), from their home
or office. End-users are not required to make a trip to the store, can act
immediately on a purchase impulse, and can locate software products that are
difficult to find. Because Digital River has a global reach, it can deliver an
extremely broad selection to end-users in rural, international or other
locations that cannot support retail stores. Software products purchased online
can either be quickly and conveniently downloaded and installed through ESD or
delivered physically. Using the Company's sophisticated search engine
technology, end-users visiting retailers' outline Web stores can access Digital
River's inventory of more than 105,000 software products. End-users also benefit
from the protection of Digital River's archiving service, through which the
Company guarantees replacement of software in the event of accidental
destruction through computer error or malfunction. End-users also benefit from
Digital River's 24x7 ESD support and readily available upgrades.
STRATEGY
The Company's objective is to become the leading provider of comprehensive
electronic commerce outsourcing solutions to software publishers and online
retailers. The Company intends to achieve its objective through the following
key strategies:
DEVELOP AND EXPAND RELATIONSHIPS WITH SOFTWARE PUBLISHERS. The Company
plans to continue to build its inventory of software products through additional
contractual relationships with software publishers. As of May 31, 1998, the
Company had signed contracts with 1,089 software publishers, representing more
than 105,000 software products and 841 Web stores. The Company believes that its
ability to develop Web hosting relationships with its software publisher clients
increases its reach to end-users and provides the basis for a long term
relationship with its software publisher clients. The Company further believes
that the large number of software products offered by the Company from its
software publisher clients will be critical to the Company's ability to deliver
a compelling inventory of products to online retailer clients.
AGGRESSIVELY EXPAND NETWORK OF ONLINE RETAILERS. The Company believes that
by increasing the number of points of entry to its CNS, Digital River will
increase the number of transactions over its network. Accordingly, in addition
to expanding and developing relationships with software publishers, the
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Company seeks to expand aggressively its network of online retailer clients.
Online retailer clients include traditional store-based and mail order retailers
with a Web presence, online retailers dedicated to online commerce, as well as
high traffic or niche Web site operators desiring to add electronic commerce
functionality. The Company had contracts with 274 online retailers as of May 31,
1998. The Company's model enables it to leverage its clients' marketing
resources to direct traffic to its software distribution network. The Company
expects online retailers to represent an increasing percentage of its sales.
PROVIDE COMPLEMENTARY SOLUTIONS. Digital River intends to continue to be a
neutral provider of cost-effective outsourcing solutions that complement the
business models of its software publisher and online retailer clients. The
Company does not maintain its own branded Web store. Instead, the Company
provides an outsourcing solution that enables its clients to promote their own
brands while leveraging Digital River's investment in infrastructure and
technology. Digital River therefore leverages its clients' investments in their
brands to generate sales. The Company may co-invest with its clients from time
to time to help drive traffic to its clients' Web stores and to Digital
River-assisted transactions.
PROVIDE CLIENTS VALUE-ADDED SERVICES. The Company believes its growing data
warehouse of end-user purchasing information provides it with a powerful tool to
assist clients with value-added services, such as targeted advertising,
promotions and direct response merchandising. The Company offers merchandising
and marketing programs, customer support and communications programs,
advertising placement services, and Web store design services. The Company
intends to continue to expand its programs and believes that these programs help
build stronger partnerships with its software publisher and online retailers,
while enabling its clients to increase sales of software on their sites.
MAINTAIN TECHNOLOGY LEADERSHIP. The Company believes that its CNS
technology has given it a competitive advantage in the market for ESD
outsourcing solutions. The Company will continue to invest in and enhance its
CNS technology in order to increase redundancy, reliability and bandwidth, to
expand services and to reduce costs. By leveraging its fixed-cost
infrastructure, Digital River will improve its ability to provide low cost, high
value services to its clients while utilizing the latest technology.
EXPAND INTERNATIONALLY. Digital River will continue to expand
internationally to gain access to additional software publishers, online
retailers and end-users. The Company intends to replicate its domestic strategy
by building its inventory of international and foreign language software
products and expanding its distribution through software publishers and online
retailers. The Company believes that significant opportunities exist
internationally to increase sales and to further leverage its scaleable
infrastructure.
SERVICES
The Company provides a broad range of services to its software publisher and
online retailer clients, including Web store hosting, ESD, physical fulfillment
and merchandising services.
WEB STORE HOSTING. The Company hosts the Web stores for all of its online
retailer clients and for those software publisher clients that choose this
option. The Company's outsourcing solution is mission-critical for many of its
software publisher and online retailer clients. Therefore, the Company has a
data center that is designed to provide its clients with the performance they
require for continuous Web store operations. The data center features redundant,
high speed connections to the Internet, 24x7 security and monitoring, back-up
generators and dedicated power.
Digital River can quickly and efficiently create Web stores for its clients,
which can be accessed easily by clicking on a "buy button" on a client's
existing Web site. The end-user is then transferred to a Web store hosted on
Digital River's CNS, which replicates the look and feel of the client Web site.
The end-user can then shop for products and make purchases online. By
replicating the look and feel of its clients' Web sites, Digital River supports
clients in conducting electronic commerce under their own brands. Digital
River's solution allows clients to choose either ESD or physical delivery, and
clients also benefit from Digital River's 24x7 ESD customer support and
archiving services. The transaction information is captured
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and added to Digital River's data warehouse. The Company's ability to retrieve
and manipulate this information creates a powerful data mining tool, which can
be used for targeted merchandising to end-users through e-mails, banner
presentations and special offers.
ESD SERVICES. The Company offers clients access to its ESD capabilities to
permit delivery of software products to an end-user's computer via the Internet.
ESD eliminates many of the costs that exist in the physical distribution chain,
such as manufacturing, packaging, shipping, warehousing and inventory carrying
and handling costs. Delivery is fulfilled when a copy is made from the master on
the Company's CNS and is then securely downloaded to the end-user via the
Internet. Digital River's ESD distribution model not only reduces costs, thereby
increasing margins available to software publishers and online retailers, but
also solves the shelf space problem constraining product availability and sales.
While most software publishers use the Company's Web hosting services, certain
software publishers use only the Company's ESD services, which provide them with
online distribution through the Company's extensive network of online retailers.
PHYSICAL FULFILLMENT SERVICES. In addition to distribution through ESD, the
Company offers clients physical distribution services. The Company maintains an
inventory of physical products, generally on consignment from its clients that
select this option, for shipment to end-users. The Company believes physical
fulfillment services are important to its ability to provide a comprehensive
electronic commerce outsourcing solution.
MERCHANDISING SERVICES. The Company offers a range of merchandising
services to its clients to help them drive additional traffic to their Web
stores. Software publisher and online retailer clients are provided with
detailed electronic and hard copy reports of transactions on their Web stores,
as well as end-user marketing information about visits to their Web stores. The
CNS captures Web page visits, banner and pricing information and other data that
can be used by the software publishers and online retailers to analyze their Web
stores' success.
The Company also offers advanced merchandising services to assist software
publishers and online retailers in increasing response rates for their marketing
efforts. These services include e-mail campaigns for special promotions, upgrade
notification programs, and the presentation of complementary products, bundled
products or other programs designed to increase average order size based on a
targeted end-user profile. The Company participates in co-op dollar and market
development fund programs with its clients and buys selected banner placements
in bulk to support clients' promotional campaigns. In addition, Digital River
tests and analyzes merchandising techniques, such as promotional pricing and
banner advertising, based on information gathered in the CNS data warehouse.
CLIENTS
The Company distributes software products through a network of software
publishers and online retailers. Online retailer clients include traditional
store-based and direct mail retailers with a Web presence, online retailers
dedicated to online commerce, as well as high traffic or niche Web site
operators desiring to add electronic commerce functionality. The Company expects
to support traditional physical retailers in developing their online stores for
the sale of software products online. While most software publishers use the
Company's Web hosting services, certain software publishers use only the
Company's ESD services, which provide them with online distribution through the
Company's extensive network of online retailers.
As of May 31, 1998, the Company had 1,089 contracts with software publishers
and 274 contracts with online retailers. Typically, there is some delay between
signing contracts and gathering the necessary materials to bring a new client
online. As of May 31, 1998, the Company had 871 software publishers and
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<PAGE>
153 online retailers connected to its CNS. During the five-month period ended
May 31, 1998, the Company completed transactions for 689 software publishers and
70 online retailers. The Company's clients include:
<TABLE>
<CAPTION>
SOFTWARE PUBLISHERS ONLINE RETAILERS
- ------------------------------------------------ ---------------------------
<S> <C>
WEB HOSTING AND ESD SERVICES Babbages', Etc. LLC
Corel Corporation BuySafe, Inc.
Dragon Systems, Inc. Channel MarketMakers
Extensis Corporation Cyberian Outpost, Inc.
JASC, Inc. Damark International, Inc.
Ulead Systems, Inc. Micro Warehouse, Inc.
Shopping.com
ESD SERVICES ONLY Software Warehouse plc
Cendant Corporation Planet Direct
Lotus Development Corporation US WEST Internet
Network Associates, Inc.
QUALCOMM Incorporated
Symantec Corporation
</TABLE>
SALES AND MARKETING
The Company markets its services directly to software publishers and online
retailers. The Company does not operate its own Web store because of its
strategy to serve as a neutral provider of electronic commerce outsourcing
solutions. This strategy allows the Company to avoid competing with its clients.
Generally, the Company's direct marketing to end-users focuses on supporting the
marketing and promotional efforts of its clients in driving traffic to their Web
stores. This direct marketing effort leverages the Company's extensive data
warehouse, which enables the Company to create and quickly implement marketing
programs targeted at specific end-user segments. By providing consistent quality
service, branding client order pages with its name and logo, billing credit card
transactions under the Digital River name and engaging in brand positioning,
advertising and promotion, the Company intends to establish the Digital River
brand as a trusted name for ESD and electronic commerce outsourcing solutions
among software publishers, online retailers and end-users.
The Company's sales and marketing organization is divided into three groups:
the Strategic Sales Group, the Product Management Group and the Account
Development Group. The Strategic Sales Group focuses on large software
publishers and online retailers, including traditional physical retailers, with
significant online revenue potential. These sales are typically complex in
nature and involve a lengthy sales cycle. The Product Management Group focuses
on all other software publishers and online retailers. Generally, these sales
involve a much shorter sales cycle, are managed primarily through a telesales
effort and result in the new client selecting one of the Company's standard
programs. The Account Development Group serves existing clients and provides
them with merchandising and database marketing assistance designed to increase
revenues. As of May 31, 1998, the Company had 27 employees engaged in sales and
marketing. See "Risk Factors--Client Concentration; Lengthy Sales Cycle."
The Company currently markets its services to clients via direct marketing,
print advertising, trade show participation and other media events. The Company
plans to increase its expenditures on direct marketing and print advertising, as
well as introducing online advertising efforts directed at potential clients.
TECHNOLOGY
Digital River delivers its electronic commerce outsourcing solution using
its proprietary CNS technology, which enables the sale and distribution of
software products via the Internet.
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ARCHITECTURE. The Company's scaleable CNS is designed to handle tens of
thousands of different Web stores and millions of software products. The CNS
consists of a pool of network servers and a proprietary software application
that serves dynamic Web pages using an Oracle database. The Company's CNS was
designed to scale to support growth by adding CPUs, memory, disk drives and
bandwidth without substantial changes to the application. The CNS software code
is written in modular layers, enabling the Company to quickly adapt in response
to industry changes, including bandwidth opportunities, payment processing
changes, international requirements for taxes and export screening, new
technologies such as Java, XML, DHTML, VRML, SET, banking procedures and
encryption technologies. The CNS product search system allows end-users to
search for items across millions of potential products and thousands of
categories specific to various product specifications, while maintaining a fast
page response that is acceptable to the end-user. The Company uses sophisticated
database indexing coupled with a dynamic cache system to provide flexibility and
speed. These caches help increase the overall speed of each page and facilitate
complex searches across the entire inventory of software products. The CNS has
also been designed to index, retrieve and manipulate all transactions that flow
through the system, including detailed commerce transaction and end-user
interaction data. This enables the Company to create proprietary market profiles
of each end-user and groups of end-users that can be used to create
merchandising campaigns. The Company's CNS is also used for internal purposes,
including reporting and maintenance for fraud detection and prevention, physical
shipping, return authorizations, back order processing and full transaction
auditing and reporting capabilities for all commerce functions.
WEB STORE MAINTENANCE. Clients' Web stores are built and maintained using
the CNS centralized management system. Global changes that affect all Web stores
or groups of Web stores can be made as easily as changes to an individual Web
store. Client Web stores include a main store and may optionally include several
"focus stores" and "channel sites" to which highly targeted traffic may be
routed. Clients may also link specific locations on their Web stores to detailed
product or category areas of the stores, in order to better target their
end-users' interests.
SECURITY. Digital River's security systems apply both to access to internal
systems and to illegal access to commerce data via the Internet. Internally,
logins and passwords are maintained for all systems, with additional logins,
passwords and IP access control granted on an individual basis to only the
required commerce areas the person is responsible for. Firewalls prevent
unauthorized access from outside. Unix, Oracle and Web server security
additionally restrict access from the outside to the appropriate transaction
data. The CNS security system is designed not to interfere with the end-user
experience. Product wrappers, clearing-house processing, and additional password
mechanisms that negatively impact ESD performance are not needed. The CNS
security system never allows direct access to the clients' products and ensures
that an end-user requests ESD through a valid page and has purchased the
product. See "Risk Factors-- Electronic Commerce Security Risks."
DATA CENTER OPERATIONS. Continuous data center operations are crucial to
the Company's success. All transaction data is backed up periodically and all
inventory data is archived and kept in fireproof storage facilities. The
Company's network software constantly monitors clients' Web stores and internal
system functions and notifies systems engineers if any unexpected conditions
arise. The Company currently leases four T1 lines from multiple vendors and
maintains a policy of adding additional lines if more than 50% of its bandwidth
capacity is utilized. Accordingly, if one line fails the other lines are able to
assume the capacity of the failed line. The Company's data center is located in
a single location in Edina, Minnesota. The data center currently incorporates
redundant systems consisting of additional servers and arrays. The Company
currently has no automatic switchover, although it has plans to implement
further redundancy in the future. See "Risk Factors--Risk of Capacity
Constraints; Limited Redundant Systems; System Development Risks."
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<PAGE>
PRODUCT DEVELOPMENT
Digital River's product development strategy is to enhance the technology
and features of its CNS. To this end, the Company has numerous development
projects in process including, but not limited to, recoverable downloading,
Internet optimization tools, end-user profiling and collaboration technologies
and online interactive customer service. Product development and operations
expenses (which include customer service, data center operations and
telecommunications infrastructure) were $130,000, $230,000, $1.5 million and
$703,000 in 1995, 1996, 1997 and the first quarter of 1998, respectively. As of
May 31, 1998, the Company employed 21 persons in product development.
To remain competitive, the Company must continue to enhance and improve the
responsiveness, functionality and features of the CNS and the underlying network
infrastructure. The Internet and the online commerce industry are characterized
by rapid technological change, changes in user and client requirements and
preferences, frequent new product and service introductions embodying new
technologies and the emergence of new industry standards and practices that
could render the Company's existing CNS proprietary technology and systems
obsolete. The Company's success will depend, in part, on its ability to both
license and internally develop leading technologies useful in its business,
enhance its existing services, develop new services and technology that address
the increasingly sophisticated and varied needs of its clients, and respond to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis. The development of the CNS technology and other
proprietary technology entails significant technical and business risks. There
can be no assurance that the Company will successfully use new technologies
effectively or adapt its proprietary technology and transaction-processing
systems to customer requirements or emerging industry standards. If the Company
is unable, for technical, legal, financial or other reasons, to adapt in a
timely manner to changing market conditions, client requirements or emerging
industry standards, its business, financial condition and results of operations
could be materially adversely affected. See "Risk Factors--Rapid Technological
Change."
COMPETITION
The electronic commerce market is new, rapidly evolving and intensely
competitive, and the Company expects competition to intensify in the future,
particularly in the area of electronic sale and distribution of software
products. The Company currently competes directly with other providers of
electronic commerce solutions, including CyberSource Corporation, Preview
Software Corporation, Release Software Corporation and TechWave, Inc. The
Company also competes indirectly with software companies that offer tools and
services for electronic commerce, including companies that provide a broad range
of Internet and server solutions such as Microsoft Corporation and Netscape
Communications Corporation, as well as a large number of companies that provide
tools and services enabling one or more of the transaction processing functions
of electronic commerce, such as transaction control, data security, customer
interaction and database marketing. In addition to direct competition with other
transaction processing providers and enablers and indirect competition with
other providers of electronic commerce software and systems, the Company also
competes with companies that sell and distribute software products via the
Internet, including online retailers such as CNET, Inc., Ingram Micro Inc. and
software.net Corporation, as well as companies such as AltaVista (a subsidiary
of Digital Equipment Corporation), America Online, Inc., Excite, Inc., Infoseek
Corporation, Lycos, Inc. and Yahoo! Inc., which specialize in electronic
commerce or derive a substantial portion of their revenues from electronic
commerce and may themselves offer, or provide means for others to offer,
software products.
The Company believes that the principal competitive factors in its market
are breadth of product offerings, software publisher and online retailer
relationships, brand recognition, system capacity, reliability, price,
selection, speed and accessibility, customer service, quality of site content,
convenience and speed of fulfillment. There can be no assurance that the online
retailers and the other companies listed above will not compete directly with
the Company by adopting a similar business model. Moreover, while certain of
these companies are also clients or potential clients of the Company, they may
compete with the
36
<PAGE>
Company's electronic commerce outsourcing solution to the extent that they
develop electronic commerce systems or acquire such systems from other software
vendors or service providers.
Many of the Company's current and potential competitors have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than the Company.
In addition, larger, well-established and well-financed entities may acquire,
invest in or form joint ventures with online competitors as the use of the
Internet and other online services increases. In addition, new technologies and
the expansion of existing technologies, such as price comparison programs that
select specific titles from a variety of Internet Web sites may direct end-users
to online retailers that compete with the Company, which would increase
competitive pressures on the Company. Increased competition may result in
reduced operating margins, as well as a loss of market share. Further, as a
strategic response to changes in the competitive environment, the Company may
from time to time make certain pricing, service or marketing decisions or
acquisitions that could have a material adverse effect on its business,
financial condition and results of operations. There can be no assurance that
the Company will be able to compete successfully against current and future
competitors, and any inability to do so could have a material adverse effect on
the Company's business, financial condition and results of operations.
INTELLECTUAL PROPERTY
The Company regards trademarks, copyrights, trade secrets and other
intellectual property as critical to its success, and relies on trademark, trade
secret protection and confidentiality and/or license agreements with its
employees, clients, partners and others to protect its proprietary rights. The
Company's policy is to seek to protect its proprietary position by, among other
methods, filing United States and foreign patent applications related to its
proprietary technology, inventions and improvements that are important to the
development of its business. Proprietary rights relating to the Company's
technologies will be protected from unauthorized use by third parties only to
the extent that they are covered by valid and enforceable patents or are
effectively maintained as trade secrets. While the Company currently has twelve
patent applications pending in the United States, none have yet been issued and
there can be no assurance that any pending patent applications now or hereafter
filed by, or licensed to, the Company will result in patents being issued. The
Company has filed certain petitions to correct certain fee deficiencies for its
pending patent applications and there can be no assurance that such petitions
can be granted or that the Company will elect to pursue these applications. In
addition, the laws of certain foreign countries do not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States. The patent position of high technology companies involves complex legal
and factual questions and, therefore, their validity and enforceability cannot
be predicted with certainty. There can be no assurance that any of the Company's
patent applications, if issued, will not be challenged, invalidated, held
unenforceable or circumvented, or that the rights granted thereunder will
provide proprietary protection or competitive advantages to the Company against
competitors with similar technology. Furthermore, there can be no assurance that
others will not independently develop similar technologies or duplicate any
technology developed by the Company. The Company has one registered trademark
for "Digital River." Effective trademark and trade secret protection may not be
available in every country in which the Company's products and services are made
available online. There can be no assurance that the steps taken by the Company
to protect its proprietary rights will be adequate or that third parties will
not infringe or misappropriate the Company's trade secrets, trademarks, trade
dress and similar proprietary rights. In addition, there can be no assurance
that others will not independently develop substantially equivalent intellectual
property. A failure by the Company to protect its intellectual property in a
meaningful manner could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, litigation
may be necessary in the future to enforce the Company's intellectual property
rights, to protect the Company's trade secrets or to determine the validity and
scope of the proprietary rights of others. Such litigation could result in
substantial costs and diversion of
37
<PAGE>
management and technical resources, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
In addition, there can be no assurance that other parties will not assert
infringement claims against the Company. From time to time, the Company may
receive notice of claims of infringement of other parties' proprietary rights.
There can be no assurance that such claims will not be asserted or prosecuted
against the Company in the future or that any past or future assertions or
prosecutions will not materially adversely affect the Company's business,
financial condition and results of operations. The defense of any such claims,
whether such claims are with or without merit, could be time-consuming, result
in costly litigation and diversion of technical and management personnel, cause
product shipment delays or require the Company to develop non-infringing
technology or enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company, or at all. In the event of a successful claim of infringement
against the Company and the failure or inability of the Company to develop
non-infringing technology or license the infringed or similar technology on a
timely basis, the Company's business, financial condition and results of
operations could be materially adversely affected.
EMPLOYEES
As of May 31, 1998, the Company employed 75 people, including eight in
administration, 40 in product development and operations and 27 in sales and
marketing. The Company also employs independent contractors and other temporary
employees. None of the Company's employees is represented by a labor union, and
the Company considers its employee relations to be good. Competition for
qualified personnel in the Company's industry is intense, particularly among
software development and other technical staff. The Company believes that its
future success will depend in part on its continued ability to attract, hire and
retain qualified personnel.
FACILITIES
The Company currently leases approximately 6,400 and 7,000 square feet of
office and warehouse space, respectively from Tech Squared in Edina, Minnesota.
Obligations under the lease from Tech Squared will continue through December 31,
1998 or until a party is found to sublease the office space, whichever is
earlier. The Company will continue to pay for warehouse space from Tech Squared
as long as it continues to utilize any of the space. Rent for the warehouse
space will be calculated pursuant to a formula based on square footage utilized.
The Company has also entered into a sublease agreement, effective July 15, 1998,
for approximately 32,900 square feet of office and warehouse space in Eden
Prairie, Minnesota. This sublease agreement expires on July 31, 2003. The
Company believes that its facilities will be adequate to accommodate the
Company's needs for the foreseeable future.
LEGAL PROCEEDINGS
From time to time, the Company may be involved in litigation relating to
claims arising out of its ordinary course of business. The Company presently is
not subject to any material legal proceedings.
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<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth information regarding the Company's executive
officers, key employees and directors as of May 31, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Joel A. Ronning.................... 42 President, Chief Executive Officer and Director
Robert E. Strawman................. 38 Chief Financial Officer and Treasurer
Kelly J. Wical..................... 41 Chief Technology Officer
Draper M. Jaffray.................. 36 Vice President of Business Development
Gregory R.L. Smith................. 31 Secretary and Controller
Randy J. Womack.................... 34 Chief Information Officer
Timothy C. Choate.................. 33 Director
Thomas F. Madison (1)(2)........... 62 Director
Charles E. Reese, Jr............... 44 Director
Christopher J. Sharples............ 51 Director
Perry W. Steiner (1)(2)............ 32 Director
J. Paul Thorin (1)(2).............. 54 Director
</TABLE>
- ------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Mr. Ronning founded the Company in February 1994 and has been President and
Chief Executive Officer and a director of the Company since that time. Since May
1995, Mr. Ronning has served as Chairman of the Board of Directors, Chief
Executive Officer, Chief Financial Officer and Secretary of Tech Squared, a
direct catalog marketer of software and hardware products. From May 1995 to
August 1996, Mr. Ronning also served as the President of Tech Squared. Mr.
Ronning is the founder of MacUSA, Inc., a wholly-owned subsidiary of Tech
Squared, and has served as a director and Chief Executive Officer of MacUSA,
Inc. since April 1990. Mr. Ronning also serves as a director of the Software
Publishers Association.
Mr. Strawman joined the Company in April 1998 as Chief Financial Officer and
Treasurer. From September 1995 to April 1998, Mr. Strawman served as Director of
Finance and Vice President of Finance for Caribou Coffee Company, Inc., a
gourmet coffee retailer. From 1989 to 1995, Mr. Strawman held various financial
positions at Software Etc. Stores, Inc., a specialty retailer of software, most
recently as Chief Financial Officer.
Mr. Wical joined the Company in April 1997 as Chief Technology Officer. From
1992 to April 1997, Mr. Wical was Director of Development and Chief
Scientist/Architect of the ConText Server Division of Oracle Corporation. From
1987 to 1992, Mr. Wical was co-founder and Vice President of Research and
Development for Artificial Linguistics, Inc., a developer of text management
software.
Mr. Jaffray joined the Company in December 1996 as Vice President of
Business Development. From January 1996 to December 1996, Mr. Jaffray was a
partner in The Firm, a computer products manufacturers representative. From 1991
to 1995, Mr. Jaffray served as Director of Sales for Tech Squared.
Mr. Smith joined the Company as Controller in June 1997 and has served as
Secretary and Controller since December 1997. From November 1995 to June 1997,
Mr. Smith was Manager, External Reporting and Investor Relations at Secure
Computing Corporation, a developer of network and Internet security products.
From June 1988 to November 1995, Mr. Smith held various positions with Ernst &
Young LLP.
Mr. Womack joined the Company in October 1997 as Chief Information Officer.
From May 1997 to September 1997, Mr. Womack was Director of Engineering at Xerox
Corporation. From 1992 to 1997,
39
<PAGE>
Mr. Womack held various positions, including Development Manager at Oracle
Corporation. From 1989 to 1992, Mr. Womack was Director of Technical Services at
Artificial Linguistics, Inc.
Mr. Choate has served as a director of the Company since May 1998. Mr.
Choate has been Chairman of FreeShop International, Inc. since its inception in
June 1997 and has been President and Chief Executive Officer since March 1998.
Mr. Choate co-founded Online Interactive, Inc., the original parent company of
FreeShop International, Inc., in June 1994, and served as President, Chief
Executive Officer and Chairman until February, 1997 and Chairman until July
1997. Mr. Choate served as a Vice President of Micro Warehouse, Inc. from July
1997, when it acquired Online Interactive, Inc., until February 1998. From
February 1991 to May 1994, Mr. Choate held various positions at Softdisk
Publishing, LLC, most recently as President. From February 1989 until February
1991, Mr. Choate was a Senior Marketing Manager at Prodigy Services Company.
Mr. Madison has served as a director of the Company since August 1996. Since
January 1993 he has been the President and Chief Executive Officer of MLM
Partners, a consulting and small business investment company. From February 1994
to September 1994, Mr. Madison served as Vice Chairman and Chief Executive
Officer at Minnesota Mutual Life Insurance Company. From June 1987 to December
1992, Mr. Madison was President of US WEST Communications Markets, a division of
US WEST, Inc. Mr. Madison also serves on the Boards of Directors of Valmont
Industries Inc., Eltrax Systems, Inc., Minnegasco Division of Houston
Industries, ACI Telecentrics, Span Link Communications and Delaware Group of
Funds.
Mr. Reese has served as a director of the Company since July 1996. In August
1996, Mr. Reese joined Tech Squared, Inc. as President and Chief Operating
Officer and has served as a director of Tech Squared since April 1996. From
April 1995 to August 1996, Mr. Reese served as Vice President of Sales and
Marketing for the Weidt Group, Inc., a privately-held custom software
development firm specializing in Internet Web site design and development. From
July 1987 to April 1995, Mr. Reese served as Vice President of Sales at
Lasermaster Corp., a manufacturer and seller of high-resolution plain paper
typesetters, chemical-free image setters and large format color printers.
Mr. Sharples has served as a director of the Company and Digital River Ltd.,
a wholly-owned subsidiary of the Company, since April 1998. Since 1973, Mr.
Sharples has served as a director of GNI Ltd., a firm specializing in the
derivatives market, which he co-founded in 1972. Since 1995, Mr. Sharples has
been Chairman of Lombard Street Research, an economic research firm. Since
November 1996, Mr. Sharples has been the Chairman of Datastream International
Ltd., a supplier of on-line historical financial and economic information to
investment professionals. Since 1981, Mr. Sharples has been the Chairman of ICV
Ltd, a financial information company. Both Datastream International Ltd. and ICV
Ltd. are subsidiaries of Primark Corporation, a information services company.
From 1987 to 1995, Mr. Sharples was Chairman of the Association of Futures
Brokers & Dealers and the Securities and Futures Authority, front line
regulatory organizations designated under the laws of Great Britain.
Mr. Steiner has served as a director of the Company since April 1998. In
January 1997, Mr. Steiner joined Wasserstein Perella & Co., Inc., an investment
banking firm, as Vice President and currently serves as Vice President of
Wasserstein Perella Ventures, Inc., the general partner of Wasserstein, Adelson
Ventures, L.P., a venture capital fund. From June 1993 to December 1996, Mr.
Steiner was a principal of TCW Capital, a group of leveraged buyout funds
managed by Trust Company of the West.
Mr. Thorin has served as a director of the Company since June 1996. Since
April 1996, Mr. Thorin has served as Vice President and General Counsel of
Fujitsu America Inc., a subsidiary of Fujitsu Limited and since June 1997 as its
Vice President and General Counsel. From April 1990 to March 1996, Mr. Thorin
held the position of Associate Corporate Counsel of Fujitsu America Inc.
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<PAGE>
BOARD COMPOSITION
The Company currently has authorized seven directors. In accordance with the
terms of the Company's Restated Certificate of Incorporation, effective upon the
closing of this offering, the terms of office of the Board of Directors will be
divided into three classes: the Class I term will expire at the annual meeting
of stockholders to be held in 1999; the Class II term will expire at the annual
meeting of stockholders to be held in 2000; and the Class III, term will expire
at the annual meeting of stockholders to be held in 2001. The Class I directors
will be Messrs. Madison and Reese, the Class II directors will be Messrs. Choate
and Sharples and the Class III directors will be Messrs. Ronning, Steiner and
Thorin. At each annual meeting of stockholders after the initial classification,
the successors to directors whose term will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. In addition, the Company's Restated Certificate of
Incorporation provides that the authorized number of directors may be changed
only by resolution of the Board of Directors. Any additional directorships
resulting from an increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class will consist of
one-third of the directors. This classification of the Board of Directors may
have the effect of delaying or preventing changes in control or management of
the Company. Although directors of the Company may be removed for cause by the
affirmative vote of the holders of a majority of the Common Stock, the Company's
Restated Certificate of Incorporation provides that holders of two-thirds of the
Common Stock must vote to approve the removal of a director without cause. There
are no family relationships among any of the directors and executive officers of
the Company.
BOARD COMMITTEES
The Audit Committee consists of Messrs. Madison, Steiner and Thorin. The
Audit Committee makes recommendations to the Board of Directors regarding the
selection of independent public accountants, reviews the results and scope of
the audit and other services provided by the Company's independent public
accountants and reviews and evaluates the Company's control functions.
The Compensation Committee consists of Messrs. Madison, Steiner and Thorin.
The Compensation Committee administers the issuance of stock under the Company's
1998 Stock Option Plan, makes recommendations regarding the Company's various
incentive compensation and benefit plans and determines salaries for the
executive officers and incentive compensation for employees and consultants of
the Company.
DIRECTOR COMPENSATION
Directors do not receive any cash compensation for their services as members
of the Board of Directors, although they are reimbursed for certain expenses
incurred in connection with attendance at Board and Committee meetings. From
time to time, certain non-employee directors of the Company have received grants
of options to purchase shares of the Company's Common Stock. In June 1996, Mr.
Thorin was granted an option to purchase 20,000 shares of the Company's Common
Stock at an exercise price of $0.25 per share. In September 1996, Messrs.
Madison and Reese were granted options to purchase 80,000 and 20,000 shares of
the Company's Common Stock, respectively, each at an exercise price of $0.75 per
share. In April 1998, Messrs. Madison, Reese and Thorin were granted options to
purchase 2,800, 700 and 700 shares of the Company's Common Stock, respectively,
each at an exercise price of $2.00 per share. In May 1998, Mr. Choate was
granted an option to purchase 7,500 shares of the Company's Common Stock at an
exercise price of $2.00 per share. The Company may compensate non-employee
directors in the future for their attendance at Board and Committee meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to April 1998, the Company did not have a Compensation Committee of
the Board of Directors, and the entire Board participated in all compensation
decisions, except that Mr. Ronning did not
41
<PAGE>
participate in decisions relating to his compensation. In April 1998, the Board
formed the Company's Compensation Committee to review and recommend to the Board
the compensation and benefits for the Company's executive officers and
administer the Company's stock option plan. Certain of the Company's directors,
or affiliated entities, have purchased securities of the Company. See "Certain
Transactions" and "Principal Stockholders."
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company during
the fiscal year ended December 31, 1997 to the Company's Chief Executive Officer
and all other executive officers receiving compensation in excess of $100,000 in
fiscal 1997 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
--------------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) OPTIONS(#)
- ---------------------------------------------------------------------- -------------------- --------------------
<S> <C> <C>
Joel A. Ronning ...................................................... $ 140,000 --
President and Chief Executive Officer
Draper M. Jaffray .................................................... 120,000 120,400
Vice President of Business Development
</TABLE>
- ------------------------
(1) In accordance with the rules of the Securities and Exchange Commission, the
compensation described in this table does not include medical, group life
insurance or other benefits received by the Named Executive Officers which
are available generally to all salaried employees of the Company and certain
perquisites and other personal benefits received by the Named Executive
Officers, which do not exceed the lesser of $50,000 or 10% of any such
officer's salary and bonus disclosed in this table.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options granted
by the Company during the fiscal year ended December 31, 1997 to each of the
Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
-------------------------------------------------------------- STOCK PRICE
NUMBER OF PERCENTAGE OF APPRECIATION FOR
SECURITIES TOTAL OPTIONS OPTION
UNDERLYING GRANTED IN EXERCISE TERM($)(4)
OPTIONS FISCAL 1997 PRICE ----------------------
NAME GRANTED(#)(1) (%)(2) ($/SH)(3) EXPIRATION DATE 5%($) 10%($)
- -------------------------------- ------------- --------------- ------------- --------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Joel A. Ronning................. -- -- -- -- -- --
Draper M. Jaffray............... 120,000 16.1% $ 0.75 2/4/07
400 .1 1.125 6/26/07
</TABLE>
- ------------------------
(1) The options become exercisable at a rate of 25% on the first anniversary of
the vesting commencement date and 25% annually thereafter and expire ten
years from the date of grant, or earlier upon termination of employment.
(2) Based on an aggregate of 745,200 shares subject to options granted to
employees, directors of and consultants to the Company in the fiscal year
ended December 31, 1997, including the Named Executive Officers.
42
<PAGE>
(3) Options were granted at an exercise price equal to the fair market value of
the Company's Common Stock, as determined by the Board of Directors on the
date of grant.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciation over the
option term will be at the assumed 5% and 10% levels or at any other defined
level. Unless the market price of the Common Stock appreciates over the
option term, no value will be realized from the option grants made to the
executive officers. The potential realizable value is calculated by assuming
that the assumed initial public offering price of $ per share appreciates
at the indicated rate for the entire term of the option and that the option
is exercised at the exercise price and sold on the last day of its term at
the appreciated price. The potential realizable value computation is net of
the applicable exercise price, but does not take into account applicable
federal or state income tax consequences and other expenses of option
exercises or sales of appreciated stock.
RECENT OPTION GRANTS. Since December 31, 1997, the Company has granted
options to purchase 650,000, 120,000 and 40,000 shares of Common Stock, each at
an exercise price of $2.00 per share, to Messrs. Ronning, Strawman and Wical,
respectively. With the exception of the grant to Mr. Ronning which becomes
exercisable at a rate of 25% on the date of grant and 18.75% annually
thereafter, all grants made to the above executive officers become exercisable
at a rate of 25% on the first anniversary of the vesting commencement date and
25% annually thereafter.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND 1997 YEAR-END OPTION VALUES
The following table sets forth for each of the Named Executive Officers the
number and value of securities underlying unexercised options held by the Named
Executive Officers at December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED OPTIONS MONEY OPTIONS AT DECEMBER 31,
SHARES AT DECEMBER 31, 1997 1997(1)
ACQUIRED ON VALUE ------------------------------ ------------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE(#) UNEXERCISABLE($) EXERCISABLE($) UNEXERCISABLE($)
- --------------------- ------------- ----------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Joel A. Ronning...... -- -- 240,000 80,000 $ $
Draper M. Jaffray.... -- -- 30,000 90,400 $ $
</TABLE>
- ------------------------
(1) Value of unexercised in-the-money options are based on a value of $ per
share, the assumed initial public offering price minus the per share
exercise price, multiplied by the number of shares underlying the option.
EMPLOYMENT AGREEMENT
In May 1998, the Company entered into an employment and non-competition
agreement (the "Employment Agreement") with Joel A. Ronning, the Company's
President and Chief Executive Officer. The term of the Employment Agreement is
for a period of two years (the "Expiration Date") with automatic one-year
renewals if not terminated prior to the Expiration Date (as extended in
connection with any renewed term). Mr. Ronning's compensation pursuant to the
Employment Agreement consists of a base salary of $140,000 per year, with an
increase to not less than $225,000 upon the successful completion of the
Company's initial public offering. In addition, in 1998, Mr. Ronning will
receive a bonus consisting of (i) 50% of his base salary upon the successful
completion of the Company's initial public offering and (ii) 50% of his base
salary upon the Company achieving certain revenue milestones in 1998. Future
annual bonuses will be determined at the discretion of the Board. In the event
of Mr. Ronning's termination under certain circumstances, including termination
upon a change in control of the Company, he will be entitled to termination
payments equal to his base salary at the time of termination plus a weighted
three year average of his annual bonus amount. In addition, any unvested and
unexercised stock options held by Mr. Ronning will immediately vest and become
exercisable. Mr. Ronning has also agreed
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<PAGE>
not to compete with the Company, for a period of twelve months following
termination under certain circumstances, in countries or territories where the
Company conducts business.
EMPLOYEE BENEFIT PLANS
1998 STOCK OPTION PLAN. The Company's 1998 Stock Option Plan (the "Option
Plan") was adopted by the Board of Directors in June 1998 as an amendment and
restatement of the Amended and Restated 1994 Stock Option Plan which had been
adopted in December 1997. There is currently an aggregate of 3,500,000 shares of
Common Stock authorized for issuance under the Option Plan.
The Option Plan provides for the grant of incentive stock options, as
defined under the Internal Revenue Code of 1986, as amended (the "Code"), to
employees (including officers and employee-directors) of the Company and its
affiliates. The Option Plan also provides for the grant of nonstatutory stock
options to such employees as well as to directors and consultants of the Company
and its affiliates.
The Board (or a Committee appointed by the Board) administers the Option
Plan and determines both the recipients of options and the type of options to be
granted, including the exercise price, number of shares subject to the option
and the exercisability thereof. The terms of options granted under the Option
Plan generally may not exceed 10 years. While the Board determines the exercise
price of options, the exercise price for an incentive stock option may not be
less than 100% of the fair market value of the Common Stock on the date of the
option grant. Options vest at the rate specified in the option agreement.
No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of the Company or any affiliate of the Company,
unless the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant, and the term of the option
does not exceed five years from the date of grant. In addition, the aggregate
fair market value, determined at the time of grant, of the shares of Common
Stock with respect to which incentive stock options are exercisable for the
first time by an optionee during any calendar year (under the Option Plan and
all other option plans of the Company and its affiliates) may not exceed
$100,000.
When the Company becomes subject to Section 162(m) of the Code (which denies
a deduction to publicly held corporations for certain compensation paid to
specified employees in a taxable year to the extent that the compensation
exceeds $1,000,000), no employee may be granted options under the Option Plan
covering more than 500,000 shares of Common Stock in any calendar year.
If there is any sale of all or substantially all of the Company's assets,
any merger, any reverse merger or any consolidation in which the Company is not
the surviving corporation, any surviving entity may assume or substitute for all
outstanding options under the Option Plan. If the surviving entity does not do
so, the vesting and exercisability of options held by persons still serving the
Company or an affiliate will be accelerated. However, if the Company and the
other party to such transaction agree that such transaction is to be treated as
a "pooling of interests" for financial reporting purposes, and if such
transaction in fact is so treated, then the accelerated vesting of options will
not occur to the extent that the Company's independent public accountants and
such other party's independent public accountants separately determine in good
faith that such acceleration would preclude the use of "pooling of interests"
accounting. In any event, all options will terminate if not exercised prior to
such sale of assets, merger, reverse merger or consolidation.
If there is an acquisition by certain persons, entities or groups of 50% or
more of the Company's stock, then the exercisability and vesting of options held
by persons still serving the Company or an affiliate also will be accelerated
but the options will not automatically terminate if not exercised prior to such
acquisition (unless such options otherwise expire by their terms).
Generally, an optionee may not transfer an option other than by will or the
laws of descent or distribution. An optionee whose service to the Company and
its affiliates ceases for any reason (other than by death or permanent and total
disability) may exercise an option, as to vested shares, in the three-month
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<PAGE>
period following such cessation (unless such option expires sooner or later by
its terms). An optionee may exercise an option, as to vested shares, for up to
one year after the optionee's service to the Company and its affiliates ceases
due to death or disability (unless such option expires sooner or later by its
terms).
Shares subject to options that have expired or otherwise terminated without
having been exercised in full again become available for the grant of options
under the Option Plan.
As of the date of this Prospectus, there has been no exercise of options
granted under the Option Plan, options to purchase 2,270,100 shares of Common
Stock were outstanding and 1,229,900 shares remained available for future grant.
The Option Plan will terminate in June 2008 unless sooner terminated by the
Board.
401(K) PLAN. In 1997, the Company established a defined contribution
retirement plan (the "401(k) Plan") covering all employees of the Company
meeting minimum age and service requirements. Pursuant to the 401(k) Plan,
employees may elect to reduce their current compensation by up to the lesser of
15% of their annual compensation or the statutorily prescribed annual limit
allowable under Internal Revenue Service Regulations and to have that amount
contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require,
additional matching contributions by the Company on behalf of all participants
in the 401(k) Plan. The Company currently provides a matching contribution of
50% of an employee's contribution on an annual basis. Company matching
contributions vest 100% upon completion of two years of service by the employee.
The 401(k) Plan is intended to qualify under Section 401(k) of the Code so that
contributions to the 401(k) Plan by employees or by the Company, and the
investment earnings thereon, are not taxable to employees until withdrawn from
the 401(k) Plan, and that contributions by the Company will be deductible by the
Company when made. The trustee of the 401(k) Plan invests the assets of the
401(k) Plan at the direction of each participant based on certain investment
options.
INDEMNIFICATION AND LIMITATION OF DIRECTOR AND OFFICER LIABILITY
The Company's Restated Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware 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
(i) any breach of their duty of loyalty to the corporation or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) unlawful payments of dividends or unlawful
stock repurchases or redemptions, or (iv) any transaction from which the
director derived an improper personal benefit. Such 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.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers and may indemnify its employees and other agents to the fullest
extent permitted by law. The Company's Bylaws also permit it 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. The Company has obtained officer and
director liability insurance with respect to liabilities arising out of certain
matters, including matters arising under the Securities Act.
The Company has entered into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in the Company's
Bylaws. These agreements, among other things, indemnify the Company's directors
and executive officers for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of the Company
arising out of such person's services as a director or executive officer of the
Company, any subsidiary of the Company or any other company or enterprise to
which the person provides services at the request of the Company. The Company
believes that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers.
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<PAGE>
CERTAIN TRANSACTIONS
TRANSACTIONS WITH TECH SQUARED, INC.
Joel A. Ronning is currently the Chairman of Tech Squared and owns
approximately 49% of Tech Squared's outstanding Common Stock as of May 31, 1998.
In December 1995, Mr. Ronning issued an option to MacUSA, Inc., a wholly owned
subsidiary of Tech Squared, to purchase 4,800,000 shares of the Company's Common
Stock held by him for $1.00. The option is not transferable and is exercisable
at any time through December 31, 2000. During the term of the option, Mr.
Ronning has agreed to vote the 4,800,000 shares as directed by the Board of
Directors of MacUSA, Inc. In addition, MacUSA, Inc. has agreed to reimburse Mr.
Ronning for any tax liability that he may incur in connection with the transfer
of the option or the shares of Digital River stock issuable upon exercise
thereunder. If MacUSA, Inc. exercises its option to purchase Mr. Ronning's
interest in Digital River, it will own approximately % of the outstanding
capital stock of the Company after the completion of this offering. In addition,
some of Mr. Ronning's time is spent fulfilling his duties as Chairman of the
Board of Directors, Chief Executive Officer, Chief Financial Officer and
Secretary of Tech Squared.
Mr. Reese, a director of the Company, is also President and Chief Operating
Officer of Tech Squared.
Tech Squared currently provides office and warehouse space and certain
administrative, financial and software product fulfillment services for the
Company. Charges for these services totaled approximately $168,000 and $77,000
for fiscal 1997 and the three months ended March 31, 1998, respectively.
TRANSACTIONS WITH FUJITSU LIMITED
Fujitsu Limited ("Fujitsu"), which will own approximately % of the
outstanding capital stock of the Company after the completion of this offering,
purchased 3,200,000 shares of Common Stock for $800,000 pursuant to a Stock
Purchase Agreement between the Company and Fujitsu, dated August 1994 (the
"Stock Purchase Agreement"). Under the terms of the Stock Purchase Agreement and
related agreements, Fujitsu obtained certain rights and guarantees including,
but not limited to the following: a security interest in the Company's Common
Stock held by Mr. Ronning; covenants requiring Fujitsu's approval for certain
major business transactions and decisions; registration rights; right of first
refusal on future equity offerings of the Company; right to designate two
members of the Company's Board of Directors; a right of first refusal or an
option to purchase the Company's technology in the event of a bonafide third
party offer or change in control, respectively; and a royalty-free license to
use, develop, market and distribute certain technologies in the Asia-Pacific
region. Prior to the Modification Agreement (as defined below), the covenants
requiring Fujitsu's approvals for certain major business transactions and
decisions were to terminate in August 2001 and substantially all other rights,
with the exception of the registration rights and technology license, were to
terminate following an initial public offering or change in control.
In December 1997, Fujitsu and the Company entered into the Fujitsu
Modification Agreement (the "Modification Agreement") pursuant to which, in
exchange for receiving 90,000 shares of Common Stock, Fujitsu agreed to
relinquish its rights under the Stock Purchase Agreement (the "Prior Rights")
except for the right to (i) designate, provided that Fujitsu's ownership
percentage in the Company is not less than 10% and the Company has not initiated
a public offering, one member to the Company's Board of Directors, (ii) retain
its prior registration rights and (iii) retain a royalty-free license to use,
develop, market and distribute certain technologies in the Asia-Pacific region.
In addition, pursuant to the terms of the Modification Agreement, the Company
and Mr. Ronning agreed to execute and deliver a non-competition agreement. See
"Management--Employment Agreement."
Mr. Thorin, a director of the Company, is also Vice President and General
Counsel of Fujitsu America, Inc., a subsidiary of Fujitsu.
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<PAGE>
TRANSACTIONS WITH CHRISTOPHER J. SHARPLES
Christopher J. Sharples, a director and stockholder of the Company, has
purchased, in the aggregate, 1,852,000 shares of Common Stock for an aggregate
purchase price of $3,704,000 or $2.00 per share. Mr. Sharples will own
approximately % of the outstanding capital stock of the Company after the
completion of this offering. In addition, in February 1998, Mr. Sharples and
another stockholder (the "Sharples Team") have entered into a preliminary
agreement with the Company (the "International Agreement") whereby the Sharples
Team will help establish and oversee the international operations of the Company
for a term of three years. As consideration for their services, Mr. Sharples and
the other stockholder each received a warrant issuable for 150,000 shares of
Common Stock, at a purchase price of $2.00 per share. The International
Agreement also requires the Company to designate Mr. Sharples as a member of the
Company's Board of Directors.
TRANSACTIONS WITH WASSERSTEIN, ADELSON VENTURES, L.P.
In April 1998, Wasserstein, Adelson Ventures, L.P. ("Wasserstein") purchased
1,500,000 shares of Series A Preferred Stock from the Company at a purchase
price of $2.00 per share. In connection with the purchase of the Series A
Preferred Stock, the Company issued to Wasserstein a warrant to purchase 75,000
shares of Common Stock at $2.00 per share. The Warrant can be exercised
immediately and expires in April 2003.
In connection with certain advisory services provided by Wasserstein to the
Company, the Company issued to Wasserstein a conditional warrant (the
"Conditional Warrant") that is exercisable, at any time after the date of the
Company's initial public offering and on or before the fifth anniversary of the
initial public offering. If the Company consummates its intial public offering
on or prior to December 31, 1998, the Conditional Warrant will represent the
right to purchase 150,000 shares of Common Stock at $2.00 per share. If the
Company consummates its initial public offering after December 31, 1998 but on
or prior to March 31, 1998 at a price per share greater than $15.00, then the
Conditional Warrant will represent the right to purchase 50,000 Shares of Common
Stock at $2.00 per share.
Each of the above warrants contain provisions for the adjustment of the
exercise price and the aggregate number of shares issuable upon the exercise of
the warrant under certain circumstances including stock dividends, stock splits,
reorganizations, reclassifications and consolidations. Wasserstein is also
entitled to certain rights with respect to the registration of such shares
underlying the warrants under the Securities Act.
Mr. Steiner, a director of the Company is also Vice President of Wasserstein
Perella Ventures, Inc., the general partner of Wasserstein.
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<PAGE>
OTHER TRANSACTIONS
Listed below are the directors, executive officers and five percent
stockholders who have acquired shares of the Company's Common Stock or Series A
Preferred Stock:
<TABLE>
<CAPTION>
SHARES OF
SHARES OF SERIES A
COMMON PREFERRED AGGREGATE
STOCK STOCK CONSIDERATION($)
---------- ---------- ---------------
<S> <C> <C> <C>
Tech Squared, Inc. (1)............................. 4,800,000 1
Fujitsu Limited (2)................................ 3,290,000 800,000
Wasserstein Adelson Ventures L.P. (3) (4).......... 225,000 1,500,000 3,001,250
Joel A. Ronning (1) (5)............................ 4,905,263 200,000
Robert E. Strawman................................. 4,000 7,600
Kelly J. Wical..................................... 5,263 10,000
Draper M. Jaffray.................................. 2,500 4,750
Gregory R.L. Smith................................. 3,600 6,840
Randy J. Womack.................................... 28,157 53,498
Thomas F. Madison.................................. 50,000 95,000
Christopher J. Sharples (6)........................ 2,002,000 3,704,000
Perry W. Steiner (3) (4)........................... 225,000 1,500,000 3,001,250
</TABLE>
- ------------------------
(1) Includes 4,800,000 shares of Common Stock which MacUSA, Inc., a wholly-owned
subsidiary of Tech Squared, has the right to acquire, at a purchase price of
$1.00, from Mr. Ronning pursuant to the terms of a stock option agreement
entered into between Mr. Ronning and MacUSA, Inc. in December 1995.
(2) Includes 90,000 shares of Common Stock received as part of the Modification
Agreement as consideration to Fujitsu Limited for relinquishing the Prior
Rights.
(3) Share amounts for shown for Wasserstein, Adelson Ventures, L.P. and Mr.
Steiner have been aggregated. See "Principal Stockholders."
(4) Includes 75,000 shares of Common Stock issuable, at a purchase price of
$2.00 per share, pursuant to a warrant purchased for $750 and 150,000 shares
of Common Stock issuable, at a purchase price of $2.00 per share, pursuant
to a conditional warrant purchased for $500. See "Principal Stockholders."
(5) The Company issued 4,800,000 shares of Common Stock to Mr. Ronning in August
1994 as consideration for rights to certain technology contributed to the
Company by Mr. Ronning.
(6) Includes 812,500, 250,000 and 789,500 shares of Common Stock registered in
the name of Latour Trustees (Jersey) Limited, Latour Trustees (Jersey)
Limited and Mark Henry Murray as Trustees of the Murray 1987 Settlement and
Wilbro Nominees Limited, respectively. Of the 812,500 shares of Common Stock
registered in the name of Latour Trustees (Jersey) Limited, 62,500 of such
shares are held by Mr. Sharple's wife. Of the 789,500 shares of Common Stock
registered in the name of Wilbro Nominees Limited, 7,500 of such shares are
held by Mr. Sharple's children. Also, includes 150,000 shares of Common
Stock issuable, at a purchase price of $2.00 per share, pursuant to a
warrant issued to Mr. Sharples as consideration for entering into the
International Agreement.
The holder of the Company's Series A Preferred Stock and certain holders of
Common Stock are entitled to certain registration rights with respect to the
Common Stock issued or issuable upon conversion thereof. See "Description of
Capital Stock--Registration Rights."
The Company intends to enter into indemnification agreements with its
directors and executive officers for the indemnification of and advancement of
expenses to such persons to the fullest extent
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<PAGE>
permitted by law. The Company also intends to execute such agreements with its
future directors and executive officers.
The Company believes that the foregoing transactions were in its best
interest and were made on terms no less favorable to the Company than could have
been obtained from unaffiliated third parties. All future transactions between
the Company and any of its officers, directors or principal stockholders will be
approved by a majority of the independent and disinterested members of the Board
of Directors, will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties and will be in connection with bona
fide business purposes of the Company.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of May 31, 1998, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby by (i)
each of the Company's Named Executive Officers, (ii) each of the Company's
directors, (iii) each holder of more than 5% of the Company's Common Stock and
(iv) all current directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
SHARES ------------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNERS OWNED(1) OFFERING OFFERING
- ------------------------------------------------------------------------------ ------------ ----------- -----------
<S> <C> <C> <C>
Joel A. Ronning (2) (3) ...................................................... 5,387,763 25.59%
c/o Digital River, Inc.
5198 West 76th Street
Edina, Minnesota 55439
Tech Squared, Inc. (3) ....................................................... 4,800,000 23.33
5198 West 76th Street, Suite 220
Edina, Minnesota 55439
Fujitsu Limited .............................................................. 3,290,000 16.00
1-1 Kamikodanaka 4-Chome
Nakahara-Ku
Kawasaki 211 Japan
Christopher J. Sharples (4) .................................................. 2,002,000 9.66
GNI Ltd.
25 Dowgate Hill
London EC4R 2GN
United Kingdom
Wasserstein, Adelson Ventures, L.P. (5) ...................................... 1,725,000 8.30
31 West 52nd Street
New York New York 10019
Draper M. Jaffray (6) ........................................................ 32,600 *
Timothy C. Choate (7) ........................................................ 7,500 *
Thomas F. Madison (8) ........................................................ 132,800 *
Charles E. Reese, Jr. (9) .................................................... 20,700 *
Perry W. Steiner (5) ......................................................... 1,575,000 7.63
J. Paul Thorin (10) .......................................................... 20,700 *
All directors and executive officers as a group (12 persons) (11) ............ 12,720,083 58.75
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1% of the outstanding shares
of the Company's Common Stock.
(1) 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. Beneficial ownership also
includes shares of stock subject to options and warrants currently
exercisable or exercisable within 60 days of May 31, 1998. Percentage of
beneficial ownership is based on 20,570,645 shares of Common Stock
outstanding as of May 31, 1998 and shares of Common Stock outstanding
after the completion of this offering.
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<PAGE>
(2) Includes 482,500 shares Mr. Ronning has the right to acquire pursuant to
options exercisable within 60 days of May 31, 1998.
(3) Includes 4,800,000 shares MacUSA, Inc., a wholly-owned subsidiary of Tech
Squared, has the right to acquire from Mr. Ronning pursuant to a stock
option agreement entered into between Mr. Ronning and MacUSA, Inc. in
December 1995. During the term of the option, Mr. Ronning has agreed to
vote such 4,800,000 shares at the discretion of MacUSA, Inc.
(4) Includes 812,500, 250,000 and 789,500 shares registered in the name of
Latour Trustees (Jersey) Limited, Latour Trustees (Jersey) Limited and Mark
Henry Murray as Trustees of the Murray 1987 Settlement and Wilbro Nominees
Limited, respectively. Of the 812,500 shares of Common Stock registered in
the name of Latour Trustees (Jersey) Limited, 62,500 of such shares are
held by Mr. Sharples wife. Of the 789,500 shares of Common Stock registered
in the name of Wilbro Nominees Limited, 7,500 of such shares are held by
Mr. Sharples children. Also includes 150,000 shares Mr. Sharples has the
right to acquire pursuant to a warrant exercisable within 60 days.
(5) Includes 75,000 shares Wasserstein, Adelson Ventures, L.P. has the right to
acquire pursuant to a warrant exercisable within 60 days and 150,000 shares
issuable to Wasserstein, Adelson Ventures, L.P. pursuant to a warrant which
is exercisable upon the completion of the Company's initial public
offering. Mr. Steiner is a Vice President of Wasserstein Perella Ventures,
Inc., the general partner of Wasserstein, Adelson Ventures, L.P. and
disclaims beneficial ownership of shares held by Wasserstein, Adelson
Ventures, L.P. except to the extent of his pro rata pecuniary interest
therein.
(6) Includes 30,100 shares issuable upon exercise of options exercisable within
60 days of May 31, 1998.
(7) Includes 7,500 shares issuable upon exercise of options exercisable within
60 days of May 31, 1998.
(8) Includes 82,800 shares issuable upon exercise of options exercisable within
60 days of May 31, 1998.
(9) Includes 20,700 shares issuable upon exercise of options exercisable within
60 days of May 31, 1998.
(10) Includes 20,700 shares issuable upon exercise of options exercisable
within 60 days of May 31, 1998.
(11) Includes 704,300 shares issuable upon exercise of options exercisable
within 60 days of May 31, 1998 and 375,000 shares subject to warrants.
Also includes shares held by entities affiliated with certain directors of
the Company as described in footnote 5 above.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 100,000,000 shares of Common Stock, par value $0.01 per
share, and 5,000,000 shares of Preferred Stock, par value $0.01 per share
("Preferred Stock").
COMMON STOCK
As of May 31, 1998, there were 20,570,645 shares of Common Stock outstanding
held of record by 117 stockholders (including shares of Preferred Stock that
will be converted into Common Stock upon completion of this offering).
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding shares of the Preferred
Stock, the holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. See "Dividend Policy." In the event of a liquidation,
dissolution, or winding up of the Company, holders of the Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities.
Holders of Common Stock have no preemptive rights and no right to convert their
Common Stock into any other securities. There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock to be outstanding upon the completion
of this offering will be, fully paid and non-assessable.
PREFERRED STOCK
Upon the closing of this offering, the Board of Directors will have the
authority, without further action by the stockholders, to issue up to 5,000,000
shares of Preferred Stock, $0.01 par value, in one or more series and to fix the
designations, powers, preferences, privileges, and relative participating,
optional, or special rights and the qualifications, limitations, or restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be greater than
the rights of the Common Stock. The Board of Directors, without stockholder
approval, can issue Preferred Stock with voting, conversion, or other rights
that could adversely affect the voting power and other rights of the holders of
Common Stock. Preferred Stock could thus be issued with terms calculated to
delay or prevent a change in control of the Company or make removal of
management more difficult. Additionally, the issuance of Preferred Stock may
have the effect of decreasing the market price of the Common Stock, and may
adversely affect the voting and other rights of the holders of Common Stock.
Upon the completion of this offering, there will be no shares of Preferred Stock
outstanding and the Company has no current plans to issue any of the Preferred
Stock.
WARRANTS
As of May 31, 1998, the Company had outstanding warrants to purchase an
aggregate of 1,204,529 shares of the Company's Common Stock. The warrants expire
at various times ranging from December 2001 to May 2003. Generally, each warrant
contains provisions for the adjustment of the exercise price and the aggregate
number of shares issuable upon the exercise of the warrant under certain
circumstances, including stock dividends, stock splits, reorganizations,
reclassifications, consolidations and certain dilutive issuances of securities
at prices below the then existing warrant exercise price. All warrants are
currently exercisable, except for one warrant to purchase 150,000 shares, which
only becomes exercisable upon the completion of the Company's initial public
offering.
REGISTRATION RIGHTS
Pursuant to agreements between the Company and the holders (or their
permitted transferees) ("Holders") of approximately 12,122,263 shares of Common
Stock (assuming the conversion of all
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<PAGE>
outstanding Preferred Stock upon the completion of this offering) and options
and warrants to purchase 1,212,500 shares of Common Stock, the Holders are
entitled to certain rights with respect to the registration of such shares under
the Securities Act. If the Company proposes to register its Common Stock under
the Securities Act, subject to certain exceptions, the Holders are entitled to
notice of the registration and are entitled at the Company's expense to include
such shares therein, provided that the managing underwriters have the right to
limit the number of such shares included in the registration. The Holders do not
have registration rights with respect to this offering. In addition, certain of
the Holders may require the Company, at its expense, on no more than one
occasion, to file a registration statement under the Securities Act with respect
to their shares of Common Stock. Such rights may not be exercised until six
months after the completion of this offering. Further, Holders may require the
Company, once every 12 months and at the Company's expense, to register the
shares on Form S-3 when such form becomes available to the Company, subject to
certain conditions and limitations.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, the statute prohibits
a publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of Section
203, a "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
The Company's Restated Certificate of Incorporation and Bylaws also require
that, effective upon the closing of this offering, any action required or
permitted to be taken by stockholders of the Company must be effected at a duly
called annual or special meeting of the stockholders and may not be effected by
a consent in writing. In addition, special meetings of the stockholders of the
Company may be called only by the Board of Directors, the Chairman of the Board
or the Chief Executive Officer of the Company. The Company's Restated
Certificate of Incorporation also provides for the classification of the Board
of Directors into three classes, only one of which will be elected at each
annual meeting, and specifies that the authorized number of directors may be
changed only by resolution of the Board of Directors. These provisions, which
require the vote of stockholders holding at least two-thirds of the outstanding
shares to amend, may have the effect of deterring hostile takeovers or delaying
changes in control or management of the Company. See "Management--Board
Composition."
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A. has been appointed as the transfer agent and
registrar for the Company's Common Stock.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering, the Company will have outstanding
shares of Common Stock, based on the number of shares of Common Stock
outstanding as of May 31, 1998, assuming (i) the issuance by the Company of
shares of Common Stock offered hereby, (ii) no exercise of options, warrants or
other obligations to issue shares after May 31, 1998 and (iii) no exercise of
the Underwriters' over-allotment option to purchase shares of Common
Stock, except as otherwise noted. Of these shares, the shares sold in this
offering will be freely tradable without restriction under the Securities Act.
The remaining 20,570,645 shares of Common Stock held by existing stockholders
are restricted securities. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 or Regulation S as promulgated under the
Securities Act. Holders, including all officers and directors, of 17,566,861
shares of the Company's Common Stock and an additional 1,923,042 shares issuable
upon exercise of warrants and vested options have agreed with the
representatives of the Underwriters (the "Lock-Up Agreements"), subject to
certain exceptions, not to offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock (whether such shares or any
such securities are then owned by such person or are thereafter acquired
directly from the Company), or to enter into any swap or similar arrangement
that transfers, in whole or in part, the economic risks of ownership of the
Common Stock, without the prior written consent of BT Alex. Brown Incorporated
for a period of 180 days after the date of the Prospectus. As a result of such
contractual restrictions and the provisions of Rule 144 and 701 or Regulation S,
additional shares will be available for sale in the public market as follows:
(i) 2,262,968 shares of Common Stock currently outstanding and 87,800 shares of
Common Stock issuable upon exercise of currently outstanding options will be
eligible for sale 90 days after the date of this Prospectus, (ii) 11,599,888
restricted securities will be eligible for sale 180 days after the date of this
Prospectus and (iii) the remainder of the restricted securities will be eligible
for sale from time to time thereafter upon expiration of their respective
one-year holding periods.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, any holder, including an affiliate of the Company,
of restricted securities as to which at least one year has elapsed since the
later of the date of the holder's acquisition of such shares from the Company or
from an affiliate, would be entitled within any three-month period to sell a
number of shares that does not exceed the greater of 1% of the then outstanding
shares of Common Stock (approximately shares immediately after the
closing of this offering assuming no exercise of the Underwriters'
over-allotment option) or the average weekly trading volume of the Common Stock
on the Nasdaq National Market during the four calendar weeks preceding the date
on which notice of the sale is filed with the Commission. Sales under Rule 144
are subject to certain requirements relating to manner of sale, notice and
availability of current public information about the Company. However, a person
(or persons whose shares are aggregated) who is not deemed to have been an
affiliate of the Company at any time during the 90 days immediately preceding
the sale and who beneficially owns restricted securities is entitled to sell
such shares under Rule 144(k) without regard to the limitations described above,
provided that at least two years have elapsed since the later of the date the
shares were acquired from the Company or from an affiliate of the Company. The
foregoing is a summary of Rule 144 and is not intended to be a complete
description of that rule.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisers prior to the closing of this
offering, pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. In addition, the Commission has
indicated that Rule 701 will apply to stock options granted by the Company
before this offering, along with the shares acquired upon exercise of such
options. Securities
54
<PAGE>
issued in reliance on Rule 701 are deemed to be restricted securities and,
beginning 90 days after the date of this Prospectus (unless subject to the
contractual restrictions described above), may be sold by persons other than
affiliates, subject only to the manner of sale provisions of Rule 144 and by
affiliates under Rule 144 without compliance with its one-year minimum holding
period requirements.
The Company intends to file a registration statement on Form S-8 under the
Securities Act covering shares of Common Stock reserved for issuance under the
1998 Stock Option Plan. See "Management-- Employee Benefit Plans." Such
registration statement is expected to be filed and become effective not earlier
than 180 days after the effective date of this offering. Accordingly, shares
registered under such registration statement will, subject to rule 144 volume
limitations applicable to affiliates of the Company, be available for sale in
the open market, unless such shares are subject to vesting restrictions with the
Company. As of May 31, 1998, options to purchase 2,270,100 shares of Common
Stock were issued and outstanding. See "Management--Employee Benefit Plans."
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for the
Common Stock will develop or will continue after this offering or that the
market price of the Common Stock will not decline below the initial public
offering price. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to time.
As described herein, only a limited number of shares will be available for sale
shortly after this offering because of certain contractual and legal
restrictions on resale. Sales of substantial amounts of Common Stock of the
Company in the public market after the restrictions lapse could adversely affect
the prevailing market price and the ability of the Company to raise equity
capital in the future.
55
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement"), the underwriters named below (the "Underwriters"),
through their representatives BT Alex. Brown Incorporated, BancAmerica Robertson
Stephens and Bear, Stearns & Co. Inc. (the "Representatives"), have severally
agreed to purchase from the Company the following respective numbers of shares
of Common Stock at the initial public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
-----------
<S> <C>
BT Alex. Brown Incorporated.......................................................
BancAmerica Robertson Stephens....................................................
Bear, Stearns & Co. Inc...........................................................
Total...........................................................................
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the shares of Common Stock offered hereby if any of such shares
are purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share to certain other dealers. After the initial public
offering, the offering price and other selling terms may be changed by the
Representatives.
The Company has granted the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to
additional shares of Common Stock at the initial public offering price
less the underwriting discounts and commissions set forth on the cover page of
this Prospectus. To the extent that the Underwriters exercise such option, each
of the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it in the above table bears to , and the Company will be
obligated, pursuant to the option to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
Each of the officers and directors and certain stockholders of the Company,
holding in the aggregate 17,566,861 shares of Common Stock, have agreed not to
offer, sell, contract to sell or otherwise dispose of (or enter into any
transaction which is designed to, or could be expected to, result in the
disposition of any portion of) any Common Stock for a period of 180 days after
the date of this Prospectus, without the prior written consent of BT Alex. Brown
Incorporated. Such consent may be given at any time without public notice. The
Company has entered into a similar agreement, except that it may issue, and
grant options or warrants to purchase, shares of Common Stock or any securities
convertible into, exercisable for or exchangeable for shares of Common Stock,
pursuant to the exercise of outstanding options and warrants and the Company's
issuance of options and stock granted under the existing stock and stock
purchase plans.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
56
<PAGE>
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock has been determined by negotiation among the Company and the
Representatives. Among the factors considered in such negotiations were
prevailing market conditions, the results of operations of the Company in recent
periods, the market capitalizations and stages of development of other companies
which the Company and the Representatives believe to be comparable to the
Company, estimates of the business potential of the Company, the present stage
of the Company's development and other factors deemed relevant.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of the Common Stock. Specifically, the Underwriters may over-allot
shares of the Common Stock in connection with this offering, thereby creating a
short position in the Underwriters' syndicate account. Additionally, to cover
such over-allotments or to stabilize the market price of the Common Stock, the
Underwriters may bid for, and purchase, shares of the Common Stock in the open
market. Any of these activities may maintain the market price of the Common
Stock at a level above that which might otherwise prevail in the open market.
The Underwriters are not required to engage in these activities, and, if
commenced, any such activities may be discontinued at any time. The
Representatives, on behalf of the Underwriters, also may reclaim selling
concessions allowed to an Underwriter or dealer, if the syndicate repurchases
shares distributed by that Underwriter or dealer.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Cooley Godward LLP, Palo Alto and San Francisco, California and
certain other legal matters will be passed upon for the Company by Messerli &
Kramer P.A., Minneapolis, Minnesota. Certain legal matters related to the
offering will be passed upon for the Underwriters by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1997,
and for each of the years in the three year period ended December 31, 1997
included in this Prospectus and elsewhere in the Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Common Stock, reference is made
to the Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement may be
inspected by anyone without charge at the Commission's principal office in
Washington, D.C., and copies of all or any part of the Registration Statement
may be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of certain fees prescribed by
the Commission. The Commission also maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants, such as the Company, that file electronically with the
Commission. The address of the site is http://www.sec.gov.
57
<PAGE>
DIGITAL RIVER, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Consolidated Balance Sheets as of December 31, 1996, 1997 and March 31, 1998 (unaudited)................... F-3
Consolidated Statements of Operations for the years ended December 31, 1995, 1996, 1997 and for the three
months ended March 31, 1997 and 1998 (unaudited)......................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1995, 1996, 1997
and for the three months ended March 31, 1998 (unaudited)................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996, 1997 and for the three
months ended March 31, 1997 and 1998 (unaudited)......................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Digital River, Inc.:
We have audited the accompanying consolidated balance sheets of Digital
River, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Digital River, Inc. and
Subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 6, 1998
F-2
<PAGE>
DIGITAL RIVER, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- --------- MARCH 31,
1998
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 800 $ 2,126 $ 10,057
Accounts receivable, net allowance of $0, $20 and $41.......................... 4 94 163
Prepaid expenses and other..................................................... 5 100 156
--------- --------- -----------
Total current assets......................................................... 809 2,320 10,376
--------- --------- -----------
Property and equipment:
Property and equipment......................................................... 115 1,035 1,634
Accumulated depreciation....................................................... (8) (132) (213)
--------- --------- -----------
Net property and equipment................................................... 107 903 1,421
Other assets..................................................................... 286 182 120
--------- --------- -----------
Total assets................................................................. $ 1,202 $ 3,405 $ 11,917
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Convertible debentures......................................................... $ 998 $ -- $ --
Accounts payable............................................................... 112 720 1,631
Accrued payroll................................................................ 30 197 201
Due to related party........................................................... 67 46 142
Other accrued liabilities...................................................... 53 113 52
--------- --------- -----------
Total current liabilities.................................................... 1,260 1,076 2,026
--------- --------- -----------
Commitments and contingencies (Note 6)
Stockholders' equity (deficit):
Common stock, $.01 par value; 100,000,000 shares authorized; 8,000,000,
13,862,856 and 18,703,230 shares issued and outstanding...................... 80 139 187
Additional paid-in capital..................................................... 702 6,515 15,584
Accumulated deficit............................................................ (840) (4,325) (5,880)
--------- --------- -----------
Total stockholders' equity (deficit)......................................... (58) 2,329 9,891
--------- --------- -----------
Total liabilities and stockholders' equity (deficit)....................... $ 1,202 $ 3,405 $ 11,917
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
DIGITAL RIVER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------------- ------------------------
1995 1996 1997 1997 1998
--------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales......................................... $ -- $ 111 $ 2,472 $ 179 $ 2,270
Cost of sales................................. -- 95 2,052 147 1,896
--------- --------- --------- ----------- -----------
Gross profit................................ -- 16 420 32 374
Operating expenses:
Sales and marketing......................... 3 68 1,501 270 1,060
Product development and operations.......... 130 230 1,528 169 703
General and administrative.................. 32 415 929 81 208
--------- --------- --------- ----------- -----------
Total operating expenses.................. 165 713 3,958 520 1,971
--------- --------- --------- ----------- -----------
Loss from operations.......................... (165) (697) (3,538) (488) (1,597)
Interest income, net...................... 22 8 53 8 42
--------- --------- --------- ----------- -----------
Net loss...................................... $ (143) $ (689) $ (3,485) $ (480) $ (1,555)
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Basic and diluted net loss per share.......... $ (0.02) $ (0.09) $ (0.31) $ (0.06) $ (0.10)
--------- --------- --------- ----------- -----------
Basic and diluted weighted average common
shares outstanding.......................... 8,000 8,000 11,271 8,573 14,919
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
DIGITAL RIVER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
SHARES COMMON PAID-IN ACCUMULATED EQUITY
OUTSTANDING STOCK CAPITAL DEFICIT (DEFICIT)
----------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994........................ 8,000 $ 80 $ 698 $ (8) $ 770
Net loss........................................ -- -- -- (143) (143)
----------- ----- --------- ------------ ------------
Balance, December 31, 1995........................ 8,000 80 698 (151) 627
Issuance of warrant in exchange for financing
services...................................... -- -- 4 -- 4
Net loss........................................ -- -- -- (689) (689)
----------- ----- --------- ------------ ------------
Balance, December 31, 1996........................ 8,000 80 702 (840) (58)
Convertible debentures exchanged for common
stock......................................... 1,527 15 982 -- 997
Sales of common stock........................... 4,246 43 4,731 -- 4,774
Common stock issued in Fujitsu agreement........ 90 1 100 -- 101
Net loss........................................ -- -- -- (3,485) (3,485)
----------- ----- --------- ------------ ------------
Balance, December 31, 1997........................ 13,863 139 6,515 (4,325) 2,329
Sales of common stock (unaudited)............... 4,840 48 9,069 -- 9,117
Net loss (unaudited)............................ -- -- -- (1,555) (1,555)
----------- ----- --------- ------------ ------------
Balance, March 31, 1998
(unaudited)..................................... 18,703 $ 187 $ 15,584 $ (5,880) $ 9,891
----------- ----- --------- ------------ ------------
----------- ----- --------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
DIGITAL RIVER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------------- ------------------------
1995 1996 1997 1997 1998
--------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss............................................ $ (143) $ (689) $ (3,485) $ (480) $ (1,555)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 5 35 195 10 105
Common stock granted to Fujitsu................... -- -- 101 -- --
Change in operating assets and liabilities;
Accounts receivable and prepaid expenses........ 1 (9) (184) (184) (125)
Accounts payable................................ (9) 108 607 156 911
Accrued payroll and other accrued liabilities... 4 79 227 9 (57)
Due to related party............................ -- 67 (21) -- 95
--------- --------- --------- ----------- -----------
Net cash used in operating activities......... (142) (409) (2,560) (489) (626)
--------- --------- --------- ----------- -----------
Investing activities:
Purchases of equipment.............................. (9) (105) (920) (192) (599)
Patent acquisition costs............................ (41) (28) (64) (15) (12)
--------- --------- --------- ----------- -----------
Net cash used in investing activities......... (50) (133) (984) (207) (611)
--------- --------- --------- ----------- -----------
Financing activities:
Sales of common stock............................... -- -- 4,774 1,361 9,168
Proceeds from convertible debentures................ -- 998 147 -- --
Payment of debt issuance costs and other............ -- (143) (51) -- --
--------- --------- --------- ----------- -----------
Net cash provided by financing activities..... -- 855 4,870 1,361 9,168
--------- --------- --------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents......................................... (192) 313 1,326 665 7,931
Cash and cash equivalents,
beginning of period................................. 679 487 800 800 2,126
--------- --------- --------- ----------- -----------
Cash and cash equivalents, end of period.............. $ 487 $ 800 $ 2,126 $ 1,465 $ 10,057
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Noncash investing and financing activities:
Convertible debentures exchanged for common stock,
net of direct costs............................... $ -- $ -- $ 998 $ 998 $ --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
DIGITAL RIVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Digital River, Inc., a Delaware corporation, and its wholly owned
subsidiaries (collectively, the Company) have developed a technology platform
that allows it to provide a suite of electronic commerce services to its
software publisher and online retailer clients, including electronic software
delivery. Through contractual relationships with software publishers and online
retailers, the Company offers software products for sale via the Internet.
The Company was incorporated in February 1994, and was considered a
development stage company through August 1996. The Company conducted its first
online sale through a clients' Web store in August 1996 and is still in the
early stages of development. The Company has experienced significant losses
since inception and has experienced significant negative cash flows from
operations. The Company anticipates that operating expenses will continue to
increase, resulting in continuing net losses and negative cash flows from
operations for the foreseeable future.
The Company's prospects must be considered in light of the risks frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as electronic commerce. To
address these risks, the Company must, among other things, maintain existing and
develop new relationships with independent software publishers and online
retailers, maintain and increase its client base, implement and successfully
execute its business and marketing strategy, continue to develop and upgrade its
technology and transaction-processing systems, provide superior customer service
and order fulfillment, respond to competitive developments, and attract, retain
and motivate qualified personnel. There can be no assurance that the Company
will be successful in addressing such risks, and the failure to do so could have
a material adverse effect on the Company's business, financial condition and
results of operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Digital River,
Inc. and its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
INTERIM FINANCIAL STATEMENTS
The consolidated balance sheet as of March 31, 1998 and the related
consolidated statements of operations and cash flows for the three-month periods
ended March 31, 1997 and 1998, and the consolidated statement of stockholders'
equity (deficit) for the three month period ended March 31, 1998 are unaudited.
Such unaudited statements have been prepared on the same basis as the audited
consolidated financial statements and in the opinion of management include all
adjustments (consisting of only normal recurring adjustments) necessary for the
fair presentation of the results for the interim periods presented. The results
of operations for the unaudited three-month period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the entire 1998
fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly liquid investments, primarily
money market accounts, that are readily convertible into known amounts of cash
and that have original maturities of three months or less to be cash
equivalents.
F-7
<PAGE>
DIGITAL RIVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(CONTINUED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is being depreciated under the
straight-line method using lives of three to seven years.
PATENTS AND ORGANIZATION COSTS
The costs of developing patents are amortized over a three-year period
utilizing the straight-line method of amortization once the patent application
is filed. Organization costs are being amortized using the straight-line method
over five years. Patents and organizational costs are included in other assets
on the accompanying consolidated balance sheets, net of accumulated amortization
of $33,000, $104,000 and $129,000 as of December 31, 1996, 1997 and March 31,
1998.
DEBT ISSUANCE COSTS
Debt issuance costs represent direct financing costs incurred in 1996 to
issue convertible debentures. These costs totaling $147,413 are included in
other assets as of December 31, 1996 and were offset against paid-in capital
upon the conversion of the convertible debentures to common stock in 1997.
REVENUE RECOGNITION
The Company derives its revenue primarily from sales of third-party
software. The Company has contractual relationships with its software publisher
and online retailer clients which obligate the Company to pay to the client a
specified percentage of each sale. Revenues from the sale of software products,
net of estimated returns, are recognized upon either the electronic delivery or
shipment of the physical product to the end-user. The amount payable to the
software publisher or online retailer is reported as cost of sales. The Company
bears full credit risk with respect to most sales. Sales to foreign clients
accounted for 32% and 31% of sales for the years ended December 31, 1996 and
1997, respectively, and 30% and 32% for the three months ended March 31, 1997
and 1998. One client accounted for 18% of sales for the year ended December 31,
1997. For the three months ended March 31, 1998 there were two significant
clients which comprised 18% and 11% of sales for the period.
ADVERTISING COSTS
The costs of advertising are charged to sales and marketing expense as
incurred. For the years ended December 31, 1996 and 1997, the Company incurred
advertising expense of $7,000 and $292,000, respectively. No advertising expense
was incurred in 1995. Advertising expense totaled $81,000 and $126,000 for the
three months ended March 31, 1997 and 1998.
NET LOSS PER SHARE
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share," during 1997. All prior loss per share amounts are
presented in accordance with the new standard. Basic loss per common share is
computed by dividing net loss by the weighted average number of shares of common
stock outstanding during the year. The computation of diluted earnings per
common share,
F-8
<PAGE>
DIGITAL RIVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(CONTINUED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
formerly referred to as fully diluted earnings per share, is similar to the
computation of basic loss per common share, except that the denominator is
increased for the assumed conversion of convertible securities and the exercise
of dilutive options using the treasury stock method. The weighted average shares
used in computing basic and diluted loss per share were the same for the three
years ended December 31, 1997 and the three months ended March 31, 1997 and
1998. Options and warrants were excluded from the computation of earnings per
share as their effect is antidilutive.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make 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
reporting period. Ultimate results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has released SFAS No. 130,
"Reporting Comprehensive Income," effective for the fiscal years beginning after
December 15, 1997. SFAS No. 130 establishes standards for reporting and display
in the financial statements of total net income and the components of all other
nonowner changes in equity, referred to as comprehensive income. The Company
will adopt SFAS No. 130 in 1998 and does not believe it will have a material
impact on the disclosures in the financial statements.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use," which is effective for fiscal years beginning after December
15, 1998. SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use. The Company believes that the
adoption of SOP 98-1 will have no material impact on its financial condition or
results of operations.
During April 1998, the Accounting Standards Executive Committee of the AICPA
issued SOP 98-5, "Reporting on the Costs of Start-Up Activities," which is
effective for fiscal years beginning after December 15, 1998. SOP 98-5 requires
companies to expense as incurred all start-up, preopening, and organizational
costs that are not otherwise capitalizable as long-lived assets. The Company
believes that the adoption of SOP 98-5 will have no material impact on its
financial condition or results of operations.
2. INCOME TAXES:
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
currently enacted tax rates. No income taxes were paid in any of the years
presented.
As of December 31, 1997, the Company had net operating loss carryforwards of
approximately $4,300,000. These income tax net operating loss carryforwards
expire beginning in the year 2009. Because
F-9
<PAGE>
DIGITAL RIVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(CONTINUED)
2. INCOME TAXES: (CONTINUED)
of the uncertainty of future profitability, a valuation allowance equal to the
deferred tax asset has been recorded.
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -------------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards.................................. $ 294 $ 1,489
Nondeductible reserves and accruals............................... 3 11
Depreciation and amortization..................................... 5 5
Valuation allowance............................................... (302) (1,505)
----------- -------------
$ -- $ --
----------- -------------
----------- -------------
</TABLE>
Ownership changes resulting from the conversion of debentures to common
stock and the issuance of additional equity will limit future annual realization
of the tax net operating loss carryforwards to a specified percentage of the
value of the Company under Section 382 of the Internal Revenue Code.
3. STOCKHOLDERS' EQUITY:
STOCK SPLIT
The Company effected an 8-for-1 split of its common stock in September, 1997
in the form of a stock dividend. All share, per share and weighted average share
information has been restated to reflect the split.
CONVERTIBLE DEBENTURES
During 1996 the Company issued convertible debentures totaling $998,000.
These debentures were converted to common stock in February 1997 at a conversion
rate of $0.75 per share.
WARRANTS
Warrants to purchase 395,752 shares of common stock issued principally in
conjunction with sales of common stock at exercise prices ranging from $0.75 to
$2.00 per share were outstanding as of December 31, 1997. All warrants are
exercisable for a period of five years from their respective purchase dates.
Warrants to purchase 951,892 shares of common stock at exercise prices ranging
from $0.75 to $2.00 per share were outstanding as of March 31, 1998.
4. STOCK OPTIONS:
During 1997, the Company adopted the Amended and Restated 1994 Stock Option
Plan (the 1994 Plan) which provides for the granting of stock options to
purchase up to 2,000,000 shares of common stock. Options granted to employees
under the plan expire no later than ten years after the date of grant. The
exercise price must be at least 100% of the fair market value of the shares at
the date of grant for incentive options. The 1994 Plan covers both incentive and
nonstatutory stock options. Incentive stock options
F-10
<PAGE>
DIGITAL RIVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(CONTINUED)
4. STOCK OPTIONS: (CONTINUED)
granted to employees who immediately before such grant owned stock directly or
indirectly representing more than 10% of the voting power of all the stock of
the Company, expire no later than five years from the grant date unless the
option exercise price is at least 110% of the fair market value of the stock.
A summary of change in outstanding options under the 1994 Plan is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE
OUTSTANDING $/SHARE
----------- -----------
<S> <C> <C>
Balance, December 31, 1995............................................ -- $ --
Grants.............................................................. 508,000 0.40
----------- -----
Balance, December 31, 1996............................................ 508,000 0.40
Grants.............................................................. 745,200 1.11
Cancelled........................................................... (64,000) 1.13
----------- -----
Balance, December 31, 1997............................................ 1,189,200 0.80
Grants (unaudited).................................................. 32,000 2.00
Cancelled (unaudited)............................................... (8,000) 1.13
----------- -----
Balance, March 31, 1998 (unaudited)................................... 1,213,200 $ 0.84
----------- -----
----------- -----
</TABLE>
A summary of information about stock options outstanding at December 31,
1997 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------- ------------------------
EXERCISE NUMBER WEIGHTED AVG. NUMBER WEIGHTED
PRICE OUTSTANDING LIFE REMAINING EXERCISABLE AVG. PRICE
- ------------ ----------- -------------- ----------- ----------
<S> <C> <C> <C> <C>
$ 0.25 360,000 4 years 280,000 $0.25
0.75 276,000 9 years 112,000 0.75
1.13 513,200 9.5 years -- --
2.00 40,000 10 years -- --
- ------------ ----------- -------------- ----------- -----
$0.25-2.00 1,189,200 8 years 392,000 $0.39
- ------------ ----------- -------------- ----------- -----
- ------------ ----------- -------------- ----------- -----
</TABLE>
The Company has elected to apply the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." Accordingly, the Company
accounts for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion (APB) No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Compensation cost for
stock options is measured as the excess, if any, of the fair value of the
Company's common stock at the date of grant over the stock
F-11
<PAGE>
DIGITAL RIVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(CONTINUED)
4. STOCK OPTIONS: (CONTINUED)
option exercise price. Had compensation costs for these plans been determined
consistent with SFAS No. 123, the Company's net loss would have been adjusted to
the following pro forma amounts:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Net loss:
As reported.............................................................. $ (689) $ (3,485)
Pro forma................................................................ (704) (3,565)
Basic and diluted net loss per share:
As reported.............................................................. (0.09) (0.31)
Pro forma................................................................ (0.09) (0.32)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used: risk-free interest rates of 6%; no expected dividends;
expected lives of five years; and a volatility factor of 1.1 and .7 in 1996 and
1997, respectively. The weighted average fair value of the options granted in
1996 and 1997 was $.32 and $.69, respectively.
5. RELATED-PARTY TRANSACTIONS:
As of March 31, 1998, the Company's President owned 56% of Tech Squared,
Inc. (Tech Squared) where he spends a portion of his time working as the
Company's Chairman and Chief Executive Officer. Tech Squared holds an option to
purchase 4,800,000 shares of the Company's common stock for $1.00 from the
Company's President. The Company currently conducts its operations in leased
facilities of Tech Squared. Rent and other allocated expenses paid to Tech
Squared totaled $52,000 and $160,000 in 1996 and 1997, respectively. No amounts
were due under this arrangement in 1995. Rent and other allocated expenses
totaled $24,000 and $61,000 for the three months ended March 31, 1997 and 1998.
During 1997, Tech Squared began performing fulfillment services for Digital
River on physical shipments of products, for which Digital River pays Tech
Squared a fulfillment fee. In 1997, Tech Squared billed Digital River $8,000 for
these services. For the three months ended March 31, 1997 and 1998, the Company
was billed $0 and $16,000 for such services.
6. COMMITMENTS AND CONTINGENCIES:
In connection with an investment in the Company in 1994, Fujitsu Limited
(Fujitsu) obtained certain rights with respect to the Company's common stock and
the operations of the Company's business. In December, 1997, in exchange for the
issuance of 90,000 shares of the Company's common stock, Fujitsu agreed to
relinquish its rights with certain exceptions. Fujitsu retained the right to
designate one member to the Company's board of directors as long as its
ownership percentage is not less than 10% of the Company's common stock,
retained its prior share registration rights and retained certain technology
rights. In 1997, The Company recorded a charge to expense totaling $101,250,
which represents the fair
F-12
<PAGE>
DIGITAL RIVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(CONTINUED)
6. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
value of the common shares granted to Fujitsu as part of the December 1997
agreement. As of March 31, 1998, Fujitsu held 17.6% of the common stock of the
Company.
The United States Department of State and Department of Commerce restrict
the export of encrypting technology outside the United States. Although Digital
River does not currently believe its method of conducting business is impacted
to any significant degree by these restrictions, any significant change in these
rules or interpretations or any failure by Digital River to comply with existing
or future restrictions could have a material adverse impact on the business of
Digital River.
YEAR 2000 COMPLIANCE. The Company uses a significant number of computer
software programs and operating systems in its internal operations. The use of
computer programs that rely on two-digit date programs to perform computations
and decision-making functions may cause computer systems to malfunction in the
year 2000 and lead to significant business delays and disruptions. While the
Company believes that the software applications that it uses or has developed
are year 2000 compliant, to the extent that any of these software applications
contain source code that is unable to appropriately interpret the upcoming
calendar year 2000, some level of modification or possible replacement of such
source code or applications will be necessary. The Company has analyzed the
software applications that it uses or has developed and, as a result, the
Company at this time does not anticipate any significant expense in ensuring
that they are year 2000 compliant. However, until the year 2000 arrives, the
Company cannot be absolutely certain that its analysis is correct. The Company
is currently unable to predict the extent to which the year 2000 issue will
affect its clients or suppliers, or the extent to which it would be vulnerable
to any failure by the clients or suppliers to remediate any year 2000 issues on
a timely basis. The failure of a client or a major supplier subject to the year
2000 to convert its systems on a timely basis or a conversion that is
incompatible with the Company's systems could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition the Company's business, financial condition and results of operations
may be materially adversely affected to the extent its end-users are unable to
use their credit cards due to the year 2000 issues that are not rectified by
their credit card vendors.
7. SUBSEQUENT EVENTS (UNAUDITED):
In February 1998, two director/stockholders entered into a preliminary
agreement with the Company whereby the stockholders will help establish and
oversee the international operations for the Company for a term of three years.
As consideration for entering into the agreement, the stockholders each received
warrants issuable for 150,000 shares of common stock, at a purchase price of
$2.00 per share.
In April and May 1998, the Company sold 367,415 shares of common stock and
warrants to purchase 27,632 shares of common stock at $2.00 per share for net
proceeds of approximately $600,000. Concurrently with its private placement
offering at $2.00 per share, the Company granted options to purchase 993,900
shares of common stock at $2.00 per share to certain employees and directors
during April and May 1998.
In April 1998, the Company sold 1,500,000 of its Series A Preferred Stock,
$.01 par value and 225,000 warrants to purchase common stock at $2.00 per share
for a total consideration of $3,001,250. The Series A Preferred Stock is
convertible into common stock on a one-to-one basis at the option of the holder.
Upon
F-13
<PAGE>
DIGITAL RIVER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(CONTINUED)
7. SUBSEQUENT EVENTS (UNAUDITED): (CONTINUED)
the consummation of the Company's first underwritten public offering, the Series
A Preferred Stock will be automatically converted to common stock in the event
that the price exceeds $5.00 per share.
The Company has filed with the Securities and Exchange Commission a Form S-1
Registration Statement for the sale of shares of common stock (excluding the
underwriter's overallotment option to purchase an additional shares of
common stock). The proceeds from the offering will be used for general corporate
purposes, including continued investment in product development, expansion of
sales and marketing activities and working capital.
F-14
<PAGE>
[Illustrations]
PICTORIAL DEPICTION OF THE DIGITAL RIVER CLIENT
NETWORK, DEPICTING HOW END-USERS ARE CONNECTED TO
DIGITAL RIVER'S CNS THROUGH EITHER SOFTWARE
PUBLISHER OR ONLINE RETAILER CLIENTS.
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Use of Proceeds................................ 17
Dividend Policy................................ 17
Capitalization................................. 18
Dilution....................................... 19
Selected Consolidated Financial Data........... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 21
Business....................................... 28
Management..................................... 39
Certain Transactions........................... 46
Principal Stockholders......................... 50
Description of Capital Stock................... 52
Shares Eligible for Future Sale................ 54
Underwriting................................... 56
Legal Matters.................................. 57
Experts........................................ 57
Additional Information......................... 57
Index to Consolidated Financial Statements..... F-1
</TABLE>
--------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
SHARES
[LOGO]
COMMON STOCK
----------------
P R O S P E C T U S
----------------
BT ALEX. BROWN
BANCAMERICA ROBERTSON STEPHENS
BEAR, STEARNS & CO. INC.
, 1998
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
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 shares of Common Stock being registered. All the amounts shown are
estimates except for the registration fee, the NASD filing fee and the Nasdaq
National Market application fee.
<TABLE>
<S> <C>
Registration fee.................................................. $ 11,874
NASD filing fee................................................... 4,525
Nasdaq National Market listing fee................................ 50,000
Blue sky qualification fee and expenses........................... 5,000
Printing and engraving expenses................................... 125,000
Legal fees and expenses........................................... 350,000
Accounting fees and expenses...................................... 100,000
Transfer agent and registrar fees................................. 10,000
Miscellaneous..................................................... 43,601
---------
Total......................................................... $ 700,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
As permitted by Section 145 of the Delaware General Corporation Law, the
Bylaws of the Company provide that (i) the Company is required to indemnify its
directors and executive officers to the fullest extent permitted by the Delaware
General Corporation Law, (ii) the Company may, in its discretion, indemnify
other officers, employees and agents as set forth in the Delaware General
Corporation Law, (iii) to the fullest extent permitted by the Delaware General
Corporation Law, the Company is required to advance all expenses incurred by its
directors and executive officers in connection with a legal proceeding (subject
to certain exceptions), (iv) the rights conferred in the Bylaws are not
exclusive, (v) the Company is authorized to enter into indemnification
agreements with its directors, officers, employees and agents and (vi) the
Company may not retroactively amend the Bylaws provisions relating to indemnity.
The Company has entered into agreements with its directors and executive
officers that require the Company to indemnify such persons against expenses,
judgments, fines, settlements and other amounts that such person becomes legally
obligated to pay (including expenses of a derivative action) in connection with
any proceeding, whether actual or threatened, to which any such person may be
made a party by reason of the fact that such person is or was a director or
officer of the Company or any of its affiliated enterprises, provided such
person acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of the Company. The indemnification
agreements also set forth certain procedures that will apply in the event of a
claim for indemnification thereunder.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act of 1933, as amended (the "Act"), or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
(a) Since February 9, 1994, the Registrant has sold and issued the following
unregistered securities:
(1) From February 9, 1994 to May 31, 1998, the Company sold an aggregate
of 19,070,645 shares of Common Stock to certain investors for an aggregate
purchase price of $17,520,651.
II-1
<PAGE>
(2) From February 9, 1994 to May 31, 1998, the Company granted stock
options to employees, directors and consultants covering an aggregate of
2,270,100 shares of the Company's Common Stock (net of cancellations), at
exercise prices varying from $0.25 to $2.00. To date there have been no
exercise of any options.
(3) From February 9, 1994 to May 31, 1998, the Company has issued
warrants to purchase 1,204,524 shares of Common Stock with a weighted
average exercise price of $1.70.
(4) In April 1998, the Company sold 1,500,000 shares of the Company's
Series A Preferred Stock to Wasserstein, Adelson Ventures, L.P. for an
aggregate purchase price of $3,000,000.
The sales and issuances of securities in the transactions described above
were deemed to be exempt from registration under the Act in reliance upon
Section 4(2) of the Act, Regulation D promulgated thereunder, Regulation S
promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Act,
as transactions by an issuer not involving any public offering or transactions
pursuant to compensatory benefit plans and contracts relating to compensation as
provided under Rule 701. 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 relationship with the Company,
to information about the Registrant.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ --------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant, as currently in effect.
*3.2 Form of Amended and Restated Certificate of Incorporation to be filed upon
completion of this offering.
3.3 Bylaws of the Registrant, as currently in effect.
*3.4 Form of Amended and Restated Bylaws of the Registrant to be filed upon
completion of this offering.
*4.1 Specimen Stock Certificate.
*5.1 Opinion of Cooley Godward LLP.
10.1 Form of Indemnity Agreement between Registrant and each of its directors
and executive officers.
*10.2 1998 Stock Option Plan.
+10.3 Distributor Agreement dated April 23, 1997 by and between Corel
Corporation and the Registrant.
*10.4 Employment and Non-Competition Agreement effective May 25, 1998 by and
between Joel A. Ronning and the Registrant.
10.5 Fujitsu Modification Agreement dated December 11, 1997 by and between Joel
A. Ronning, the Registrant, Fujitsu Limited and MacUSA, Inc.
10.6 Heads of Agreement for International Agreement dated February 25, 1998 by
and between Christopher J. Sharples, David A. Taylor and the Registrant.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ --------------------------------------------------------------------------
<C> <S>
*10.7 Stock Subscription Warrant for Shares of Common Stock dated February 26,
1998 by and between Christopher Sharples and Registrant.
10.8 Termination of Lease Letter dated April 30, 1998 by and between Tech
Squared, Inc. and Registrant.
*10.9 Amended and Restated Services Agreement dated , 1998 by and
between Tech Squared, Inc. and Registrant.
*10.10 Stock Option Agreement dated December 25, 1995 by and between Joel A.
Ronning and MacUSA, Inc.
*10.11 Registration Rights Agreement dated April 22, 1998 by and between
Wasserstein, Adelson Ventures, L.P. and Registrant.
*10.12 Form of Conditional Warrant to Purchase Common Stock dated April 22, 1998
by and between Wasserstein, Adelson Ventures, L.P. and Registrant.
*10.13 Form of Warrant to Purchase Common Stock by and between certain investors
and Registrant.
*10.14 Form of Registration Rights by and between certain investors and
Registrant.
10.15 Consent to Assignment and Assumption of Lease dated April 22, 1998 by and
between CSM Investors, Inc., IntraNet Integration Group, Inc. and
Registrant.
21.1 Subsidiaries of Digital River, Inc.
23.1 Consent of Independent Public Accountants.
*23.2 Consent of Cooley Godward LLP (reference is made to Exhibit 5.1).
24.1 Power of Attorney. Reference is made to the signature page.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
+ Confidential treatment requested for portions of these exhibits. Omitted
portions have been filed separately with the Securities and Exchange
Commission.
(b) FINANCIAL STATEMENT SCHEDULES.
Schedules not listed above are omitted because they are not required, they
are not applicable or the information is already included in the Consolidated
Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide 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 Act may be
permitted to directors, officers, and controlling persons of the Registrant
pursuant to the provisions described in Item 14 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 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, unless in the opinion of its counsel the
II-3
<PAGE>
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 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 Act, the information omitted from the form
of prospectus as filed as part of the registration statement in reliance upon
Rule 430A and contained in the form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be
part of the registration statement as of the time it was declared effective, (2)
for the purpose of determining any liability under the Act, 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 this
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof, and (3) to remove from registration by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Edina, State of
Minnesota, on the 8th day of June 1998.
DIGITAL RIVER, INC.
By: /s/ JOEL A. RONNING
-----------------------------------------
Joel A. Ronning
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Joel A.
Ronning and Robert E. Strawman as his true and lawful attorney-in-fact and
agent, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments (including post-effective amendments) to this Registration
Statement on Form S-1, and to sign any registration statement filed under Rule
642 under the Securities Act of 1933, as amended, including post-effective
amendments) thereto, and to file the same, with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
President, Chief Executive
/s/ JOEL A. RONNING Officer and Director
- ------------------------------ (Principal Executive June 8, 1998
Joel A. Ronning Officer)
Chief Financial Officer
/s/ ROBERT E. STRAWMAN and Treasurer (Principal
- ------------------------------ Financial and Accounting June 11, 1998
Robert E. Strawman Officer)
/s/ THOMAS F. MADISON
- ------------------------------ Director June 8, 1998
Thomas F. Madison
/s/ CHARLES E. REESE, JR.
- ------------------------------ Director June 8, 1998
Charles E. Reese, Jr.
/s/ CHRISTOPHER J. SHARPLES
- ------------------------------ Director June 11, 1998
Christopher J. Sharples
/s/ PERRY W. STEINER
- ------------------------------ Director June 8, 1998
Perry W. Steiner
/s/ J. PAUL THORIN
- ------------------------------ Director June 11, 1998
J. Paul Thorin
/s/ TIMOTHY C. CHOATE
- ------------------------------ Director June 8, 1998
Timothy C. Choate
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant, as currently in effect.
*3.2 Form of Amended and Restated Certificate of Incorporation to be filed upon completion of this offering.
3.3 Bylaws of the Registrant, as currently in effect.
*3.4 Form of Amended and Restated Bylaws of the Registrant to be filed upon completion of this offering.
*4.1 Specimen Stock Certificate.
*5.1 Opinion of Cooley Godward LLP.
10.1 Form of Indemnity Agreement between Registrant and each of its directors and executive officers.
*10.2 1998 Stock Option Plan.
+10.3 Distributor Agreement dated April 23, 1997 by and between Corel Corporation and the Registrant.
*10.4 Employment and Non-Competition Agreement effective May 25, 1998 by and between Joel A. Ronning and the
Registrant.
10.5 Fujitsu Modification Agreement dated December 11, 1997 by and between Joel A. Ronning, the Registrant,
Fujitsu Limited and MacUSA, Inc.
10.6 Heads of Agreement for International Agreement dated February 25, 1998 by and between Christopher J.
Sharples, David A. Taylor and the Registrant.
*10.7 Stock Subscription Warrant for Shares of Common Stock dated February 26, 1998 by and between Christopher
Sharples and Registrant.
10.8 Termination of Lease Letter dated April 30, 1998 by and between Tech Squared, Inc. and Registrant.
*10.9 Amended and Restated Services Agreement dated , 1998 by and between Tech Squared, Inc. and
Registrant.
*10.10 Stock Option Agreement dated December 25, 1995 by and between Joel A. Ronning and MacUSA, Inc.
*10.11 Registration Rights Agreement dated April 22, 1998 by and between Wasserstein, Adelson Ventures, L.P.
and Registrant.
*10.12 Form of Conditional Warrant to Purchase Common Stock dated April 22, 1998 by and between Wasserstein,
Adelson Ventures, L.P. and Registrant.
*10.13 Form of Warrant to Purchase Common Stock by and between certain investors and Registrant.
*10.14 Form of Registration Rights by and between certain investors and Registrant.
10.15 Consent to Assignment and Assumption of Lease dated April 22, 1998 by and between CSM Investors, Inc.,
IntraNet Integration Group, Inc. and Registrant.
21.1 Subsidiaries of Digital River, Inc.
23.1 Consent of Independent Public Accountants.
*23.2 Consent of Cooley Godward LLP (reference is made to Exhibit 5.1).
24.1 Power of Attorney. Reference is made to the signature page.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
+ Confidential treatment requested for portions of these exhibits. Omitted
portions have been filed separately with the Securities and Exchange
Commission.
(b) FINANCIAL STATEMENT SCHEDULES.
Schedules not listed above are omitted because they are not required, they
are not applicable or the information is already included in the Consolidated
Financial Statements or Notes thereto.
<PAGE>
Exhibit 1.1
_______________ SHARES
DIGITAL RIVER, INC.
COMMON STOCK
($0.01 PAR VALUE)
UNDERWRITING AGREEMENT
_______________, 1998
BT Alex. Brown Incorporated
BancAmerica Robertson Stephens
Bear, Stearns & Co. Inc.
As Representatives of the Several Underwriters
c/o BT Alex. Brown Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Gentlemen:
Digital River, Inc., a Delaware corporation (the "Company"), proposes to
sell to the several underwriters (the "Underwriters") named in Schedule I hereto
for whom you are acting as representatives (the "Representatives") an aggregate
of __________ shares of the Company's Common Stock, $0.01 par value (the "Firm
Shares"). The respective amounts of the Firm Shares to be so purchased by the
several Underwriters are set forth opposite their names in Schedule I hereto.
The Company also proposes to sell at the Underwriters' option an aggregate of up
to __________ additional shares of the Company's Common Stock (the "Option
Shares") as set forth below.
As the Representatives, you have advised the Company (a) that you are
authorized to enter into this Agreement on behalf of the several Underwriters
and (b) that the several Underwriters are willing, acting severally and not
jointly, to purchase the numbers of Firm Shares set forth opposite their
respective names in Schedule I, plus their pro rata portion of the Option Shares
if you elect to exercise the over-allotment option in whole or in part for the
accounts of the several Underwriters.
<PAGE>
The Firm Shares and the Option Shares (to the extent the aforementioned
option is exercised) are herein collectively called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Underwriters as
follows:
(a) A registration statement on Form S-1 (File No. 333-______) with
respect to the Shares has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
Rules and Regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder and has been filed with the
Commission. Copies of such registration statement, including any amendments
thereto, the preliminary prospectuses (meeting the requirements of the Rules and
Regulations) contained therein and the exhibits, financial statements and
schedules, as finally amended and revised, have heretofore been delivered by the
Company to you. Such registration statement, together with any registration
statement filed by the Company pursuant to Rule 462 (b) of the Act, herein
referred to as the "Registration Statement," which shall be deemed to include
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as of the
date of this Agreement. "Prospectus" means (a) the form of prospectus first
filed with the Commission pursuant to Rule 424(b) or (b) the last preliminary
prospectus included in the Registration Statement filed prior to the time it
becomes effective or filed pursuant to Rule 424(a) under the Act that is
delivered by the Company to the Underwriters for delivery to purchasers of the
Shares, together with the term sheet or abbreviated term sheet filed with the
Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary
prospectus included in the Registration Statement prior to the time it becomes
effective is herein referred to as a "Preliminary Prospectus." Any reference
herein to the Registration Statement, any Preliminary Prospectus or to the
Prospectus shall be deemed to refer to and include any supplements or amendments
to any Prospectus, filed with the Commission after the date of filing of the
Prospectus under Rules 424(b) or 430A, and prior to the termination of the
offering of the Shares by the Underwriters.
(b) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement. Each of the subsidiaries of
the Company as listed in EXHIBIT A hereto (collectively, the "Subsidiaries") has
been duly organized and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, with corporate power
and authority to own or lease its properties and conduct its business as
described in the Registration Statement. The Subsidiaries are the only
subsidiaries, direct or indirect, of the Company. The Company and each of the
Subsidiaries are duly qualified to transact business in all jurisdictions in
which the conduct of their business requires such
-2-
<PAGE>
qualification, except where the failure to be so qualified would not have a
material adverse effect on the business, properties, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole.
All of the outstanding shares of capital stock of each of the Subsidiaries
have been duly authorized and validly issued, are fully paid and
non-assessable and are owned by the Company or another Subsidiary free and
clear of all liens, encumbrances and equities and claims; and no options,
warrants or other rights to purchase, agreements or other obligations to
issue or other rights to convert any obligations into shares of capital stock
or ownership interest in the Subsidiaries are outstanding. All prior
securities of the Company (and its predecessor in Minnesota) have been duly
authorized and validly issued, are fully paid and nonassessable, and were
issued in compliance with the applicable federal and state securities laws.
(c) The outstanding shares of Common Stock of the Company have been
duly authorized and validly issued and are fully paid and non-assessable; the
Shares to be issued and sold by the Company have been duly authorized and when
issued and paid for as contemplated herein will be validly issued, fully paid
and non-assessable; and no preemptive rights of stockholders exist with respect
to any of the Shares or the issue and sale thereof. Neither the filing of the
Registration Statement nor the offering or sale of the Shares as contemplated by
this Agreement gives rise to any rights, other than those which have been waived
or satisfied, for or relating to the registration of any shares of Common Stock.
(d) The information set forth under the caption "Capitalization"
in the Prospectus is true and correct as of the date therein indicated. All
of the Shares conform to the description thereof contained in the
Registration Statement. The form of certificates for the Shares conforms to
the corporate law of the jurisdiction of the Company's incorporation.
(e) The Commission has not issued an order preventing or
suspending the use of any Prospectus relating to the proposed offering of the
Shares nor instituted proceedings for that purpose. The Registration
Statement contains, and the Prospectus and any amendments or supplements
thereto will contain, all statements which are required to be stated therein
by, and will conform in all material respects, to the requirements of the Act
and the Rules and Regulations. At the time it became effective, the
Registration Statement and any amendment thereto did not contain, and will
not contain as of the Closing Date and Option Closing Date (both as defined
in Section 2 hereof), any untrue statement of a material fact and did not
omit, and as of the Closing Date and Option Closing Date will not omit to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading. The Prospectus and any amendments and
supplements thereto do not contain, and will not as of the Closing Date or
the Option Closing Date contain, any untrue statement of material fact; and
do not omit, and will not, as of the Closing Date or the Option Closing Date,
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that the Company makes no
representations or warranties as to information contained in or omitted from
the Registration Statement or the Prospectus, or any such amendment or
supplement, in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of any Underwriter through the
Representatives, specifically for use in the preparation thereof.
-3-
<PAGE>
(f) The consolidated financial statements of the Company and the
Subsidiaries, together with related notes and schedules as set forth in the
Registration Statement, present fairly on a consolidated basis the financial
position and the results of operations and cash flows of the Company and the
consolidated Subsidiaries, at the indicated dates and for the indicated periods.
Such financial statements and related schedules have been prepared in accordance
with generally accepted principles of accounting, consistently applied
throughout the periods involved, except as disclosed herein, and all adjustments
necessary for a fair presentation of results for such periods have been made.
The summary financial and statistical data included in the Registration
Statement presents fairly the information shown therein and such data has been
compiled on a basis consistent with the financial statements presented therein
and the books and records of the Company. The pro forma financial information
included in the Registration Statement and the Prospectus present fairly the
information shown therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements, have been properly compiled on the pro forma bases described
therein, and, in the opinion of the Company, the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transactions or circumstances referred to
therein.
(g) Arthur Andersen LLP, who have certified certain of the financial
statements filed with the Commission as part of the Registration Statement, are
independent public accountants as required by the Act and the Rules and
Regulations.
(h) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened against the Company or any of the
Subsidiaries before any court or administrative agency or otherwise, which, if
determined adversely to the Company or any of its Subsidiaries might result in
any material adverse change in the earnings, business, management, properties,
assets, rights, operations, condition (financial or otherwise) or prospects of
the Company and of the Subsidiaries taken as a whole or to prevent the
consummation of the transactions contemplated hereby, except as set forth in the
Registration Statement.
(i) The Company and the Subsidiaries have good and marketable title
to all of the properties and assets reflected in the financial statements (or as
described in the Registration Statement) hereinabove described, subject to no
lien, mortgage, pledge, charge or encumbrance of any kind except those reflected
in such financial statements (or as described in the Registration Statement) or
which are not material in amount. The Company and the Subsidiaries occupy their
leased properties under valid and binding leases conforming in all material
respects to the description thereof set forth in the Registration Statement.
(j) The Company and the Subsidiaries have filed all Federal, State,
local and foreign income tax returns which have been required to be filed and
have paid all taxes indicated by said returns and all assessments received by
them or any of them to the extent that such taxes have become due. All tax
liabilities have been adequately provided for in the financial statements of the
Company, and the Company does not know of any actual or proposed additional tax
assessments.
-4-
<PAGE>
(k) Since the respective dates as of which information is given in
the Registration Statement, as it may be amended or supplemented, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise), or
prospects of the Company and its Subsidiaries taken as a whole, whether or not
occurring in the ordinary course of business, and there has not been any
material transaction entered into or any material transaction that is probable
of being entered into by the Company or the Subsidiaries, other than
transactions in the ordinary course of business and changes and transactions
described in the Registration Statement, as it may be amended or supplemented.
The Company and the Subsidiaries have no material contingent obligations which
are not disclosed in the Company's financial statements which are included in
the Registration Statement.
(l) Neither the Company nor any of the Subsidiaries is or with the
giving of notice or lapse of time or both, will be, (i) in violation of or in
default under its Certificate of Incorporation or Bylaws or (ii) in material
breach of or default under any agreement, lease, contract, indenture or other
instrument or obligation to which it is a party or by which it, or any of its
properties, is bound and which default is of material significance in respect of
the condition, financial or otherwise of the Company and its Subsidiaries taken
as a whole or the business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company and its
Subsidiaries taken as a whole. The execution and delivery of this Agreement and
the consummation of the transactions herein contemplated and the fulfillment of
the terms hereof will not conflict with or result in a breach of any of the
terms or provisions of, or constitute a default under, any indenture, mortgage,
deed of trust or other agreement or instrument to which the Company or any
Subsidiary is a party, or of the Certificate of Incorporation or Bylaws of the
Company or any order, rule or regulation applicable to the Company or any
Subsidiary of any court or of any regulatory body or administrative agency or
other governmental body.
(m) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery by the
Company of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the Commission,
the National Association of Securities Dealers, Inc. (the "NASD") or such
additional steps as may be necessary to qualify the Shares for public offering
by the Underwriters under state securities or Blue Sky laws) has been obtained
or made and is in full force and effect.
(n) The Company and each of the Subsidiaries holds all material
licenses, certificates and permits from governmental authorities which are
necessary to the conduct of their businesses. Except as specifically disclosed
in the Prospectus, the Company and each of the Subsidiaries has sufficient
trademarks, trade names, patents, patent rights, mask works, copyrights,
licenses, approvals and governmental authorizations to conduct its business as
now conducted and as proposed to be conducted; and except as specifically
disclosed in the Prospectus, neither the Company nor any of the Subsidiaries has
infringed any trademark, trade name, patent, patent right, mask work, copyright,
license, trade secret or other similar right of others, and, except as disclosed
-5-
<PAGE>
in the Prospectus, no claim has been made against the Company or any of the
Subsidiaries regarding trademark, trade name, patent, mask work, copyright,
license, trade secret or other infringement which could have a material
adverse effect on the condition (financial or otherwise), business, results
of operations or prospects of the Company and its Subsidiaries taken as a
whole. The Company knows of no material infringement by others of any
trademark, trade name, patent, patent right, mask work, copyright, license,
trade secret or other similar right owned by or licensed to the Company.
(o) Neither the Company, nor to the Company's best knowledge, any of
its affiliates, has taken or may take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of the shares of Common Stock to facilitate the sale or resale of the
Shares. The Company acknowledges that the Underwriters may engage in passive
market making transactions in the Shares on the Nasdaq Stock Market in
accordance with Rule 10b-6A under the Securities Exchange Act of 1934, as
amended.
(p) Neither the Company nor any Subsidiary is an "investment company"
within the meaning of such term under the Investment Company Act of 1940 and the
rules and regulations of the Commission thereunder.
(q) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(r) The Company and each of its Subsidiaries carry, or are covered
by, insurance in such amounts and covering such risks as is adequate for the
conduct of their respective businesses and the value of their respective
properties.
(s) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security Act
of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any liability; the Company has not incurred and does not expect to
incur liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and published
interpretations thereunder (the "Code"); and each "pension plan" for which the
Company would have any liability that is intended to be qualified under
Section 401(a) of the Code is so qualified in all material respects and nothing
has occurred, whether by action or by failure to act, which would cause the loss
of such qualification.
-6-
<PAGE>
(t) To the Company's knowledge, there are not affiliations or
associations between any member of the NASD and any of the Company's officers,
directors or 5% or greater security holders, except as set forth in the
Registration Statement.
(u) Neither the Agreement and Plan of Exchange dated as of
December 5, 1997 between the Company and Digital River, Inc., a Minnesota
corporation nor the exchange of shares consummated in connection therewith
contravened, conflicted with or resulted in a material violation or breach
of, or resulted in a default under, any provisions of any agreement or
contract of the Company or its predecessor Minnesota corporation, except for
(i) any contravention, conflict, violation, breach or default which could not
reasonably be expected to result in a material adverse effect on the Company
and its Subsidiaries taken as a whole; (ii) gave any person the right to (a)
declare a default or exercise any remedy under any such agreement or
contract, except where any such default or exercise of a remedy could not
reasonably be expected to result in a material adverse effect on the Company
and its Subsidiaries taken as a whole, (b) accelerate the maturity or
performance of any such agreement or contract, expect where such acceleration
could not reasonably be expected to result in a material adverse effect on
the Company and its Subsidiaries taken as a whole, or (c) cancel, terminate
or modify any such contract, except where any such cancellation, termination
or modification could not reasonably be expected to result in a material
adverse effect on the Company and its Subsidiaries taken as a whole; or (iii)
result in the imposition or creation of any encumbrance upon or with respect
to any of the shares of capital stock or the assets of the Company and its
Subsidiaries, except where such encumbrance would not result in a material
adverse effect on the Company and its Subsidiaries taken as a whole.
2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES.
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the Company
agrees to sell to the Underwriters and each Underwriter agrees, severally and
not jointly, to purchase, at a price of $_____ per share, the number of Firm
Shares set forth opposite the name of each Underwriter in Schedule I hereof,
subject to adjustments in accordance with Section 10 hereof.
(b) Payment for the Firm Shares to be sold hereunder is to be made in
same-day funds by wire transfer to the order of the Company against delivery of
certificates therefor to the Representatives for the several accounts of the
Underwriters. Such payment and delivery are to be
-7-
<PAGE>
made at the offices of BT Alex. Brown Incorporated, 135 East Baltimore
Street, Baltimore, Maryland, at 10:00 a.m., Baltimore time, on the third
business day after the date of this Agreement or at such other time and date
not later than five business days thereafter as you and the Company shall
agree upon, such time and date being herein referred to as the "Closing
Date." (As used herein, "business day" means a day on which the New York
Stock Exchange is open for trading and on which banks in New York are open
for business and are not permitted by law or executive order to be closed.)
The certificates for the Firm Shares will be delivered in such denominations
and in such registrations as the Representatives request in writing not later
than the second full business day prior to the Closing Date, and will be made
available for inspection by the Representatives at least one business day
prior to the Closing Date.
(c) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company hereby grants an option to the several Underwriters to purchase the
Option Shares at the price per share as set forth in the first paragraph of this
Section 2. The option granted hereby may be exercised in whole or in part by
giving written notice (i) at any time before the Closing Date and (ii) only once
thereafter within 30 days after the date of this Agreement, by you, as
Representatives of the several Underwriters, to the Company setting forth the
number of Option Shares as to which the several Underwriters are exercising the
option, the names and denominations in which the Option Shares are to be
registered and the time and date at which such certificates are to be delivered.
The time and date at which certificates for Option Shares are to be delivered
shall be determined by the Representatives but shall not be earlier than three
nor later than 10 full business days after the exercise of such option, nor in
any event prior to the Closing Date (such time and date being herein referred to
as the "Option Closing Date"). If the date of exercise of the option is three
or more days before the Closing Date, the notice of exercise shall set the
Closing Date as the Option Closing Date. The number of Option Shares to be
purchased by each Underwriter shall be in the same proportion to the total
number of Option Shares being purchased as the number of Firm Shares being
purchased by such Underwriter bears to the total number of Firm Shares being
purchased by such Underwriter adjusted by you in such manner as to avoid
fractional shares. The option with respect to the Option Shares granted
hereunder may be exercised only to cover over-allotments in the sale of the Firm
Shares by the Underwriters. You, as Representatives of the several
Underwriters, may cancel such option at any time prior to its expiration by
giving written notice of such cancellation to the Company. To the extent, if
any, that the option is exercised, payment for the Option Shares shall be made
on the Option Closing Date by wire transfer in same-day funds to the order of
the Company against delivery of certificates therefor at the offices of BT Alex.
Brown Incorporated, 135 East Baltimore Street, Baltimore, Maryland.
3. OFFERING BY THE UNDERWRITERS.
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it advisable to
do so. The Firm Shares are to be initially offered to the public at the initial
public offering price set forth in the Prospectus. The Representatives may from
time to time thereafter change the public offering price and other selling
-8-
<PAGE>
terms. To the extent, if at all, that any Option Shares are purchased pursuant
to Section 2 hereof, the Underwriters will offer them to the public on the
foregoing terms.
It is further understood that you will act as the Representatives for
the Underwriters in the offering and sale of the Shares in accordance with a
Master Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. COVENANTS OF THE COMPANY.
The Company covenants and agrees with the several Underwriters that:
(a) The Company will (i) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule 430A of
the Rules and Regulations is followed, to prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form
approved by the Representatives containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A of
the Rules and Regulations, (ii) not file any amendment to the Registration
Statement or supplement to the Prospectus of which the Representatives shall not
previously have been advised and furnished with a copy or to which the
Representatives shall have reasonably objected in writing or which is not in
compliance with the Rules and Regulations and (iii) file on a timely basis all
reports and any definitive proxy or information statements required to be filed
by the Company with the Commission subsequent to the date of the Prospectus and
prior to the termination of the offering of the Shares by the Underwriters.
(b) The Company will advise the Representatives promptly (i) when the
Registration Statement or any post-effective amendment thereto shall have become
effective, (ii) of receipt of any comments from the Commission, (iii) of any
request of the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus or of the institution of any
proceedings for that purpose. The Company will use its best efforts to prevent
the issuance of any such stop order preventing or suspending the use of the
Prospectus and to obtain as soon as possible the lifting thereof, if issued.
(c) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of such
jurisdictions as the Representatives may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from time to
time, prepare and file such statements, reports, and other documents, as are or
may be required to continue such qualifications in effect for so long a period
as the Representatives may reasonably request for distribution of the Shares.
-9-
<PAGE>
(d) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary Prospectus
as the Representatives may reasonably request. The Company will deliver to, or
upon the order of, the Representatives during the period when delivery of a
Prospectus is required under the Act, as many copies of the Prospectus in final
form, or as thereafter amended or supplemented, as the Representatives may
reasonably request. The Company will deliver to the Representatives at or
before the Closing Date, four signed copies of the Registration Statement and
all amendments thereto including all exhibits filed therewith, and will deliver
to the Representatives such number of copies of the Registration Statement
(including such number of copies of the exhibits filed therewith that may
reasonably be requested), and of all amendments thereto, as the Representatives
may reasonably request.
(e) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934 (the "Exchange Act"), and
the rules and regulations of the Commission thereunder, so as to permit the
completion of the distribution of the Shares as contemplated in this Agreement
and the Prospectus. If during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer, any event shall occur as a
result of which, in the judgment of the Company or in the reasonable opinion of
the Underwriters, it becomes necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances existing
at the time the Prospectus is delivered to a purchaser, not misleading, or, if
it is necessary at any time to amend or supplement the Prospectus to comply with
any law, the Company promptly will prepare and file with the Commission an
appropriate amendment to the Registration Statement or supplement to the
Prospectus so that the Prospectus as so amended or supplemented will not, in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with the law.
(f) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later than
15 months after the effective date of the Registration Statement, an earning
statement (which need not be audited) in reasonable detail, covering a period of
at least 12 consecutive months beginning after the effective date of the
Registration Statement, which earning statement shall satisfy the requirements
of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will
advise you in writing when such statement has been so made available.
(g) The Company will, for a period of five years from the Closing
Date, deliver to the Representatives copies of annual reports and copies of all
other documents, reports and information furnished by the Company to its
stockholders or filed with any securities exchange pursuant to the requirements
of such exchange or with the Commission pursuant to the Act or the Securities
Exchange Act of 1934, as amended. The Company will deliver to the
Representatives similar reports with respect to significant subsidiaries, as
that term is defined in the Rules and Regulations, which are not consolidated in
the Company's financial statements.
(h) No offering, sale, short sale or other disposition of any shares
of Common Stock of the Company or other securities convertible into or
exchangeable or exercisable for shares
-10-
<PAGE>
of Common Stock or derivative of Common Stock (or agreement for such) will be
made for a period of 180 days after the date of this Agreement, directly or
indirectly, by the Company otherwise than hereunder or with the prior written
consent of BT Alex. Brown Incorporated except for sales of shares pursuant to
the exercise of outstanding stock options under the Company's employee
benefit plans, as such employee benefit plans are described in the Prospectus.
(i) The Company will use its best efforts to list, subject to notice
of issuance, the Shares on the Nasdaq National Market.
(j) The Company has caused each officer and director and certain
security holders of the Company to furnish to you, on or prior to the date of
this agreement, a letter or letters, in form and substance satisfactory to
the Underwriters, pursuant to which each such person shall agree not to
offer, sell, sell short or otherwise dispose of any shares of Common Stock of
the Company or other capital stock of the Company, or any other securities
convertible, exchangeable or exercisable for Common Shares or derivative of
Common Shares owned by such person or request the registration for the offer
or sale of any of the foregoing (or as to which such person has the right to
direct the disposition of) for a period of 180 days after the date of this
Agreement, directly or indirectly, except with the prior written consent of
BT Alex. Brown Incorporated ("Lockup Agreements").
(k) The Company shall apply the net proceeds of its sale of the
Shares as set forth in the Prospectus and shall file such reports with the
Commission with respect to the sale of the Shares and the application of the
proceeds therefrom as may be required in accordance with Rule 463 under the Act.
(l) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Shares in such a manner as would
require the Company or any of the Subsidiaries to register as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act").
(m) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar for the
Common Stock.
(n) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably be
expected to constitute, the stabilization or manipulation of the price of any
securities of the Company.
(o) The Company will not take, directly or indirectly, any action
designed to cause or result in the filing of a registration statement on Form
S-8 under the Act covering shares of Common Stock reserved for issuance under
the Company's employee benefit plans for a period of 180 days after the date
of this Agreement.
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5. COSTS AND EXPENSES.
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Company under this Agreement, including,
without limiting the generality of the foregoing, the following: accounting
fees of the Company; the fees and disbursements of counsel for the Company; the
cost of printing and delivering to, or as requested by, the Underwriters copies
of the Registration Statement, Preliminary Prospectuses, the Prospectus, this
Agreement, the Underwriters' Selling Memorandum, the Underwriters' Invitation
Letter, the Listing Application, the Blue Sky Survey and any supplements or
amendments thereto; the filing fees of the Commission; the filing fees incident
to securing any required review by the National Association of Securities
Dealers, Inc. (the "NASD") of the terms of the sale of the Shares; the Listing
Fee of the Nasdaq National Market; and the expenses, including the fees and
disbursements of counsel for the Underwriters, incurred in connection with the
qualification of the Shares under State securities or Blue Sky laws. The
Company agrees to pay all costs and expenses of the Underwriters, including the
fees and disbursements of counsel for the Underwriters, incident to the offer
and sale of directed shares of the Common Stock by the Underwriters to employees
and persons having business relationships with the Company and its Subsidiaries.
The Company shall not, however, be required to pay for any of the Underwriters
expenses (other than those related to qualification under State securities or
Blue Sky laws) except that, if this Agreement shall not be consummated because
the conditions in Section 6 hereof are not satisfied, or because this Agreement
is terminated by the Representatives pursuant to Section 11 hereof, or by reason
of any failure, refusal or inability on the part of the Company to perform any
undertaking or satisfy any condition of this Agreement or to comply with any of
the terms hereof on its part to be performed, unless such failure to satisfy
said condition or to comply with said terms be due to the default or omission of
any Underwriter, then the Company shall reimburse the several Underwriters for
reasonable out-of-pocket expenses, including fees and disbursements of counsel,
reasonably incurred in connection with investigating, marketing and proposing to
market the Shares or in contemplation of performing their obligations hereunder;
but the Company shall not in any event be liable to any of the several
Underwriters for damages on account of loss of anticipated profits from the sale
by them of the Shares.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the Firm
Shares on the Closing Date and the Option Shares, if any, on the Option Closing
Date are subject to the accuracy, as of the Closing Date or the Option Closing
Date, as the case may be, of the representations and warranties of the Company
contained herein, and to the performance by the Company of its covenants and
obligations hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by Rule 424
and Rule 430A of the Rules and Regulations shall have been made, and any request
of the Commission for additional information (to be included in the Registration
Statement or otherwise) shall have been disclosed to the Representatives and
complied with to their reasonable satisfaction. No stop order suspending the
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effectiveness of the Registration Statement, as amended from time to time,
shall have been issued and no proceedings for that purpose shall have been
taken or, to the knowledge of the Company, shall be contemplated by the
Commission and no injunction, restraining order, or order of any nature by a
Federal or state court of competent jurisdiction shall have been issued as of
the Closing Date which would prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, the legal opinions from Cooley
Godward LLP, and from Messerli and Kramer, each as counsel for the Company,
dated the Closing Date or the Option Closing Date, as the case may be, addressed
to the Underwriters (and stating that it may be relied upon by counsel to the
Underwriters) which collectively shall opine to the effect that: [separate
opinions from each firm to be resolved]
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own or lease its properties
and conduct its business as described in the Registration Statement; its
Minnesota Subsidiary has been duly organized and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, with corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement; the Company and its Minnesota Subsidiary are duly qualified to
transact business in all jurisdictions in which the conduct of their business
requires such qualification, or in which the failure to qualify would have a
materially adverse effect upon the business of the Company and the Subsidiary
taken as a whole; the outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued and are fully paid
and nonassessable and are owned by the Company or a Subsidiary; and, to the
best of such counsel's knowledge, the outstanding shares of capital stock of
its Minnesota Subsidiary are owned free and clear of all liens, encumbrances
and equities and claims, and no options, warrants or other rights to
purchase, agreements or other obligations to issue or other rights to convert
any obligations into any shares of capital stock or of ownership interests in
the Subsidiaries are outstanding.
(ii) The authorized and outstanding capital stock is as set
forth under the caption "Capitalization" in the Prospectus as of the date
stated therein; the authorized shares of the Company's Common Stock have been
duly authorized; the outstanding shares of the Company's Common Stock have
been duly authorized and validly issued and are fully paid and
non-assessable; all of the Shares conform to the description thereof
contained in the Prospectus; the certificates for the Shares, assuming they
are in the form filed with the Commission, are in due and proper form; the
shares of Common Stock, including the Option Shares, if any, to be sold by
the Company pursuant to this Agreement (i) have been duly authorized and (ii)
will be validly issued, fully paid and non-assessable when issued and paid
for as contemplated by this Agreement; and no preemptive rights of
stockholders or other rights to subscribe for or purchase securities under
the Delaware General Corporation Law, the Minnesota Business Corporation Act,
the Company's Certificate of Incorporation or Bylaws or any agreement or
contract known to such counsel exist with respect to any of the Shares or the
issue or sale thereof.
(iii) Except as described in or contemplated by the
Prospectus, to the knowledge of such counsel (i) there are no outstanding
securities of the Company convertible or
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exchangeable into or evidencing the right to purchase or subscribe for any
shares of capital stock of the Company and (ii) there are no outstanding or
authorized options, warrants or rights of any character obligating the
Company to issue any shares of its capital stock or any securities
convertible or exchangeable into or evidencing the right to purchase or
subscribe for any shares of such stock; and except as described in the
Prospectus, to the knowledge of such counsel, (iii) no holder of any
securities of the Company or any other person has the right, contractual or
otherwise, which has not been satisfied or effectively waived, to cause the
Company to sell or otherwise issue to them any of the Shares or the right to
have any Common Shares or other securities of the Company included in the
Registration Statement or the right, as a result of the filing of the
Registration Statement, to require registration under the Act of any shares
of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective under the
Act and, to the best of the knowledge of such counsel, no stop order proceedings
with respect thereto have been instituted or are pending or threatened under the
Act.
(v) At the time it became effective and at the Closing Date
or Option Closing Date (as the case may be) the Registration Statement, the
Prospectus and each amendment or supplement thereto comply or will have
complied (as the case may be) as to form in all material respects with the
requirements of the Act and the applicable rules and regulations thereunder
(except that such counsel need express no opinion as to the financial
statements and related schedules therein).
(vi) The statements under the captions
"Management--Employment Agreements," "Certain Transactions," and "Description
of Capital Stock" in the Prospectus, insofar as such statements constitute a
summary of documents referred to therein or matters of law has been reviewed
and is correct in all material respects and presents the information called
for with respect thereto under the Act and the regulations thereunder.
(vii) Such counsel does not know of any contracts or
documents required to be filed as exhibits to the Registration Statement or
described in the Registration Statement or the Prospectus which are no so filed
or described as required, and such contracts and documents as are summarized in
the Registration Statement or the Prospectus are fairly summarized in all
material respects.
(viii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company or any of the Subsidiaries
except as set forth in the Prospectus.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, the Certificate of Incorporation or Bylaws of the
Company, or any agreement or instrument known to such counsel to which the
Company or is a party or by which the Company or any of the Subsidiaries may
be bound, except where such conflict, breach or default would not have a
material adverse effect on the earnings, business, management, properties,
assets, rights, operations or financial condition of the Company and its
Subsidiaries taken as a whole.
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<PAGE>
(x) This Agreement has been duly authorized, executed and
delivered by the Company.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and delivery of
this Agreement and the consummation of the transactions herein contemplated
(other than as may be required by the NASD or as required by State securities
and Blue Sky laws as to which such counsel need express no opinion) except such
as have been obtained or made, specifying the same.
(xii) The Company is not, and will not become, as a result of
the consummation of the transactions contemplated by this Agreement, and
application of the net proceeds therefrom as described in the Prospectus,
required to register as an investment company under the 1940 Act.
In rendering such opinion Cooley Godward LLP, may rely as to matters
governed by the laws of states other than California, Delaware, or Federal laws
on local counsel in such jurisdictions, provided that in each case Cooley
Godward LLP, shall state that they believe that they and the Underwriters are
justified in relying on such other counsel. In addition to the matters set
forth above, such opinion shall also include a statement to the effect that
nothing has come to the attention of such counsel which leads them to believe
that (i) the Registration Statement, at the time it became effective under the
Act (but after giving effect to any modifications incorporated therein pursuant
to Rule 430A under the Act) and as of the Closing Date or the Option Closing
Date, as the case may be, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, and (ii) the Prospectus, or any
supplement thereto, on the date it was filed pursuant to the Rules and
Regulations and as of the Closing Date or the Option Closing Date, as the case
may be, contained an untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements, in the light of the
circumstances under which they are made, not misleading (except that such
counsel need express no view as to financial statements, related notes,
schedules and other financial information and statistical information derived
therefrom). With respect to such statement, check and verification, Cooley
Godward LLP may state that their belief is based upon the procedures set forth
therein, but is without independent check and verification.
(c) The Underwriters shall have received on the Closing Date or the
Option Closing Date, as the case may be, legal opinions from Merchant & Gould
and Larkin & Hoffman, dated the Closing Date or the Option Closing Date, as the
case may be, with respect to certain intellectual property matters, which
collectively shall opine to the effect that:
(i) The Company owns all patents, trademarks, trademark
registrations, service marks, service mark registrations, trade
names, copyrights, licenses, inventions, trade secrets and rights
described in the Prospectus as being owned by it or necessary for
the conduct of its business, and such counsel is not aware of any
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<PAGE>
claim to the contrary or any challenge by any other person to the
rights of the Company with respect to the foregoing other than
those identified in the Prospectus.
(ii) Such counsel is not aware of any legal actions, claims
or proceedings pending or threatened against the Company alleging
that the Company is infringing or otherwise violating any patents
or trade secrets owned by others other than those identified in the
Prospectus.
(iii) Such counsel has reviewed the descriptions of patents
and patent applications under the captions "Risk
Factors--Intellectual Property" and "Business--Intellectual
Property" in the Registration Statement and Prospectus, and, to the
extent they constitute matters of law or legal conclusions, these
descriptions are accurate and fairly and completely present the
patent situation of the Company.
(iv) Such counsel is aware of nothing that causes such
counsel to believe that, as of the date that the Registration
Statement became effective and as of the date of such opinion, the
description of patents and patent applications under the captions
"Risk Factors--Intellectual Property" and "Business--Intellectual
Property" in the Registration Statement and Prospectus contained or
contains any untrue statement of a material fact or omitted or
omits to state a material fact necessary to make the statements
made therein, in light of the circumstances under which they were
made, not misleading, including without limitation, any undisclosed
material issue with respect to the subsequent validity or
enforceability of such patent or patent issuing from any such
pending patent application.
(d) The Representatives shall have received from Wilson Sonsini
Goodrich & Rosati, P.C., counsel for the Underwriters, an opinion dated the
Closing Date or the Option Closing Date, as the case may be, substantially to
the effect specified in subparagraphs (iv) and (v) of Paragraph (b) of this
Section 6, and that the Company is a duly organized and validly existing
corporation under the laws of the State of Delaware. In rendering such opinion
Wilson Sonsini Goodrich & Rosati, P.C. may rely as to all matters governed other
than by the laws of the State of California, the State of Delaware or Federal
laws on the opinion of counsel referred to in Paragraph (b) of this Section 6.
In addition to the matters set forth above, such opinion shall also include a
statement to the effect that nothing has come to the attention of such counsel
which leads them to believe that (i) the Registration Statement, or any
amendment thereto, as of the time it became effective under the Act (but after
giving effect to any modifications incorporated therein pursuant to Rule 430A
under the Act) as of the Closing Date or the Option Closing Date, as the case
may be, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and (ii) the Prospectus, or any supplement thereto, on
the date it was filed pursuant to the Rules and Regulations and as of the
Closing Date or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact, necessary in
order to make the statements, in the light of the circumstances under which they
are made, not misleading (except that such counsel need
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<PAGE>
express no view as to financial statements, related notes, schedules and
other financial information therein). With respect to such statement, Wilson
Sonsini Goodrich & Rosati, P.C. may state that their belief is based upon the
procedures set forth therein, but is without independent check and
verification.
(e) The Representatives shall have received at or prior to the
Closing Date from Wilson Sonsini Goodrich & Rosati, P.C., a memorandum or
summary, in form and substance satisfactory to the Representatives, with respect
to the qualification for offering and sale by the Underwriters of the Shares
under the State securities or Blue Sky laws of such jurisdictions as the
Representatives may reasonably have designated to the Company.
(f) You shall have received, on each of the dates hereof, the Closing
Date and the Option Closing Date, as the case may be, a letter dated the date
hereof, the Closing Date or the Option Closing Date, as the case may be, in form
and substance satisfactory to you, of Arthur Andersen LLP confirming that they
are independent public accountants within the meaning of the Act and the
applicable published Rules and Regulations thereunder and stating that in their
opinion the financial statements and schedules examined by them and included in
the Registration Statement comply in form in all material respects with the
applicable accounting requirements of the Act and the related published Rules
and Regulations; and containing such other statements and information as is
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial and statistical
information contained in the Registration Statement and Prospectus.
(g) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, a certificate or certificates of
the Chief Executive Officer and the Chief Financial Officer of the Company to
the effect that, as of the Closing Date or the Option Closing Date, as the case
may be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the Registrations
Statement has been issued, and no proceedings for such purpose have been taken
or are, to his knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company contained
in Section 1 hereof are true and correct as of the Closing Date or the Option
Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to
Rules 424 or 430A under the Act have been made;
(iv) He has carefully examined the Registration Statement and
the Prospectus and, in his opinion, as of the effective date of the
Registration Statement, the statements contained in the Registration
Statement were true and correct, and such Registration Statement and
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Prospectus did not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not misleading,
and since the effective date of the Registration Statement, no event has
occurred which should have been set forth in a supplement to or an amendment
of the Prospectus which has not been so set forth in such supplement or
amendment; and
(v) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been any
material adverse change or any development involving a prospective material
adverse change in or affecting the condition, financial or otherwise, of the
Company and its Subsidiaries taken as a whole or the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and its Subsidiaries taken as a whole,
whether or not arising in the ordinary course of business.
(h) The Company shall have furnished to the Representatives such
further certificates and documents confirming the representations and
warranties, covenants and conditions contained herein and related matters as
the Representatives may reasonably have requested.
(i) The Firm Shares and Option Shares, if any, have been approved for
designation upon notice of issuance on the Nasdaq National Market.
(j) The Lockup Agreements described in Section 4 (j) are in full
force and effect.
The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in all
material respects satisfactory to the Representatives and to Wilson Sonsini
Goodrich & Rosati, P.C., counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated by
the Representatives by notifying the Company of such termination in writing or
by telegram at or prior to the Closing Date or the Option Closing Date, as the
case may be.
In such event, the Company and the Underwriters shall not be under any
obligation to each other (except to the extent provided in Sections 5 and 8
hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY.
The obligations of the Company to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing Date,
as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
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8. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of the Act, against any losses, claims, damages or liabilities to which
such Underwriter or any such controlling person may become subject under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) arise out of or are based upon (i) any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (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; and will reimburse each Underwriter and
each such controlling person upon demand for any legal or other expenses
reasonably incurred by such Underwriter or such controlling person in connection
with investigating or defending any such loss, claim, damage or liability,
action or proceeding or in responding to a subpoena or governmental inquiry
related to the offering of the Shares, whether or not such Underwriter or
controlling person is a party to any action or proceeding; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement, or omission or alleged omission made in
the Registration Statement, any Preliminary Prospectus, the Prospectus, or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof and that the indemnity agreement
contained in this Section 8 (a) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
such losses, claims, damages, liabilities or expenses purchased the shares which
is the subject thereof (or to the benefit of any person, controlling such
Underwriter) if at or prior to the written confirmation of the sale of such
shares a copy of the Prospectus (or the Prospectus as amended or supplemented)
was not sent or delivered to such person and the untrue statement or omission of
a material fact contained in such Preliminary Prospectus was corrected in the
Prospectus (or the Prospectus as amended or supplemented). This indemnity
agreement will be in addition to any liability which the Company may otherwise
have.
(b) Each Underwriter severally and not jointly will indemnify and
hold harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Company or any such director, officer, or controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (ii) the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made; and
will reimburse any legal or other expenses reasonably incurred by the
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Company or any such director, officer, or controlling person in connection
with investigating or defending any such loss, claim, damage, liability,
action or proceeding; provided, however, that each Underwriter will be liable
in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission has
been made in the Registration Statement, any Preliminary Prospectus, the
Prospectus or such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Company by or through
the Representatives specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which such
Underwriter may otherwise have.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to this Section 8, such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing. No indemnification provided for in Section
8(a) or (b) shall be available to any party who shall fail to give notice as
provided in this Section 8(c) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
materially prejudiced by the failure to give such notice, but the failure to
give such notice shall not relieve the indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution or
otherwise than on account of the provisions of Section 8(a) or (b). In case any
such proceeding shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party and
shall pay as incurred the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the right
to retain its own counsel at its own expense. Notwithstanding the foregoing,
the indemnifying party shall pay as incurred (or within 30 days of presentation)
the fees and expenses of the counsel retained by the indemnified party in the
event (i) the indemnifying party and the indemnified party shall have mutually
agreed to the retention of such counsel, (ii) the named parties to any such
proceeding (including any impleaded parties) include both the indemnifying party
and the indemnified party and representation of both parties by the same counsel
would be inappropriate due to actual or potential differing interests between
them or (iii) the indemnifying party shall have failed to assume the defense and
employ counsel acceptable to the indemnified party within a reasonable period of
time after notice of commencement of the action. It is understood that the
indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one separate firm for all such indemnified parties. Such
firm shall be designated in writing by you in the case of parties indemnified
pursuant to Section 8(a) and by the Company in the case of parties indemnified
pursuant to Section 8(b). The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent but if settled
with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment. In addition,
the indemnifying party will not, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action or proceeding of which
indemnification may be sought
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hereunder (whether or not any indemnified party is an actual or potential
party to such claim, action or proceeding) unless such settlement, compromise
or consent includes an unconditional release of each indemnified party from
all liability arising out of such claim, action or proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, (or actions or proceedings in respect thereof),
as well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other shall
be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company on the one hand or the Underwriters on the other and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 8(d). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) referred
to above in this Section 8(d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and commissions
applicable to the Shares purchased by such Underwriter, and (ii) no person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations in this
Section 8(d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
-21-
<PAGE>
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this
Section 8 hereby consents to the jurisdiction of any court having
jurisdiction over any other contributing party, agrees that process issuing
from such court may be served upon him or it by any other contributing party
and consents to the service of such process and agrees that any other
contributing party may join him or it as an additional defendant in any such
proceeding in which such other contributing party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which
an indemnified party is entitled to indemnification or contribution under
this Section 8 shall be paid by the indemnifying party to the indemnified
party as such losses, claims, damages, liabilities or expenses are incurred.
The indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement
shall remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A successor
to any Underwriter, or to the Company, its directors or officers, or any
person controlling the Company, shall be entitled to the benefits of the
indemnity, contribution and reimbursement agreements contained in this
Section 8.
9. DEFAULT BY UNDERWRITERS.
If on the Closing Date or the Option Closing Date, as the case may be,
any Underwriter shall fail to purchase and pay for the portion of the Shares
which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company), you, as
Representatives of the Underwriters, shall use your reasonable efforts to
procure within 36 hours thereafter one or more of the other Underwriters, or any
others, to purchase from the Company such amounts as may be agreed upon and upon
the terms set forth herein, the Firm Shares or Option Shares, as the case may
be, which the defaulting Underwriter or Underwriters failed to purchase. If
during such 36 hours you, as such Representatives, shall not have procured such
other Underwriters, or any others, to purchase the Firm Shares or Option Shares,
as the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case may
be, with respect to which such default shall occur exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company or you
as the Representatives of the Underwriters will have the right, by written
notice given within the next 36-hour period to the parties to this Agreement, to
terminate this Agreement without liability on the part of the non-defaulting
Underwriters or of the Company except to the extent provided in Section 8
hereof. In the event of a
-22-
<PAGE>
default by any Underwriter or Underwriters, as set forth in this Section 9,
the Closing Date or Option Closing Date, as the case may be, may be postponed
for such period, not exceeding seven days, as you, as Representatives, may
determine in order that the required changes in the Registration Statement or
in the Prospectus or in any other documents or arrangements may be effected.
The term "Underwriter" includes any person substituted for a defaulting
Underwriter. Any action taken under this Section 9 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
10. NOTICES.
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or telegraphed
and confirmed as follows: if to the Underwriters, to BT Alex. Brown
Incorporated, 1 South Street, Baltimore, Maryland 21202, Attention:____________;
with a copy to BT Alex. Brown Incorporated, One Bankers Trust Plaza, 130 Liberty
Street, New York, New York 10006, Attention: General Counsel; if to the
Company, to
Joel A. Ronning
President and Chief Executive Officer
Digital River, Inc.
5198 West 76th Street
Edina, Minnesota 55439
11. TERMINATION.
This Agreement may be terminated by you by notice to the Company as
follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on
the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or any
development involving a prospective material adverse change in or affecting the
condition, financial or otherwise, of the Company and its Subsidiaries taken as
a whole or the earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the Company,
whether or not arising in the ordinary course of business, (ii) any outbreak or
escalation of hostilities or declaration of war or national emergency or other
national or international calamity or crisis or change in economic or political
conditions if the effect of such outbreak, escalation, declaration, emergency,
calamity, crisis or change on the financial markets of the United States would,
in your reasonable judgment, make it impracticable to market the Shares or to
enforce contracts for the sale of the Shares, or (iii) suspension of trading in
securities generally on the New York Stock Exchange or the American Stock
Exchange or limitation on prices (other than limitations on hours or numbers of
days of
-23-
<PAGE>
trading) for securities on either such Exchange, (iv) the enactment,
publication, decree or other promulgation of any statute, regulation, rule or
order of any court or other governmental authority which in your opinion
materially and adversely affects or may materially and adversely affect the
business or operations of the Company, (v) declaration of a banking
moratorium by United States or New York State authorities, (vi) the
suspension of trading of the Company's Common Stock by the Commission on the
Nasdaq National Market or (viii) the taking of any action by any governmental
body or agency in respect of its monetary or fiscal affairs which in your
reasonable opinion has a material adverse effect on the securities markets in
the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of the
Underwriters and the Company and their respective successors, executors,
administrators, heirs and assigns, the officers, directors and controlling
persons referred to herein, and no other person will have any right or
obligation hereunder. No purchaser of any of the Shares from any Underwriter
shall be deemed a successor or assign merely because of such purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS.
The Company, and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company for
inclusion in any Prospectus or the Registration Statement consists of the
information set forth in the last paragraph on the front cover page (insofar as
such information relates to the Underwriters), legends required by Item 502(d)
of Regulation S-K under the Act and the information under the caption
"Underwriting" in the Prospectus.
14. MISCELLANEOUS.
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of
any Underwriter or controlling person thereof, or on behalf of the Company or
its directors or officers and (c) delivery of and payment for the Shares under
this Agreement.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Maryland.
-24-
<PAGE>
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
DIGITAL RIVER, INC.
By
-------------------------------------
Joel A. Ronning
President and Chief Executive Officer
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
BT ALEX. BROWN INCORPORATED
BANCAMERICA ROBERTSON STEPHENS
BEAR, STEARNS & CO. INC.
As Representatives of the several
Underwriters listed on Schedule I
By: BT Alex. Brown Incorporated
By:
------------------------------
Authorized Officer
-25-
<PAGE>
<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF FIRM
SHARES TO BE
UNDERWRITER PURCHASED
- ------------------------------------------------------- --------------------
<S> <C>
BT Alex. Brown Incorporated............................
BancAmerica Robertson Stephens.........................
Bear, Stearns & Co. Inc. ..............................
Total............................................. ----------------
----------------
</TABLE>
<PAGE>
EXHIBIT A
LIST OF SUBSIDIARIES
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
DIGITAL RIVER, INC.
The undersigned, of full age, for the purpose of forming a corporation
under and pursuant to the provisions of the Delaware General Corporation Law,
and laws amendatory thereof and supplementary thereto, hereby creates a body
corporate and adopts the following Certificate of Incorporation:
ARTICLE 1
NAME
The name of the Corporation is Digital River, Inc.
ARTICLE 2
REGISTERED OFFICE
The address of the registered office of the Corporation in the State of
Delaware shall be located at 1209 Orange Street, Wilmington, Delaware 19801.
The name of the Corporation's registered agent at such address is the
Corporation Trust Company.
ARTICLE 3
PURPOSES
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE 4
CAPITAL STOCK
(a) The Corporation is authorized to issue one hundred million
(100,000,000) shares of One Cent ($.01) per share par value capital stock, to be
held, sold and paid for at such times and in such manner as the Board of
Directors may from time to time determine, in accordance with the laws of the
State of Delaware.
(b) Unless otherwise established by the Board of Directors, all shares of
the Corporation are common shares entitled to vote and shall be of one class and
one series having equal rights and preferences in all matters. Unless otherwise
provided, a common shareholder has one (1) vote for each share held.
(c) The Board of Directors shall have the power to establish more than one
class or series of shares and to fix the relative rights and preferences of any
such different classes or series.
1.
<PAGE>
(d) The shareholders of the Corporation shall not have preemptive rights.
(e) Cumulative voting for directors is not permitted.
ARTICLE 5
INCORPORATOR
The name and address of the person acting as incorporator of this
Corporation is as follows:
Andrew F. Perrin
1500 Norwest Financial Center
7900 Xerxes Avenue South
Bloomington, Minnesota 55431
ARTICLE 6
DIRECTORS
Any action required or permitted to be taken at any meeting of the Board of
Directors may be taken without a meeting if all members of the Board of
Directors consent thereto in writing and the writing or writings are filed with
the minutes of proceedings of the Board of Directors. The business and affairs
of the Corporation shall be managed by or under the direction of the Board of
Directors, and the Directors need not be elected by written ballot unless
required by the Bylaws of the Corporation.
No director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director;
except for liability (i) for any breach of the directors' duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or, (iv) for any
transaction from which the director derived an improper personal benefit.
No amendment to or repeal of this Article 6 shall apply to or have any
effect on the liability or alleged liability of any director of the Corporation
for or with respect to any acts or omissions of the director occurring prior to
such amendment or repeal. If the laws of the State of Delaware are hereafter
changed to permit further elimination or limitation of the liability of
directors, then the liability of each director of the Corporation shall
thereupon be eliminated or limited to the fullest extent then permitted by law.
ARTICLE 7
AMENDMENT OF ARTICLES
The corporation reserves the right at any time, and from time to time, to
amend, alter, change or repeal any provision contained in this Certificate of
Incorporation, and other provisions authorized by the laws of the State of
Delaware at the time in force may be added or
2.
<PAGE>
inserted, in the manner now or hereafter prescribed by law; and all rights,
preferences and privileges of whatsoever nature conferred upon stockholders,
directors or any other persons whomsoever by and pursuant to this Certificate of
Incorporation in its present form or as hereafter amended are granted subject to
the rights reserved in this article.
ARTICLE 8
AMENDMENT OF BYLAWS
In furtherance and not in limitation of the powers conferred by the laws of
the State of Delaware, the Board of Directors of the Corporation is expressly
authorized to make, alter and repeal the by-laws of the Corporation, subject to
the power of the stockholders of the corporation to alter or repeal any by-law
whether adopted by them or otherwise.
I, the undersigned, being the incorporator for the purpose of forming a
corporation under the laws of the State of Delaware, do make, file and record
this Certificate of Incorporation, do certify that the facts herein stated are
true, and accordingly I have hereto set my hand and seal this 24th day of
September 1997.
/s/ Andrew F. Perrin
-----------------------------------
ANDREW F. PERRIN
3.
<PAGE>
EXHIBIT 3.3
BY-LAWS
OF
DIGITAL RIVER, INC.
ARTICLE 1
STOCKHOLDERS
1.1) ANNUAL MEETINGS. An annual meeting of stockholders shall be held for
the election of directors at such date, time and place, either within or without
the State of Delaware, as may be designated by resolution of the Board of
Directors from time to time. Any other proper business may be transacted at the
annual meeting.
1.2) SPECIAL MEETINGS. Special meetings of stockholders for any purpose
or purposes may be called at any time by the Board of Directors, but such
special meetings may not be called by any other person or persons.
1.3) NOTICE OF MEETINGS. Whenever stockholders are required or permitted
to take any action at a meeting, a written notice of the meeting shall be given
that shall state the place, date and hour of the meeting and, in the case of a
special meeting, the purpose or purposes for which the meeting is called. Unless
otherwise provided by law, the certificate of incorporation or these by-laws,
the written notice of any meeting shall be given not less than ten nor more than
sixty days before the date of the meeting to each stockholder entitled to vote
at such meeting. If mailed, such notice shall be deemed to be given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation.
1.4) ADJOURNMENTS. Any meeting of stockholders, annual or special, may
adjourn from time to time to reconvene at the same or some other place, and
notice need not be given of any such adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken. At the
adjourned meeting the corporation may transact any business which might have
been transacted at the original meeting. If the adjournment is for more than
thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
1.5) QUORUM. Except as otherwise provided by law, the certificate of
incorporation or these by-laws, at each meeting of stockholders the presence in
person or by proxy of the holders of a majority in voting power of the
outstanding shares of stock entitled to vote at the meeting shall be necessary
and sufficient to constitute a quorum. In the absence of a quorum, the
stockholders so present may, by a majority in voting power thereof, adjourn the
meeting from time to time in the manner provided in Section 1.4 of these by-laws
until a quorum shall attend. Shares of its own stock belonging to the
corporation or to another corporation, if a majority of the shares entitled to
vote in the election of directors of such other corporation is held, directly or
indirectly, by the corporation, shall neither be entitled to vote nor be counted
for quorum purposes; provided, however, that the foregoing shall not limit the
right of the corporation or any
1.
<PAGE>
subsidiary of the corporation to vote stock, including but not limited to its
own stock, held by it in a fiduciary capacity.
1.6) ORGANIZATION. Meetings of stockholders shall be presided over by the
Chairman of the Board, if any, or in his absence by the Vice Chairman of the
Board, if any, or in his absence by the President, or in his absence by a Vice
President, or in the absence of the foregoing persons by a chairman designated
by the Board of Directors, or in the absence of such designation by a chairman
chosen at the meeting. The Secretary shall act as secretary of the meeting, but
in his absence the chairman of the meeting may appoint any person to act as
secretary of the meeting.
1.7) VOTING, PROXIES. Except as otherwise provided by the certificate of
incorporation, each stockholder entitled to vote at any meeting of stockholders
shall be entitled to one vote for each share of stock held by him which has
voting power upon the matter in question. Each stockholder entitled to vote at a
meeting of stockholders or to express consent or dissent to corporate action in
writing without a meeting may authorize another person or persons to act for him
by proxy, but no such proxy shall be voted or acted upon after three years from
its date, unless the proxy provides for a longer period. A proxy shall be
irrevocable if it states that it is irrevocable and if, and only as long as, it
is coupled with an interest sufficient in law to support an irrevocable power. A
stockholder may revoke any proxy which is not irrevocable by attending the
meeting and voting in person or by filing an instrument in writing revoking the
proxy or by delivering a proxy in accordance with applicable law bearing a later
date to the Secretary of the corporation. Voting at meetings of stockholders
need not be by written ballot. At all meetings of stockholders for the election
of directors a plurality of the votes cast shall be sufficient to elect. All
other elections and questions shall, unless otherwise provided by law, the
certificate of incorporation or these by-laws, be decided by the affirmative
vote of the holders of a majority in voting power of the shares of stock which
are present in person or by proxy and entitled to vote thereon.
1.8) FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD. In order
that the corporation may determine the stockholders entitled to notice of or to
vote at any meeting of stockholders or any adjournment thereof, or to express
consent to corporate action in writing without a meeting, or entitled to receive
payment of any dividend or other distribution or allotment of any rights, or
entitled to exercise any rights in respect of any change, conversion or exchange
of stock or for the purpose of any other lawful action, the Board of Directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board of Directors, and
which record date: (1) in the case of determination of stockholders entitled to
vote at any meeting of stockholders or adjournment thereof, shall, unless
otherwise required by law, not be more than sixty nor less than ten days before
the date of such meeting; (2) in the case of determination of stockholders
entitled to express consent to corporate action in writing without a meeting,
shall not be more than ten days from the date upon which the resolution fixing
the record date is adopted by the Board of Directors; and (3) in the case of any
other action, shall not be more than sixty days prior to such other action. If
no record date is fixed: (1) the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given,
or, if notice is waived, at the close of business on the day next preceding the
day on which the meeting is held; (2) the record date for
2.
<PAGE>
determining stockholders entitled to express consent to corporate action in
writing without a meeting, when no prior action of the Board of Directors is
required by law, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
corporation in accordance with applicable law, or, if prior action by the Board
of Directors is required by law, shall be at the close of business on the day on
which the Board of Directors adopts the resolution taking such prior action; and
(3) the record date for determining stockholders for any other purpose shall be
at the close of business on the day on which the Board of Directors adopts the
resolution relating thereto. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
1.9) LIST OF STOCKHOLDERS ENTITLED TO VOTE. The Secretary shall prepare
and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any stockholder who is present. Upon the willful
neglect or refusal of the directors to produce such a list at any meeting for
the election of directors, they shall be ineligible for election to any office
at such meeting. Except as otherwise provided by law, the stock ledger shall be
the only evidence as to who are the stockholders entitled to examine the stock
ledger, the list of stockholders or the books of the corporation, or to vote in
person or by proxy at any meeting of stockholders.
1.10) ACTION BY WRITTEN CONSENT OF STOCKHOLDERS. Unless otherwise
restricted by the certificate of incorporation, any action required or permitted
to be taken at any annual or special meeting of the stockholders may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted and shall be
delivered to the corporation by delivery to its registered office in the State
of Delaware, its principal place of business, or an officer or agent of the
corporation having custody of the book in which proceedings of minutes of
stockholders are recorded. Delivery made to the corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall, to the extent required by law, be given to
those stockholders who have not consented in writing.
1.11) INSPECTORS OF ELECTION. The corporation may, and shall if required
by law, in advance of any meeting of stockholders, appoint one or more
inspectors of election, who may be employees of the corporation, to act at the
meeting or any adjournment thereof and to make a written report thereof The
corporation may designate one or more persons as alternate inspectors to replace
any inspector who fails to act. In the event that no inspector so appointed or
designated
3.
<PAGE>
is able to act at a meeting of stockholders, the person presiding at the meeting
shall appoint one or more inspectors to act at the meeting. Each inspector,
before entering upon the discharge of his or her duties, shall take and sign an
oath to execute faithfully the duties of inspector with strict impartiality and
according to the best of his or her ability. The inspector or inspectors so
appointed or designated shall (i) ascertain the number of shares of capital
stock of the corporation outstanding and the voting power of each such share,
(ii) determine the shares of capital stock of the corporation represented at the
meeting and the validity of proxies and ballots, (iii) count all votes and
ballots, (iv) determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the inspectors, and
(v) certify their determination of the number of shares of capital stock of the
corporation represented at the meeting and such inspectors' count of all votes
and ballots. Such certification and report shall specify such other information
as may be required by law. In determining the validity and counting of proxies
and ballots cast at any meeting of stockholders of the corporation, the
inspectors may consider such information as is permitted by applicable law. No
person who is a candidate for an office at an election may serve as an inspector
at such election.
1.12) CONDUCT OF MEETINGS. The date and time of the opening and the
closing of the polls for each matter upon which the stockholders will vote at a
meeting shall be announced at the meeting by the person presiding over the
meeting. The Board of Directors of the corporation may adopt by resolution such
rules and regulations for the conduct of the meeting of stockholders as it shall
deem appropriate. Except to the extent inconsistent with such rules and
regulations as adopted by the Board of Directors, the chairman of any meeting of
stockholders shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts as, in the judgment of such
chairman, are appropriate for the proper conduct of the meeting. Such rules,
regulations or procedures, whether adopted by the Board of Directors or
prescribed by the chairman of the meeting, may include, without limitation, the
following: (i) the establishment of an agenda or order of business for the
meeting; (ii) rules and procedures for maintaining order at the meeting and the
safety of those present; (iii) limitations on attendance at or participation in
the meeting to stockholders of record of the corporation, their duly authorized
and constituted proxies or such other persons as the chairman of the meeting
shall determine; (iv) restrictions on entry to the meeting after the time fixed
for the commencement thereof-, and (v) limitations on the time allotted to
questions or comments by participants. Unless and to the extent determined by
the Board of Directors or the chairman of the meeting, meetings of stockholders
shall not be required to be held in accordance with the rules of parliamentary
procedure.
ARTICLE 2
BOARD OF DIRECTORS
2.1) NUMBER, QUALIFICATIONS. The Board of Directors shall consist of one
or more members, the number thereof to be determined from time to time by
resolution of the Board of Directors. Directors need not be stockholders.
2.2) ELECTION, RESIGNATION, VACANCIES. The Board of Directors shall
initially consist of the persons named as directors in the certificate of
incorporation or elected by the incorporator of the corporation, and each
director so elected shall hold office until the first annual meeting of
4.
<PAGE>
stockholders or until his successor is elected and qualified. At the first
annual meeting of stockholders and at each annual meeting thereafter, the
stockholders shall elect directors each of whom shall hold office for a term of
one year or until his successor is elected and qualified. Any director may
resign at any time upon written notice to the corporation. Any newly created
directorship or any vacancy occurring in the Board of Directors for any cause
may be filled by a majority of the remaining members of the Board of Directors,
although such majority is less than a quorum, or by a plurality of the votes
cast at a meeting of stockholders, and each director so elected shall hold
office until the expiration of the term of office of the director whom he has
replaced or until his successor is elected and qualified.
2.3) REGULAR MEETINGS. Regular meetings of the Board of Directors may be
held at such places within or without the State of Delaware and at such times as
the Board of Directors may from time to time determine, and if so determined
notices thereof need not be given.
2.4) SPECIAL MEETINGS. Special meetings of the Board of Directors may be
held at any time or place within or without the State of Delaware whenever
called by the President, any Vice President, the Secretary, or by any member of
the Board of Directors. Notice of a special meeting of the Board of Directors
shall be given by the person or persons calling the meeting at least twenty-four
hours before the special meeting.
2.5) TELEPHONIC MEETINGS PERMITTED. Members of the Board of Directors, or
any committee designated by the Board of Directors, may participate in a meeting
thereof by means of conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other, and
participation in a meeting pursuant to this by-law shall constitute presence in
person at such meeting.
2.6) QUORUM, VOTE REQUIRED FOR ACTION. At all meetings of the Board of
Directors a majority of the whole Board of Directors shall constitute a quorum
for the transaction of business. Except in cases in which the certificate of
incorporation, these by-laws or applicable law otherwise provides, the vote of a
majority of the directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors.
2.7) ORGANIZATION. Meetings of the Board of Directors shall be presided
over by the Chairman of the Board, if any, or in his absence by the Vice
Chairman of the Board, if any, or in his absence by the President, or in their
absence by a chairman chosen at the meeting. The Secretary shall act as
secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
2.8) ACTION BY WRITTEN CONSENT OF DIRECTORS. Unless otherwise restricted
by the certificate of incorporation or these by-laws, any action required or
permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting if all members of the Board of
Directors or such committee, as the case may be, consent thereto in writing, and
the writing or writings are filed with the minutes of proceedings of the Board
of Directors or such committee.
5.
<PAGE>
ARTICLE 3
COMMITTEES
3.1) COMMITTEES. The Board of Directors may designate one or more
committees, each committee to consist of one or more of the directors of the
corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of a
member of the committee, the member or members thereof present at any meeting
and not disqualified from voting, whether or not he or they constitute a quorum,
may unanimously appoint another member of the Board of Directors to act at the
meeting in place of any such absent or disqualified member. Any such committee,
to the extent permitted by law and to the extent provided in the resolution of
the Board of Directors, shall have and may exercise all the powers and authority
of the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it.
3.2) COMMITTEE RULES. Unless the Board of Directors otherwise provides,
each committee designated by the Board of Directors may make, alter and repeal
rules for the conduct of its business. In the absence of such rules each
committee shall conduct its business in the same manner as the Board of
Directors conducts its business pursuant to Article II of these by-laws.
ARTICLE 4
OFFICERS
4.1) EXECUTIVE OFFICERS; ELECTION, QUALIFICATIONS, TERM OF OFFICE,
RESIGNATION, REMOVAL, VACANCIES. The Board of Directors shall elect a President,
Chief Executive Officer, and Secretary, and it may, if it so determines, choose
a Chairman of the Board and a Vice Chairman of the Board from among its members.
The Board of Directors may also choose one or more Vice Presidents, one or more
Assistant Secretaries, a Treasurer and one or more Assistant Treasurers. Each
such officer shall hold office until the first meeting of the Board of Directors
after the annual meeting of stockholders next succeeding his election, and until
his successor is elected and qualified or until his earlier resignation or
removal. Any officer may resign at any time upon written notice to the
corporation. The Board of Directors may remove any officer with or without cause
at any time, but such removal shall be without prejudice to the contractual
rights of such officer, if any, with the corporation. Any number of offices may
be held by the same person. Any vacancy occurring in any office of the
corporation by death, resignation, removal or otherwise may be filled for the
unexpired portion of the term by the Board of Directors at any regular or
special meeting.
4.2) POWERS AND DUTIES OF EXECUTIVE OFFICERS. The officers of the
corporation shall have such powers and duties in the management of the
corporation as may be prescribed in a resolution by the Board of Directors and,
to the extent not so provided, as generally pertain to their respective offices,
subject to the control of the Board of Directors. The Board of Directors may
require any officer, agent or employee to give security for the faithful
performance of his duties.
6.
<PAGE>
ARTICLE 5
STOCK
5.1) CERTIFICATES. Every holder of stock shall be entitled to have a
certificate signed by or in the name of the corporation by the Chairman or Vice
Chairman of the Board of Directors, if any, or the President or a Vice
President, and by the Treasurer or an Assistant Treasurer, or the Secretary or
an Assistant Secretary, of the corporation certifying the number of shares owned
by him in the corporation. Any of or all the signatures on the certificate may
be a facsimile. In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent, or registrar before such certificate
is issued, it may be issued by the corporation with the same effect as if he
were such officer, transfer agent, or registrar at the date of issue.
5.2) LOST, STOLEN OR DESTROYED STOCK CERTIFICATES, ISSUANCE OF NEW
CERTIFICATES. The corporation may issue a new certificate of stock in the place
of any certificate theretofore issued by it, alleged to have been lost, stolen
or destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate.
ARTICLE 6
INDEMNIFICATION
6.1) RIGHT TO INDEMNIFICATION. The corporation shall indemnify and hold
harmless, to the fullest extent permitted by applicable law as it presently
exists or may hereafter be amended, any person (an "Indemnitee") who was or is
made or is threatened to be made a party or is otherwise involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative (a
"proceeding"), by reason of the fact that he, or a person for whom he is the
legal representative, is or was a director or officer of the corporation or,
while a director or officer of the corporation, is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust, enterprise or nonprofit
entity, including service with respect to employee benefit plans, against all
liability and loss suffered and expenses (including attorneys' fees) reasonably
incurred by such Indemnitee. Notwithstanding the preceding sentence, except as
otherwise provided in Section 6.3, the corporation shall be required to
indemnify an Indemnitee in connection with a proceeding (or part thereof)
commenced by such Indemnitee only if the commencement of such proceeding (or
part thereof) by the Indemnitee was authorized by the Board of Directors of the
corporation.
6.2) PREPAYMENT OF EXPENSES. The corporation shall pay the expenses
(including attorneys' fees) incurred by an Indemnitee in defending any
proceeding in advance of its final disposition, PROVIDED, HOWEVER, that, to the
extent required by law, such payment of expenses in advance of the final
disposition of the proceeding shall be made only upon receipt of an undertaking
by the Indemnitee to repay all amounts advanced if it should be ultimately
determined that the Indemnitee is not entitled to be indemnified under this
Article 6 or otherwise.
7.
<PAGE>
6.3) CLAIMS. If a claim for indemnification or payment of expenses under
this Article 6 is not paid in full within sixty days after a written claim
therefor by the Indemnitee has been received by the corporation, the Indemnitee
may file suit to recover the unpaid amount of such claim and, if successful in
whole or in part, shall be entitled to be paid the expense of prosecuting such
claim. In any such action the corporation shall have the burden of proving that
the Indemnitee is not entitled to the requested indemnification or payment of
expenses under applicable law.
6.4) NONEXCLUSIVITY OF RIGHTS. The rights conferred on any indemnitee by
this Article 6 shall not be exclusive of any other rights which such Indemnitee
may have or hereafter acquire under any statute, provision of the certificate of
incorporation, these by-laws, agreement, vote of stockholders or disinterested
directors or otherwise.
6.5) OTHER SOURCES. The corporation's obligation, if any, to indemnify or
to advance expenses to any Indemnitee who was or is serving at its request as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, enterprise or nonprofit entity shall be reduced by any amount
such Indemnitee may collect as indemnification or advancement of expenses from
such other corporation, partnership, joint venture, trust, enterprise or
non-profit enterprise.
6.6) AMENDMENT OR REPEAL. Any repeal or modification of the foregoing
provisions of this Article 6 shall not adversely affect any right or protection
hereunder of any Indemnitee in respect of any act or omission occurring prior to
the time of such repeal or modification.
6.7) OTHER INDEMNIFICATION AND PREPAYMENT OF EXPENSES. This Article 6
shall not limit the right of the corporation, to the extent and in the manner
permitted by law, to indemnify and to advance expenses to persons other than
Indemnitees when and as authorized by appropriate corporate action.
ARTICLE 7
MISCELLANEOUS
7.1) FISCAL YEAR. The fiscal year of the corporation shall be determined
by resolution of the Board of Directors.
7.2) SEAL. The corporate seal shall have the name of the corporation
inscribed thereon and shall be in such form as may be approved from time to time
by the Board of Directors.
7.3) WAIVER OF NOTICE OF MEETINGS OF STOCKHOLDERS, DIRECTORS AND
COMMITTEES. Any written waiver of notice, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at nor the purpose of any
regular or special meeting of the stockholders, directors, or members of a
committee of directors need be specified in any written waiver of notice.
8.
<PAGE>
7.4) INTERESTED DIRECTORS; QUORUM. No contract or transaction between the
corporation and one or more of its directors or officers, or between the
corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because his or their votes are
counted for such purpose, if: (1) the material facts as to his relationship or
interest and as to the contract or transaction are disclosed or are known to the
Board of Directors or the committee, and the Board of Directors or committee in
good faith authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested directors
be less than a quorum; or (2) the material facts as to his relationship or
interest and as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or (3) the
contract or transaction is fair as to the corporation as of the time it is
authorized, approved or ratified, by the Board of Directors, a committee
thereof, or the stockholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
7.5) FORM OF RECORDS. Any records maintained by the corporation in the
regular course of its business, including its stock ledger, books of account,
and minute books, may be kept on, or be in the form of, punch cards, magnetic
tape, photographs, microphotographs, or any other information storage device,
provided that the records so kept can be converted into clearly legible form
within a reasonable time.
7.6) AMENDMENT OF BY-LAWS. These by-laws may be altered or repealed, and
new by-laws made, by the Board of Directors, but the stockholders may make
additional by-laws and may alter and repeal any by-laws whether adopted by them
or otherwise.
The undersigned, Joel Ronning, President of Digital River, Inc., hereby
certifies that the foregoing Bylaws were adopted as the complete Bylaws of the
Corporation by action of the Board of Directors, as of the 25th day of
September, 1997.
/s/ Joel Ronning
-----------------------------------
Joel Ronning, President
9.
<PAGE>
EXHIBIT 10.1
INDEMNITY AGREEMENT
THIS AGREEMENT is made and entered into this ____ day of _________, 1998 by
and between DIGITAL RIVER, INC., a Delaware corporation (the "Corporation"), and
____________ ("Agent").
RECITALS
WHEREAS, Agent performs a valuable service to the Corporation in his/her
capacity as _______________ of the Corporation;
WHEREAS, the stockholders of the Corporation have adopted bylaws (the
"Bylaws") providing for the indemnification of the directors, officers,
employees and other agents of the Corporation, including persons serving at the
request of the Corporation in such capacities with other corporations or
enterprises, as authorized by the Delaware General Corporation Law, as amended
(the "Code");
WHEREAS, the Bylaws and the Code, by their non-exclusive nature, permit
contracts between the Corporation and its agents, officers, employees and other
agents with respect to indemnification of such persons; and
WHEREAS, in order to induce Agent to continue to serve as ______________ of
the Corporation, the Corporation has determined and agreed to enter into this
Agreement with Agent;
NOW, THEREFORE, in consideration of Agent's continued service as
_______________ after the date hereof, the parties hereto agree as follows:
AGREEMENT
1. SERVICES TO THE CORPORATION. Agent will serve, at the will of the
Corporation or under separate contract, if any such contract exists, as
______________ of the Corporation or as a director, officer or other fiduciary
of an affiliate of the Corporation (including any employee benefit plan of the
Corporation) faithfully and to the best of his ability so long as he is duly
elected and qualified in accordance with the provisions of the Bylaws or other
applicable charter documents of the Corporation or such affiliate; PROVIDED,
HOWEVER, that Agent may at any time and for any reason resign from such position
(subject to any contractual obligation that Agent may have assumed apart from
this Agreement) and that the Corporation or any affiliate shall have no
obligation under this Agreement to continue Agent in any such position.
2. INDEMNITY OF AGENT. The Corporation hereby agrees to hold harmless
and indemnify Agent to the fullest extent authorized or permitted by the
provisions of the Bylaws and the Code, as the same may be amended from time to
time (but, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than the Bylaws or the Code permitted
prior to adoption of such amendment).
1.
<PAGE>
3. ADDITIONAL INDEMNITY. In addition to and not in limitation of the
indemnification otherwise provided for herein, and subject only to the
exclusions set forth in Section 4 hereof, the Corporation hereby further agrees
to hold harmless and indemnify Agent:
(a) against any and all expenses (including attorneys' fees), witness
fees, damages, judgments, fines and amounts paid in settlement and any other
amounts that Agent becomes legally obligated to pay because of any claim or
claims made against or by him in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, arbitrational,
administrative or investigative (including an action by or in the right of the
Corporation) to which Agent is, was or at any time becomes a party, or is
threatened to be made a party, by reason of the fact that Agent is, was or at
any time becomes a director, officer, employee or other agent of Corporation, or
is or was serving or at any time serves at the request of the Corporation as a
director, officer, employee or other agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise; and
(b) otherwise to the fullest extent as may be provided to Agent by
the Corporation under the non-exclusivity provisions of the Code and Section 43
of the Bylaws.
4. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to
Section 3 hereof shall be paid by the Corporation:
(a) on account of any claim against Agent for an accounting of
profits made from the purchase or sale by Agent of securities of the Corporation
pursuant to the provisions of Section 16(b) of the Securities Exchange Act of
1934 and amendments thereto or similar provisions of any federal, state or local
statutory law;
(b) on account of Agent's conduct that was knowingly fraudulent or
deliberately dishonest or that constituted willful misconduct;
(c) on account of Agent's conduct that constituted a breach of
Agent's duty of loyalty to the Corporation or resulted in any personal profit or
advantage to which Agent was not legally entitled;
(d) for which payment is actually made to Agent under a valid and
collectible insurance policy or under a valid and enforceable indemnity clause,
bylaw or agreement, except in respect of any excess beyond payment under such
insurance, clause, bylaw or agreement;
(e) if indemnification is not lawful (and, in this respect, both the
Corporation and Agent have been advised that the Securities and Exchange
Commission believes that indemnification for liabilities arising under the
federal securities laws is against public policy and is, therefore,
unenforceable and that claims for indemnification should be submitted to
appropriate courts for adjudication); or
(f) in connection with any proceeding (or part thereof) initiated by
Agent, or any proceeding by Agent against the Corporation or its directors,
officers, employees or other agents, unless (i) such indemnification is
expressly required to be made by law, (ii) the proceeding was authorized by the
Board of Directors of the Corporation, (iii) such
2.
<PAGE>
indemnification is provided by the Corporation, in its sole discretion, pursuant
to the powers vested in the Corporation under the Code, or (iv) the proceeding
is initiated pursuant to Section 9 hereof.
5. CONTINUATION OF INDEMNITY. All agreements and obligations of the
Corporation contained herein shall continue during the period Agent is a
director, officer, employee or other agent of the Corporation (or is or was
serving at the request of the Corporation as a director, officer, employee or
other agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise) and shall continue thereafter so long as Agent
shall be subject to any possible claim or threatened, pending or completed
action, suit or proceeding, whether civil, criminal, arbitrational,
administrative or investigative, by reason of the fact that Agent was serving in
the capacity referred to herein.
6. PARTIAL INDEMNIFICATION. Agent shall be entitled under this Agreement
to indemnification by the Corporation for a portion of the expenses (including
attorneys' fees), witness fees, damages, judgments, fines and amounts paid in
settlement and any other amounts that Agent becomes legally obligated to pay in
connection with any action, suit or proceeding referred to in Section 3 hereof
even if not entitled hereunder to indemnification for the total amount thereof,
and the Corporation shall indemnify Agent for the portion thereof to which Agent
is entitled.
7. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty (30) days
after receipt by Agent of notice of the commencement of any action, suit or
proceeding, Agent will, if a claim in respect thereof is to be made against the
Corporation under this Agreement, notify the Corporation of the commencement
thereof; but the omission so to notify the Corporation will not relieve it from
any liability which it may have to Agent otherwise than under this Agreement.
With respect to any such action, suit or proceeding as to which Agent notifies
the Corporation of the commencement thereof:
(a) the Corporation will be entitled to participate therein at its
own expense;
(b) except as otherwise provided below, the Corporation may, at its
option and jointly with any other indemnifying party similarly notified and
electing to assume such defense, assume the defense thereof, with counsel
reasonably satisfactory to Agent. After notice from the Corporation to Agent of
its election to assume the defense thereof, the Corporation will not be liable
to Agent under this Agreement for any legal or other expenses subsequently
incurred by Agent in connection with the defense thereof except for reasonable
costs of investigation or otherwise as provided below. Agent shall have the
right to employ separate counsel in such action, suit or proceeding but the fees
and expenses of such counsel incurred after notice from the Corporation of its
assumption of the defense thereof shall be at the expense of Agent unless
(i) the employment of counsel by Agent has been authorized by the Corporation,
(ii) Agent shall have reasonably concluded that there may be a conflict of
interest between the Corporation and Agent in the conduct of the defense of such
action or (iii) the Corporation shall not in fact have employed counsel to
assume the defense of such action, in each of which cases the fees and expenses
of Agent's separate counsel shall be at the expense of the Corporation. The
Corporation shall not be entitled to assume the defense of any action, suit or
proceeding
3.
<PAGE>
brought by or on behalf of the Corporation or as to which Agent shall have made
the conclusion provided for in clause (ii) above; and
(c) the Corporation shall not be liable to indemnify Agent under this
Agreement for any amounts paid in settlement of any action or claim effected
without its written consent, which shall not be unreasonably withheld. The
Corporation shall be permitted to settle any action except that it shall not
settle any action or claim in any manner which would impose any penalty or
limitation on Agent without Agent's written consent, which may be given or
withheld in Agent's sole discretion.
8. EXPENSES. The Corporation shall advance, prior to the final
disposition of any proceeding, promptly following request therefor, all expenses
incurred by Agent in connection with such proceeding upon receipt of an
undertaking by or on behalf of Agent to repay said amounts if it shall be
determined ultimately that Agent is not entitled to be indemnified under the
provisions of this Agreement, the Bylaws, the Code or otherwise.
9. ENFORCEMENT. Any right to indemnification or advances granted by this
Agreement to Agent shall be enforceable by or on behalf of Agent in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. Agent, in such enforcement action, if
successful in whole or in part, shall be entitled to be paid also the expense of
prosecuting his claim. It shall be a defense to any action for which a claim
for indemnification is made under Section 3 hereof (other than an action brought
to enforce a claim for expenses pursuant to Section 8 hereof, provided that the
required undertaking has been tendered to the Corporation) that Agent is not
entitled to indemnification because of the limitations set forth in Section 4
hereof. Neither the failure of the Corporation (including its Board of
Directors or its stockholders) to have made a determination prior to the
commencement of such enforcement action that indemnification of Agent is proper
in the circumstances, nor an actual determination by the Corporation (including
its Board of Directors or its stockholders) that such indemnification is
improper shall be a defense to the action or create a presumption that Agent is
not entitled to indemnification under this Agreement or otherwise.
10. SUBROGATION. In the event of payment under this Agreement, the
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Agent, who shall execute all documents required and shall
do all acts that may be necessary to secure such rights and to enable the
Corporation effectively to bring suit to enforce such rights.
11. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Agent by this
Agreement shall not be exclusive of any other right which Agent may have or
hereafter acquire under any statute, provision of the Corporation's Certificate
of Incorporation or Bylaws, agreement, vote of stockholders or directors, or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding office.
12. SURVIVAL OF RIGHTS.
(a) The rights conferred on Agent by this Agreement shall continue
after Agent has ceased to be a director, officer, employee or other agent of the
Corporation or to serve
4.
<PAGE>
at the request of the Corporation as a director, officer, employee or other
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise and shall inure to the benefit of Agent's
heirs, executors and administrators.
(b) The Corporation shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Corporation, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Corporation would be required to perform if no such succession
had taken place.
13. SEPARABILITY. Each of the provisions of this Agreement is a separate
and distinct agreement and independent of the others, so that if any provision
hereof shall be held to be invalid for any reason, such invalidity or
unenforceability shall not affect the validity or enforceability of the other
provisions hereof. Furthermore, if this Agreement shall be invalidated in its
entirety on any ground, then the Corporation shall nevertheless indemnify Agent
to the fullest extent provided by the Bylaws, the Code or any other applicable
law.
14. GOVERNING LAW. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Delaware.
15. AMENDMENT AND TERMINATION. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless in writing signed by
both parties hereto.
16. IDENTICAL COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
but all of which together shall constitute but one and the same Agreement. Only
one such counterpart need be produced to evidence the existence of this
Agreement.
17. HEADINGS. The headings of the sections of this Agreement are inserted
for convenience only and shall not be deemed to constitute part of this
Agreement or to affect the construction hereof.
18. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given
(i) upon delivery if delivered by hand to the party to whom such communication
was directed or (ii) upon the third business day after the date on which such
communication was mailed if mailed by certified or registered mail with postage
prepaid:
(a) If to Agent, at the address indicated on the signature page
hereof.
(b) If to the Corporation, to
Digital River, Inc.
Attn: Joel A. Ronning
9625 W. 76th Street
Suite 150
Eden Prairie, MN 55344
5.
<PAGE>
or to such other address as may have been furnished to Agent by the Corporation.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and
as of the day and year first above written.
DIGITAL RIVER, INC.
By:
------------------------------------------
Title:
---------------------------------------
AGENT
---------------------------------------------
Address:
---------------------------------------------
---------------------------------------------
6.
<PAGE>
EXHIBIT 10.3
CERTAIN CONFIDENTIAL INFORMATION
CONTAINED IN THIS DOCUMENT, MARKED BY
BRACKETS, HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO RULE
406 OF THE SECURITIES ACT OF 1933, AS
AMENDED.
DISTRIBUTOR AGREEMENT
This Agreement made as of this 23rd day of April, 1997, by and between Corel
Corporation (USA) ("COREL") having its principal place of business at 567
East Timpanogos Parkway, Orem, Utah, 84057 (Tel: 801-765-4010; Fax:
801-222-4379) and Digital River, Inc. ("Distributor"), having its principal
place of business at 5198 West 76th Street, Edina, Minnesota (Tel:
612-832-5622; Fax: 612-830-1154).
BACKGROUND:
1. COREL desires to secure distribution of certain of its software; and
2. Distributor desires to obtain certain software from COREL for
distribution.
NOW THEREFORE, in consideration of the mutual promises, covenants and
obligations contained herein the parties agree as follows:
1. INTERPRETATION
1.01 DEFINITIONS. As used herein:
(a) "Agreement" means this Agreement and any Schedule attached
hereto.
(b) "Customer", means any individual or entity who purchases Software
from Distributor, including an End User.
(c) "Distributor System" or "Electronic Commerce System" means the
system used by Distributor for the receipt and delivery of
on-line orders for the Software and processing of credit card
information for all Software orders by Customers.
(d) "Electronic Software Distribution" means the electronic delivery
of Products, using on line services, the Internet, phone lines,
cable systems, servers, satellite, or other public or private
access network or electronic communication mediums.
(e) "Electronic Distributor Materials" means Distributor-provided
computer readable materials which have received prior written
approval from COREL to be included in a Product.
(f) "End User License Agreement (EULA)" means COREL's end user
license, as modified by COREL from time to time.
(g) "Hard Goods" means any tangible item other than Schedule "B"
Software which is offered for sale or distribution by COREL and
Distributor pursuant to this Agreement.
(h) "Product" means a copy of the Schedule "A" Software,
Documentation, End User License Agreement, and any Electronic
Distributor Materials packaged in computer readable form for
Electronic Software Distribution in accordance with the terms of
this Agreement.
(i) "Software" means collectively, the object code version of the
COREL software Products listed in Schedule "B" ("Schedule "B"
Software") and the object code version in any form or format of
any of the COREL software Products listed in
<PAGE>
Schedule "A" ("Schedule "A" Software"). In those instances where
the term "Software" is used, such reference shall include both
schedule "A" and Schedule "B" software. In those instances where
only Schedule "A" or Schedule "B" Software is indicated, such
reference shall refer only to that software so specified.
(j) "Software Prices" means the amount payable by Distributor
pursuant to section 7 of this agreement and according to the
pricing schedule set out in Schedule "A" and Schedule "B" for
each copy of the Software which is distributed by Distributor.
(k) "Territory" means world-wide subject to section 5.04 herein.
2. APPOINTMENT
2.01 LICENSE AND APPOINTMENT. Subject to the terms and conditions hereof,
COREL hereby grants to Distributor and Distributor accepts from COREL:
2.01.1 REPRODUCTION - a non-exclusive license to reproduce Schedule "A"
Software only in computer readable form for the purposes of distribution
only through Electronic Software Distribution as part of a Product;
2.01.2 DISTRIBUTION - the exclusive right to distribute and resell the
Schedule "A" Software, Schedule "B" Software, and Hard Goods to Customers
within the Territory for sales originating from or through COREL's web
site. Distributor agrees not to distribute the Schedule "A" Software
other than in computer readable form as part of a Product.
2.02 INTELLECTUAL PROPERTY. Distributor acknowledges that COREL is the owner
of all intellectual property, including, without limitation, copyright,
relating to the Software and the trade-marks used in association with
the Software. Distributor shall have no rights in respect of such
copyright other than to act as a distributor of the Software to deliver
the Software subject to the End User Licenses.
2.03 END USER LICENSE AGREEMENT. Distributor shall ensure that each copy of
the Software is distributed with a copy of the End User License
Agreement.
3. TRADEMARKS
3.01 COREL MARKS. During the term of this Agreement, COREL grants
Distributor a non-exclusive license to use the COREL Marks for the
distribution and marketing of the Software.
3.02 NON-ALTERATION. Distributor agrees not to alter the trademarks, trade
names, copyright notices and designs of any Software. Distributor
acknowledges and agrees that COREL retains all of is right, title and
interest in the COREL Marks, and all use of the COREL Marks by
Distributor shall inure to the benefit of COREL.
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*CONFIDENTIAL TREATMENT REQUESTED
3.03 MARK POLICIES AND STANDARDS. Distributor shall display the COREL Marks
in accordance with COREL's Guidelines for Using Trademarks in effect
from time to time. COREL retains the right to specify and approve the
quality and standards of all materials on which the COREL Marks are
displayed and to inspect from time to time samples of such materials.
Failure of Distributor to adhere to such standards of quality shall be
grounds for COREL to terminate Distributor's rights to use such COREL
Marks and to terminate this Agreement. In order to enable COREL to
protect its rights in the COREL Marks, Distributor will advise COREL
of every country in which it markets or distributes the Software.
3.04 VALIDITY AND ENFORCEABILITY OF MARKS. Distributor shall not at any time
during or after this Agreement assert any claim or interest in or to
any of the COREL Marks or institute any proceeding reasonably
calculated to adversely affect the validity or enforceability of any
of the COREL Marks. Distributor shall not register, seek to register,
or cause to be registered any of COREL's trademarks, logos, or
copyrights, including the COREL Marks, without COREL's prior written
consent. Distributor shall not adopt or use such trademark, trade
names, logos or insignia, or any confusingly similar work or symbol,
as part of Distributor's company or partnership name.
3.05 INFRINGEMENT AND FURTHER ASSURANCE. Distributor agrees to report all
infringement or improper or unauthorized use of COREL's trademarks, trade
names, logos or insignia, including the COREL Marks which come to the
attention of Distributor. Distributor further agrees to execute all
documents and further assurances reasonably required by COREL to
register or protect COREL's rights.
4. TERM OF AGREEMENT
4.01 EFFECTIVE DATE. This Agreement shall be effective as of the date first
written above.
4.02 INITIAL TERM. The initial term of this Agreement shall commence upon
the date first written above and shall continue, subject to section 13,
for a period of twelve (12) months from such date.
4.03 RENEWAL. Subject to section 13, this Agreement shall be renewed for
subsequent periods of [ * ] at the end of the prior [ * ]
term unless either party notifies the other at least [ * ] prior
to the expiration of the term that it does not wish to renew the
Agreement for a further [ * ] term.
5. RESPONSIBILITIES OF DISTRIBUTOR
5.01 ACCEPTANCE OF EULA. Distributor shall display to Customer the
applicable End User License Agreement ("EULA") as provided by COREL for
the Schedule "A" Software
<PAGE>
prior to download of the Schedule "A" Software by Customer. Distributor
shall require all Customers to either accept or reject the terms and
conditions of the EULA via a point and click mechanism or other
mechanism acceptable to COREL prior to download and in the event
Customer rejects the EULA, Customer shall not be permitted to download
or purchase the Schedule "A" Software. Distributor agrees that the
mechanism used by Distributor to require Customers to accept or reject
the EULA shall be in a form which will record and store all Customer's
acceptance of the EULA for future reference.
5.02 RESTRICTIONS. Distributor shall distribute the Schedule "A" Software
only in the form provided by COREL as part of a Product, and shall
distribute the Schedule "B" Software only in the form provided by
COREL, and shall not alter the Software, Software packaging thereof or
End User License or any part thereof except as provided in section
5.03. Distributor shall not rent the Software or Products or
knowingly distribute or resell to anyone who rents same or infringes
COREL's rights. Should Distributor become aware of or receive notice
from COREL, Distributor shall immediately discontinue all distribution
of Software to Customers who rent same or infringe COREL's rights.
Distributor shall impose this same restriction on all Customers, other
than end users, who purchase Software from Distributor.
5.03 DISTRIBUTOR MATERIALS. Distributor shall be entitled to add Electronic
Distributor Materials in the electronic package which shall include
only the Schedule "A" Software, Documentation and End User License
Agreement, provided that the additions in no way alter the features or
functionality of the Schedule "A" Software except as permitted and
authorized in writing by COREL, nor create any obligations, warranties
or representations on behalf of COREL. In no event shall Distributor
be permitted to modify the End User License Agreement. Distributor
may append code, data files, serialization, or ancillary software
programs to the Schedule "A" Software, or encapsulate the Schedule "A"
Software in an electronic envelope, for the purpose of performing
Electronic Software Distribution, maintaining or preserving Customer
information, or authenticating the purchase and distribution of
Schedule "A" Software. To the extent the distribution and purchase of
Schedule "A" Software is authorized by COREL, Distributor may modify
the functionality of the Schedule "A" Software to allow limited-time
or limited-functionality trial use or similar "try-before-buy" uses of
the Schedule "A" Software.
5.04 COMPLIANCE WITH LAWS. Distributor shall comply with all laws, rules,
regulations and industry standards existing with respect to the
Software and the performance by Distributor of its obligations
hereunder in the jurisdictions where Distributor carries on activities
under this Agreement and where Software is resold or distributed from
time to time. Distributor shall not export the Software unless such
export complies with any applicable export laws and regulations as
they apply to the Software.
5.05 REPORTS. Distributor shall provide COREL with monthly reports detailing
information on its distribution of all Software and inventory costs of
Schedule "B" Software. Upon COREL's request for credit purposes,
Distributor shall provide a copy of the current financial statement
within (7) days.
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*CONFIDENTIAL TREATMENT REQUESTED
5.06 UPGRADES. In the distribution by Distributor of any Software upgrades,
Distributor shall comply with all requirements on the resale of such
upgrades which COREL generally imposes on other distributors of
upgrades. Distributor shall impose this same restriction on all
Customers other than End Users, who purchase upgrades from Distributor.
5.07 CUSTOMER SUPPORT. Distributor shall support connections by Customers
using Internet browsers with Windows(R) 3.1; Windows(R) 95; Windows(R)
NT, Macintosh(R), UNIX, and OS/2 operating systems, or other operating
systems as agreed to by COREL and Distributor. Distributor shall
provide all Electronic Software Distribution and download support for
the Schedule "A" Software to Customers. In addition, Distributor
shall provide all support necessary for online commercial transactions
engaged in by Customers accessing Distributor's Web Site or utilizing
the Distributor System.
5.08 DISTRIBUTOR WEB SITE. Distributor shall maintain Distributor Web Site
sufficient to provide Customers access to Distributor's Web Site 24
hours per day, 7 days per week to enable Electronic Software
Distribution of Schedule "A" Software to Customers or the purchase of
Schedule "B" Software by Customers. Distributor shall provide all
hardware programming logistics for Distributor System and Distributor
Web Site including, but not limited to, integrated shopping basket,
credit card processing, Hard Goods fulfillment and COREL Club
Memberships.
5.09 PRESS RELEASES. Distributor agrees that all information released to the
media or the general public, including press releases and communications
with COREL Club members or Customers, shall require prior written
approval by COREL.
5.10 DEDICATED DATABASE. Distributor shall develop and maintain a COREL
dedicated Oracle 7 database, or other form of database as required by
COREL from time to time, which shall contain all Customer information
collected by Distributor ("Dedicated Database"). Distributor shall
not maintain any third party information on the Dedicated Database.
COREL shall be entitled to immediate onsite access to the Dedicated
Database with twenty-four (24) hour notice to review the contents
thereof, including all current reports and data. Distributor agrees
that: (i) all information collected by Distributor on the Dedicated
Database is the Proprietary Information of COREL and shall be governed
by Section 8 herein; (ii) upon termination or expiration of this
Agreement, Distributor shall immediately provide all information
contained on the Dedicated Database, and any other Customer
information under the possession or control of Distributor, to COREL;
(iii) Distributor is [ * ] information; and (iv) COREL is in no way
restricted in the use of the Dedicated Database or Customer
information. Upon termination or expiration of this Agreement,
Distributor may retain a copy of the Customer information contained in
the Dedicated database for verification purposes regarding this
Agreement, and the limitations contained in Sections 5.10 and 8
regarding the disclosure and use of Customer information do not apply
to data obtained or identified by Distributor which can be
demonstrated as arising from or within a third party or independent
source.
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*CONFIDENTIAL TREATMENT REQUESTED
5.11 REPORTS. Distributor shall provide to COREL a quarterly database report
and on-going Distributor System reports as more fully described in
Schedule "D" hereto.
5.12 LOCALIZATION. In the event COREL determines that Distributor's Web Site
should be localized, all localization shall be done by COREL, and all
ownership of the localized works and intellectual property rights in
the localized works, including without limitation copyright relating
to the localized works and trademarks used in association with the
localized works, but excluding any intellectual property rights in or
related to Distributor's electronic commerce or software distribution
system, shall remain the property of COREL.
5.13 ACCOUNT MANAGER. Distributor agrees to assign a dedicated COREL account
manager as the point of contact for COREL.
5.14 COREL EMPLOYEES. Distributor agrees that any COREL employee shall be
permitted to download COREL photoimages from Distributor Web Site
without charge. Distributor shall not be responsible for the
unauthorized downloading, distribution, or use of such photoimages
performed or facilitated by any COREL employee.
5.15 DISTRIBUTOR SYSTEM. Distributor shall utilize its best efforts to
establish a fully functional Distributor System by [ * ].
Distributor shall be responsible for processing all Customer orders
and credit card transactions. Distributor shall use best efforts to
make the Distributor System processing service available 24 hours per
day, 7 days per week. Distributor shall provide processing for VISA,
Mastercard, American Express and Discover credit cards or other credit
cards as are reasonably requested by COREL. COREL will similarly take
such steps are necessary to establish a connection with Distributor
and use commercially reasonable efforts to keep that connection
operating.
5.16 CREDIT CARD PROCESSING. Distributor shall submit and process all credit
card transactions as quickly as is reasonably practical for Distributor's
electronic commerce system in light of Customer instructions and
required third-party connections, from the time of receipt by
Distributor, which in most circumstances shall not exceed [ * ] in
addition to any Internet or third-party processor associated delays.
5.17 DISTRIBUTOR SYSTEM MAINTENANCE. Distributor shall provide twenty four
(24) hours notice to COREL of any planned interruption of Distributor
System or Distributor Web Site for maintenance or any other purpose.
In the event Distributor fails to provide such notice, Distributor
shall pay those Downtime Charges as set forth in Schedule "D" hereto.
5.18 DISTRIBUTOR WEB SITE FAILURE. In the event Distributor System or
Distributor's Web Site ceases to be available to Customers by reason
of some failure of equipment or services (whether or not caused by
Distributor or constituting Force majeure as described in section
16.06), Distributor will use its best efforts to restore the
Distributor System and/or Distributor Web Site to normal operating
condition as soon as is reasonably practical and,
<PAGE>
*CONFIDENTIAL TREATMENT REQUESTED
in addition, shall immediately advise COREL of any such failure and
provide a Failure Report as more fully described in Schedule "D" hereto.
5.19 SSL NOTICE. Distributor shall provide a notice to Customers prior to
any input of Customer information that those Customers without browsers
containing Secure Socket Layer technology are advised to phone in all
Software orders to promote the security of their Customer information.
Distributor will provide COREL with such notice for their approval.
6. RESPONSIBILITIES OF COREL
6.01 PROMOTIONAL MATERIALS. COREL shall furnish Distributor, at no charge,
with sales aids, product briefs, brochures and similar literature and
materials with respect to the Software which COREL generally makes
available to distributors without charge.
6.02 SUPPORT FOR CUSTOMERS. COREL shall be responsible for providing
maintenance and technical support for the Software to Customers in
accordance with COREL's standard procedures as they may be changed by
COREL from time to time. Such maintenance and technical support shall
in no way apply to Electronic Software Distribution and download
support for the Schedule "A" Software or Customer use of the
Distributor System.
6.03 PREPARATION OF SOFTWARE FOR DISTRIBUTION. COREL agrees to provide
assistance as is commercially reasonable to Distributor to assist
Distributor to prepare Schedule "A" Software for Electronic Software
Distribution, including the provision of an End User License, or other
electronic documentation as provided by COREL, in COREL's sole
discretion.
7. PAYMENTS
7.01 AMOUNTS PAYABLE. Distributor shall pay COREL as follows:
7.01.1 Distributor shall pay COREL an amount equal to Schedule "A"
Software Price multiplied by the number of copies of the Schedule "A"
Software distributed by Distributor to Customers in each [ * ]
period, such amounts to be paid within [ * ] of the close of that
[ * ] period.
7.01.2 For the first [ * ] period, Distributor will pay COREL the
Software Price for each copy of the Schedule "B" Software or Hard Goods
which are sold by Distributor to Customers. Schedule "B" Software and
Hard Good Prices will be payable by Distributor within [ * ] of
sale by Distributor to Customer of the items to which they relate, such
amounts to be paid within [ * ] of the close of that [ * ]
period. Distributor shall not be bound by any retail pricing suggested
by COREL except to the extent required for compliance with relevant
advertising and consumer protection
<PAGE>
*CONFIDENTIAL TREATMENT REQUESTED
laws.
7.02 NOTICE OF CHANGES. During the term of this Agreement, COREL shall have
the right to change the Software Prices for any of the Software. In the
event that COREL raises the Software Prices for Schedule "B" Software,
all orders for Schedule "B" Software placed prior to the effective
date of the increase shall be invoiced to Distributor at the lower
amount. In the event that COREL lowers the Software Prices for
Schedule "B" Software, COREL shall grant to Distributor a credit
against future orders equal to the difference between the Schedule "B"
Software Prices paid by Distributer for Schedule "B" Software and the
reduced Software Prices for each unit of Schedule "B" Software
purchased by Distributor within thirty (30) days prior to the date the
reduced price is first offered and remaining in the inventory of
Distributor on the date the reduced price is first offered.
7.03 SHIPMENT. COREL will ship the Schedule "B" Software and Hard Goods to
Distributor freight [ * ] pursuant to purchase orders placed by
Distributor with COREL. All shipments will be shipped [ * ].
In the event Distributor's warehouse location changes, Distributor
will provide COREL with written notice.
7.04 TAXES. Distributor shall be responsible for collecting and paying, in
addition to all amounts specified in this Agreement, all foreign,
federal, state, county, or local taxes arising from Distributor's
business operation or Distributor's transactions with Customers, to
the extent such taxes are based upon the purchase or distribution of
the Software or Hard Goods by or to Customers. In the event any
payments required to be made by Distributor under this Agreement are
subject to applicable withholding tax that Distributor is required to
deduct from such payments, Distributor shall promptly deliver to COREL
receipts issued by appropriate government authorities for all such
taxes withheld or paid by Distributor and Distributor shall fully and
promptly cooperate with COREL to provide such information and records
as COREL may require in connection with any application by COREL to
obtain available tax credits.
7.05 LATE PAYMENT. If Distributor is more than thirty (30) days in arrears
under this Agreement, COREL will give written notice to Distributor
that Distributor is responsible for payment of all outstanding amounts
and finance charges. If the outstanding amounts are not paid within
ten (10) days of such notice, COREL has the right to terminate this
Agreement. Late payments will be assessed a one percent (1%) finance
charge per month (twelve percent (12%) per annum) or the highest
finance charge permitted by applicable law, whichever is less.
Distributor shall pay all costs including reasonable attorney's fees,
incurred by COREL in collecting overdue amounts. In addition, if
Distributor is in arrears to any extent under this Agreement, COREL
may hold further shipments until all arrears have been paid.
7.06 U.S. CURRENCY. All payments to COREL pursuant to this Agreement shall
be made in the lawful currency of the United States of America and all
amounts referred to in this Agreement are in the lawful currency of
the United States of America.
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*CONFIDENTIAL TREATMENT REQUESTED
7.07 STOCK BALANCING. Distributor may order and return Schedule "B" Software
for the first [ * ] month period from the date of this Agreement
([ * ]Period), Distributor may, from time to time and at
[ * ] expense, return the Software described in Schedule "B" or
Hard Goods as [ * ] Merchandise to COREL. Distributor must obtain
RMA (Return Material Authorization) prior to return of any [ * ]
Software to COREL. Distributor and COREL agree that they shall review
this section 7.07.1 at least thirty (30) days prior to the end of the
[ * ] Period to determine whether or not any extension of the
[ * ] Period shall be granted to Distributor by COREL. Any such
extension shall only be effective if in writing and signed by an
authorized signing officer of COREL.
7.08 AUDITS. Distributor agrees to maintain complete and accurate records
relating to its promotion, marketing, use and distribution of the
Software. COREL shall have the right no more often than once every
six (6) month period, and upon five (5) business days notice to
appoint a nationally recognized auditing firm to examine Distributor's
books and records in order to verify Distributor's compliance with the
promotional marketing use, distribution and payment terms of this
Agreement. Any such audit shall be at the expense of COREL unless the
audit reveals a non-compliance by Distributor with the terms of this
Agreement in which case the audit shall be at the expense of
Distributor, in addition to paying any deficit to COREL.
7.09 SOFTWARE AND SOFTWARE PRICE. During the term of this Agreement, COREL
shall have the right to change the Software Prices for any of the
Software. COREL shall be entitled to: (i) increase the Software
Prices or discontinue any Software at any time upon thirty (30) days
prior written notice to Distributor; and (ii) decrease the Software
Prices at any time upon notice to Distributor. In all such cases
COREL shall provide Distributor with a revised Schedule "A" and
Schedule "B". New software shall be added to Schedule "A" or "B" by
mutual written agreement of the parties. In the event COREL
discontinues any Schedule "A" Software, Distributor shall immediately
remove all discontinued Schedule "A" Software from Distributor's Web
Site and Distributor's server and erase or destroy any Schedule "A"
Software contained on Distributor computers and/or computer diskettes
in its possession or under its control.
8. CONFIDENTIALITY
8.01 PROPRIETARY INFORMATION. "Proprietary Information" means, in the case
of information disclosed by COREL to Distributor: (i) the terms and
conditions of this Agreement; (ii) any information provided to
Distributor by COREL to enable Distributor to perform the Electronic
Software Distribution; (iii) the names, telephone numbers, addresses,
and credit card information of any Customer or any information
relating to Customers obtained by Distributor relating to a
transaction (herein "Customer information"); (iv) all other Dedicated
Database and Customer information as more fully described in section
5.10 herein; and (v) any information with respect to COREL which it
has received or may in the future receive in connection with this
Agreement which is not otherwise
<PAGE>
available to the general public without restriction. "Proprietary
Information" means, in the case of information disclosed by Distributor
to COREL: (i) the terms and conditions of this Agreement, (ii) any
information relating to Distributor's electronic commerce system, file
encryption, encapsulation, or code appending procedures, or data
analysis and forecasting methods, and (iii) any information with respect
to Distributor which it has received or may in the future receive in
connection with this Agreement which is not otherwise available to the
general public without restriction. In the case of information received
by either COREL or Distributor, Proprietary Information does not include
information that: (i) prior to or after the time of disclosure becomes
generally available or readily ascertainable in substantially the same
and useable form through appropriate means without undue research,
refinement, derivation, or experimentation; (ii) is disclosed to the
receiving party by a third party under no legal obligation to maintain
the confidentiality of such information; (iii) is in the possession of
the receiving party at the time of disclosure without any obligation of
confidentiality, or (iv) is otherwise excluded by this Agreement.
Proprietary Information shall be treated confidentially by the receiving
party and its employees and contractors, and except as authorized in
this Agreement shall not be used or disclosed by the receiving party
without the disclosing party's prior written consent.
8.02 TREATMENT OF PROPRIETARY INFORMATION. The receiving party shall not
duplicate all or any part of the disclosing party's Proprietary
Information, except in accordance with the terms and conditions of
this Agreement. Each party shall have an appropriate agreement with
each of its employees and contractors having access to the other
party's Proprietary Information sufficient to enable that party to
comply with all the terms of this Agreement. Each party agrees to
protect the other party's Proprietary Information with the same
standard of care and procedures which it uses to protect its own trade
secrets and confidential or proprietary information of like importance
and, in any event, shall adopt or maintain procedures reasonably
calculated under the circumstances to protect such Proprietary
Information.
8.03 FURTHER TREATMENT OF PROPRIETARY INFORMATION. Each party agrees to hold
all Proprietary Information of the other party in trust and confidence
for the other party and not to use the same other than as expressly
authorized under and to carry out the purposes of this Agreement. The
receiving party agrees not to disclose any such Proprietary
Information without the prior written consent of the disclosing party,
to anyone other than the receiving party's employees and contractors
who have a need to know same to carry out the rights granted hereunder
or to agents, or contractors who have a need to know same to carry out
the rights granted hereunder and with whom the receiving party has a
valid nondisclosure agreement, or as required under any applicable law
or regulation.
8.04 EQUITABLE RELIEF. In recognition of the unique and proprietary nature
of the information disclosed by each party, it is agreed that each
party's remedy for breach by the other party of its obligations under
this section 8 shall be inadequate and the disclosing party shall, in
the event of such breach, be entitled to equitable relief, including,
without limitation, injunctive relief and specific performance, in
addition to any other remedies provided
<PAGE>
*CONFIDENTIAL TREATMENT REQUESTED
hereunder or available at law.
9. COREL WARRANTIES AND OTHER REPRESENTATIONS
9.01 WARRANTY. The Schedule "B" Software storage medium is warranted by
COREL to End Users against defects in workmanship and materials for a
period of ninety (90) days from the date it is delivered to the End
User. In the event that the storage medium is defective, COREL will
replace it free of charge with another copy of the Schedule "B"
Software. Replacement of the Schedule "B" Software shall be COREL's
sole obligation and Distributor's sole remedy for a breach of the
warranty in this section.
9.02 LIMITATION. EXCEPT AS EXPRESSLY STATED IN THIS AGREEMENT, THE SOFTWARE,
AND STORAGE MEDIA ARE PROVIDED AND LICENSED BY COREL "AS IS" AND THERE
ARE NO WARRANTIES, REPRESENTATIONS OR CONDITIONS, EXPRESSED OR
IMPLIED, WRITTEN OR ORAL, ARISING BY STATUTE, OPERATION OF LAW OR
OTHERWISE, REGARDING THEM OR ANY OTHER GOODS OR SERVICE PROVIDED BY
COREL HEREUNDER OR IN CONNECTION HEREWITH. COREL DISCLAIMS ANY
IMPLIED WARRANTY OR CONDITION OF MERCHANTABLE QUALITY,
MERCHANTABILITY, DURABILITY OR FITNESS FOR A PARTICULAR PURPOSE. NO
REPRESENTATION OR OTHER AFFIRMATION OF FACT, INCLUDING BUT NOT LIMITED
TO STATEMENTS REGARDING PERFORMANCE OF THE SOFTWARE, OR STORAGE MEDIA,
WHICH IS NOT CONTAINED IN THIS AGREEMENT, SHALL BE DEEMED TO BE A
WARRANTY BY COREL.
9.03 NO VARIATION. NO AGREEMENTS VARYING OR EXTENDING TIES WARRANTY OR THE
FOREGOING LIMITATIONS WILL BE BINDING ON COREL UNLESS IN WRITING AND
SIGNED BY AN AUTHORIZED REPRESENTATIVE OF COREL.
9.04 DISTRIBUTOR NOT TO BIND. Distributor will not give or make any
warranties or representations on behalf of COREL as to quality,
merchantable quality, merchantability, fitness for a particular use or
purpose, or any other features of the Software; and Distributor shall
not incur any liabilities, obligations, or commitments on behalf of
COREL, including without limitation, a variation of the End User
License Agreement (EULA).
9.05 [ * ] shall be liable for any breach of warranty alleged or
claimed by any End User, or implied or imposed by statute or common law,
relating to the Software, its distribution, or the use of its electronic
commerce system by Customer or End User.
<PAGE>
10. DISTRIBUTOR WARRANTIES
10.01 YEAR 2000 COMPLIANCE. Distributor warrants that all hardware, software,
and firmware used by Distributor or in Distributor's System shall be
able to accurately process data (including but not limited to
calculating, comparing, and sequencing) from, into, and between the
twentieth and twenty-first centuries, including leap-year calculations.
10.02 ENCRYPTION WARRANTY. Distributor warrants that the Distributor System
shall receive and transmit all Customer information in encrypted
format when Customers utilize browsers compliant with Secure Socket
Layer technology. Distributor further warrants that the Distributor
System encryption protocol will prevent unauthorized access to and use
of Customer information received by Distributor to the extent
reasonably practical with such technology, and that to the best of
Distributor's knowledge the algorithm has never been breached as of
the date of this Agreement. Distributor shall continue to update the
Distributor System with encryption technology reasonably suited and
intended for this application as it is shown to be effective and
becomes available. Neither COREL nor Distributor shall be responsible
or liable to any Customer or End User or each other for any acts of
fraud, theft, misappropriation, tampering, hacking, interception,
piracy, misuse, misrepresentation, dissemination, or other illegal or
unauthorized activities of third parties involving Customer
information.
11. INFRINGEMENT
11.01 DEFENSE AND SETTLEMENT. If notified promptly in writing of any action
(and all prior related claims) brought against Distributor alleging
that Distributor's resale, distribution, or other disposition of the
Software or Hard Goods under this agreement infringes any Canadian or
United States patent, trademark, trade dress, copyright, or similar
intellectual property right, COREL will defend that action at its
expense and will pay all costs and damages of any type awarded against
Distributor in the action, provided that: (i) COREL shall have sole
control of the defense of any such action and all negotiations for its
settlement or compromise; (ii) Distributor, and where applicable,
those for whom Distributor is in law responsible, cooperate fully with
COREL in its defense of the action; and (iii) COREL shall have no
liability if the action results from the use of the Software for
purposes or in an environment for which it was not designed or
intended, or due to modification of the Software, including, but not
limited to, combination with Electronic Distributor Materials, by
anyone other than COREL.
11.02 OPTIONS WHERE CLAIM. If a final injunction is obtained in such action
against Distributor's resale of the Software or if in COREL's opinion
the Software is likely to become the subject of a claim of
infringement, COREL may at its sole option and expense either procure
for Distributor the right to resell the Software or replace or modify
the Software so that it becomes non-infringing.
<PAGE>
*CONFIDENTIAL TREATMENT REQUESTED
12. LIMITATION OF LIABILITY
12.01 LIMITATION. IN NO EVENT WILL [ * ] BE LIABLE FOR INCIDENTAL,
INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES, OR ANY DAMAGES WHATSOEVER
RESULTING FROM LOSS OF USE, DATA OR PROFITS, ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT OR THE USE OR PERFORMANCE OF THE SOFTWARE
OR STORAGE MEDIA, OR OTHER COREL-PROVIDED MATERIAL, WHETHER IN AN ACTION
IN CONTRACT OR TORT, INCLUDING BUT NOT LIMITED TO NEGLIGENCE, AND
WHETHER OR NOT [ * ] HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES. This section shall not apply to breach of [ * ]
obligations under sections [ * ] inclusive, [ * ] and
[ * ].
12.02 AGGREGATE LIABILITY. Other than as provided in section 10, COREL's
aggregate liability to Distributor whether for negligence, breach of
contract, misrepresentation or otherwise shall in respect of a single
occurrence or a series of occurrences in no circumstances exceed the
Software Prices paid by Distributor to COREL over the twelve (12)
month period preceding the claim by Distributor.
13. DISTRIBUTOR INDEMNIFICATION
13.01 INDEMNIFICATION. Except as set forth in Section 11, Distributor agrees
to indemnify and save COREL harmless from and against any and all
claims, demands, costs and liabilities (including all reasonable legal
and attorney fees and expenses) finally awarded of any kind
whatsoever, arising directly or indirectly out of claims by
Distributor's Customers or any third party relating to: (i)
Distributor's performance under this Agreement; (ii) Electronic
Distributor Materials or the combination of Schedule "A" Software with
Electronic Distributor Materials; (iii) Distributor's distribution of
the Schedule "A" Software through Electronic Software Distribution or
distribution of the Schedule "B" Software through Distributors System;
(iv) the maintenance and functionality of the Distributor Web site
(excluding COREL-provided content); (v) breach of Section 10,
warranties; or (vi) misuse of any Customer or credit card information
submitted to Distributor. Distributor agrees to its best efforts to
become bonded to cover its liability under this Section 13.01 (vi) and
to institute such procedures to minimize any such misuse by
Distributor's agents and employees and by the agents and employees of
its third party processors.
14. TERMINATION
14.01 TERMINATION. This Agreement will terminate in the event of any of the
following:
14.01.1 written notice of termination from COREL, effective
immediately, under section 7.05;
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*CONFIDENTIAL TREATMENT REQUESTED
14.01.2 written notice of termination from COREL, effective
immediately, in the event Distributor fails to establish a
fully functional Distributor System by [ * ];
14.01.3 on the thirtieth (30th) day after one party gives the other
written notice of a material breach by the other of this
Agreement and a request for a cure, unless the breach is
cured before that day;
14.01.4 written notice of termination by one party, effective
immediately, after a receiver has been appointed in respect
of the whole or a substantial part of the other's assets or
a petition in bankruptcy or for liquidation is filed by or
against that other or if the other has been dissolved or
liquidated or is insolvent, as permitted by applicable
governing rules or statutes relating to such petition in
bankruptcy or for liquidation; or
14.01.5 written notice of termination, effective immediately, by the
non-breaching party, if Distributor or COREL has materially
breached its obligations under Section 8.
14.02 NO COMPENSATION. Distributor acknowledges and agrees that it has no
expectation that its business relationship with COREL will continue
for any minimum period of years, or that Distributor shall obtain any
anticipated amount of profits by virtue of this Agreement. Neither
COREL nor Distributor shall be liable, by reasons of any termination
of this Agreement, for compensation, reimbursement, or damages on
account of the loss of prospective profits on anticipated orders, or
on account of expenditures, investments, leases, or commitments
whatsoever in connection with the business or goodwill of the other.
15. EFFECT OF TERMINATION
15.01 DISTRIBUTOR. In the event of termination hereof Distributor shall:
15.01.1 perform with respect to COREL all payment and other
obligations of Distributor arising hereunder within thirty
(30) days of termination;
15.01.2 immediately cease to use the COREL Marks in any manner
whatsoever; and
15.01.3 immediately discontinue the Distributor Web Site.
15.02 SURVIVAL. Sections 2.02, 3.04, 5.04, 7 to 10 inclusive, 11.01, 12,
14.02, 15, and 16 shall survive the termination of this Agreement.
15.03 NO PREJUDICE. Except as provided in section 14.02, termination
hereunder shall be without
<PAGE>
prejudice to any other right or remedy to which either party may
be entitled hereunder in law.
15.04 DESTROY OR DELIVER UP. At termination, Distributor shall erase or
destroy any unlicensed Schedule "A" Software contained on Distributor
computers and/or computer diskettes in its possession or under its
control. COREL shall have the option to require Distributor to
destroy and certify that it has destroyed or to deliver to COREL, any
property of COREL then in its possession or under its control,
excluding that Software or Hard Goods which Distributor has purchased
for as own use. Distributor may retain one copy of such information
in a secure location for verification purposes.
16. MISCELLANEOUS
16.01 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties concerning the subject matter hereof, and
supersedes all prior statements, representations, discussions,
negotiations, and agreements, both oral and written, including all
pre-printed terms and conditions appearing on Distributor's order
forms, COREL's acknowledgment of order forms, and COREL's invoice
forms.
16.02 AMENDMENT OR WAIVER. Except to the extent permitted by this Agreement
or the Schedules appended hereto, this agreement may not be amended or
modified except in a writing signed by authorized officers of both
parties. No order, invoice, or similar document will modify the terms
of this agreement even if accepted by the receiving party.
16.03 ILLEGAL OR UNENFORCEABLE PROVISIONS. In the event that any one or more
of the provisions of this agreement shall be found to be illegal or
unenforceable, this agreement shall nevertheless remain in full force
and effect, and such term or provision shall be deemed severed unless
such severance defeats the purpose of this Agreement or results in
substantial injustice to one of the parties.
16.04 INDEPENDENT CONTRACTORS. The parties to this agreement are independent
contractors. No relationship of principal to agent, master to servant,
employer to employee, or franchisor to franchisee is established hereby
between the parties. Neither party has the authority to bind the other
or incur any obligation on its behalf.
16.05 NON-RESTRICTIVE RELATIONSHIP. Nothing in this agreement shall be
construed to preclude Distributor from distributing any software
regardless of whether or not such software is the same as or
competitive with any COREL Software.
16.06 FORCE MAJEURE. Unless continuing for a period of ninety (90)
consecutive days or unless involving the payment of amounts due under
this Agreement beyond thirty (30) days from the date for which the
payment is due, no default, delay or failure to perform on the part of
either party shall be considered a breach of the agreement if such
default, delay, or failure to perform is shown to be due entirely or
proximately to any event constituting
<PAGE>
force majeure, or to causes beyond the reasonable control of the
defaulting party, including without limitation strikes, lockouts of
other labor disputes, riots, civil disturbances, actions or inactions
concerning government authorities, epidemics, war, embargoes, severe
weather, fire, earthquakes, acts of God or the public enemy, default of
a common carrier, interruption of power or communications sources or
connections, failures in or affecting the performance, use, or
availability of the Internet or associated intranets, viruses, the
terroristic, illegal, malicious, wanton, or capricious acts a third
party, changes or modifications in international, national, or industry
standards or protocols, and the existence of or changes in federal or
state laws or the laws of other countries prohibiting or imposing
criminal penalties or civil liability for performance hereunder, always
provided that the party so relieved of its obligations shall promptly
and lawfully take such steps to prevent, correct or amend such act or
event which renders such obligations impossible as are reasonable under
the circumstances.
16.07 NO WAIVER. In either of the party's rights to enforce provisions of this
agreement shall be affected by any prior course of dealing, waiver,
delay, omission, or forbearance.
16.08 ASSIGNMENT. This agreement and the rights granted hereunder shall not
be assigned, encumbered by security interest or otherwise transferred
by Distributor without the prior written consent of the COREL. An
amalgamation or merger of Distributor or COREL with any person who is
not a party to this Agreement shall be deemed to result in an
assignment of this agreement. COREL may assign this agreement at any
time upon notice to this effect to Distributor.
16.09 ENUREMENT. This Agreement shall enure to the benefit of and be binding
upon the parties and their respective successors and permitted assigns.
16.10 NOTICES. Any notice or other communication to the parties shall be sent
to the addresses set out above, or such other places as they may from
time to time specify by notice in writing to the other party. Any
such notice or other communication shall be in writing, and, unless
delivered to a responsible officer of the addressee, shall be given by
registered mail, facsimile or telex and shall be deemed to have been
given when such notice should have reached the addressee in the
ordinary course, provided there is no strike by postal employees in
effect or other circumstances delaying mail delivery, in which case
notice shall be delivered or given by facsimile or telex.
16.11 FURTHER ASSURANCES. The parties agree to do all such things and to
execute such further documents as may reasonably be required to give
full effect to this Agreement.
16.12 TIME. Time shall be of the essence.
16.13 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota and the laws of
these United States, excluding that body of law applicable to choice
of law and excluding the United Nations Convention on Contracts for
the International Sale of Goods and any legislation implementing such
<PAGE>
Convention, if otherwise applicable. Distributor hereby consents and
jurisdiction of the courts of such province. If either party employs
attorneys to enforce any rights arising out of or relating to this
agreement, the prevailing party shall be entitled to recover reasonable
attorney's fees.
16.14 LANGUAGE. The original of this agreement has been written in English
and each party waives any right it may have to have this agreement
written in any other language. The parties represent that they have
the ability to read and write in English, and have read and understand
this agreement. If this agreement is translated into a language other
than English, the English version and interpretation shall govern and
prevail. All communications between the parties hereunder shall be in
English.
IN WITNESS WHEREOF, the parties have caused this agreement to be executed by
their duly authorized representatives as of the date first above written.
DIGITAL RIVER, INC.
Per: /S/ Joel Ronning
--------------------------
Name: Joel Ronning
Title: President
COREL CORPORATION (USA)
Per: /s/ Mitch Despochers
--------------------------
Name: Mitch Despochers
Tittle: Controller
<PAGE>
SCHEDULE "A"
SOFTWARE AND SOFTWARE PRICES FOR SCHEDULE "A" SOFTWARE
<PAGE>
*CONFIDENTIAL TREATMENT REQUESTED
SCHEDULE 'A'
USD CDN
[ * ]
<PAGE>
SCHEDULE "B"
SOFTWARE AND SOFTWARE PRICES FOR SCHEDULE "B" SOFTWARE
<PAGE>
*CONFIDENTIAL TREATMENT REQUESTED
SCHEDULE 'B'
USD CDN
[ * ]
<PAGE>
SCHEDULE "C"
GUIDELINES FOR USING COREL MARKS
<PAGE>
GUIDELINES FOR USING COREL LOGOS
Corel logos or trademarks in stylized form (the "Marks") are valuable assets and
may be used publicly with permission only from Corel. In order to protect the
value of these assets, Corel must maintain control over the manner in which the
Marks are used. Corel has established the following set of guidelines for
properly using the Marks. If these guidelines are not followed, Corel may
terminate your right to use the Marks.
* Upon request, COREL will provide authorized users with camera
ready artwork of the Marks. This artwork may not be altered in
any way.
* You may not display the Marks on packaging, documentation,
collateral or advertising in a manner which suggests that your
product is a COREL product, or in a manner which suggests that
COREL or any of the Marks are a part of your product name.
* When displayed, the Marks cannot be larger than or more prominent
than your product name, trade-mark, logo or trade name.
* When displayed, the Marks must stand alone. AL minimum amount of
empty space must be left between the Marks and any other object
such as type, photography, borders, edges, etc. The required
border of empty space around the Marks must be 1/2x wide, where x
is the height of the Mark.
* You may not combine the Marks with any other feature including,
but not limited to, other logos, words, graphics, photos,
slogans, number, design features, or symbols.
* None of the Marks may be used as a design feature on your
product, product packaging, documentation, collateral or
advertising.
COREL LOGOS INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING:
1. COREL LOGO
The word COREL is used in association with Corel's stylized "C" in two different
forms as follows:
[COREL LOGO] [COREL LOGO]
(Form A) (Form B)
<PAGE>
2
The logo is approved for use in black or colour. If used in colour, the C must
be reproduced in red (PMS 186) and the word COREL must be reproduced in blue
(PMS 293). The logo should be used only in the forms depicted above. The logo
should be identified with the -Registered Trademark- symbol in the following
countries:
Canada, Germany, United Kingdom, United States, Austria, Benelux,
France, Columbia, Finland, Poland, Norway, South Korea, Switzerland and
Taiwan.
The logo should be identified with the symbol (TM) in all other countries. The
(R) or (TM) symbol must appear at the top-right comer of the graphic. When
using the Marks in some countries where the symbol (TM) should be used as well
as other countries where the symbol (R) should be used, the symbol (TM) may be
used in all cases.
2. CORELDRAW! LOGO
This logo is used in the following design form:
[LOGO]
The logo is approved for use in black or with a coloured line in PMS Magenta.
The logo should be identified with the (R) symbol in Canada only.
The logo should be identified with the (TM) symbol in all other countries.
When used in text, the trade-mark must be depicted in the form CorelDRAW
3. BALLOON DESIGN LOGO
This logo is used in the following form:
[LOGO]
The logo should be identified with the (TM) symbol at the top right corner of
the graphic in all countries. Note that either the CorelDRAW logo or the Corel
trademark may be used on the balloon, provided properly identified.
<PAGE>
3
4. COREL VENTURA LOGO
This logo is used in the following form:
[LOGO]
The logo should be identified with the (TM) symbol at the top right comer of the
graphic in all countries.
5. COREL PROFESSIONAL CD-ROM PHOTOS LOGO
This logo is used in the following form:
[LOGO]
The logo should be identified with the (TM)symbol at the top right corner of the
graphic in all countries.
TRADEMARK NOTICE
All products sold and all advertisements or other printed materials distributed
displaying any of the Marks must, in an appropriate place, bear the following
notice:
IS A TRADE-MARK OF
COREL CORPORATION OR COREL CORPORATION LIMITED, USED
UNDER LICENSE.
QUALITY CONTROL
<PAGE>
Corel reserves the right to review your use of the Marks. Any specimens or
examples which are required to be delivered to Corel under the terms of your
license should be sent to ONE OF THE FOLLOWING:
COREL CORPORATION
THE COREL BUILDING
1600 CARLING AVENUE
OTTAWA, ONTARIO
K1Z 8R7
ATTENTION: PUBLISHING PROGRAMS(RELATING TO BOOKS/MAGAZINES)
ATTENTION: EDUCATION DEPARTMENT(TRAINING MATERIALS)
ATTENTION: MEDIA RELATIONS (ARTICLES/REVIEWS)
ATTENTION: LEGAL DEPARTMENT (IF NONE OF THE ABOVE APPLIES)
Corel reserves the right to conduct spot checks and will periodically request
samples. Corel may also conduct spot checks in the marketplace of advertising
and related printed materials. Failure to comply with standards of quality
specified by Corel, failure to adhere to these guidelines or failure to comply
with a request for samples is grounds for termination of your license.
<PAGE>
*CONFIDENTIAL TREATMENT REQUESTED
SCHEDULE "D"
DISTRIBUTOR REPORTS AND FAILURE CHARGES
A. DISTRIBUTOR REPORTS:
Distributor shall provide to COREL the following reports:
(a) QUARTERLY REPORT. Distributor shall provide to COREL a report for each
fiscal quarter which shall capture the following information, or
information as reasonably requested by COREL from time to time:
(i) the frequency of use of Distributor Web Site by prospects
("Hits");
(ii) any and all data compiled by Distributor regarding Customer use
of the Web Site including, but not limited to, Customer name, address
and all Software selected by Customer from Distributor Web Site;
(iii) the number of new COREL Club memberships created by Distributor;
(iv) promotion, marketing and distribution activities of Distributor
during the quarter; and
(v) a summary of all Failure Reports.
(b) FAILURE REPORTS. Distributor shall provide a report to COREL within
[ * ] of an equipment or service failure relating to
Distributor's connection with COREL or Distributor's Web Site which
shall capture the following information, in addition to any
information which Distributor should otherwise provide to COREL to
enable COREL to evaluate the quality of the Distributor System:
(i) Cause of interruption or failure of Distributor System or
Distributor's Web Site;
(ii) duration of the interruption or failure; and
(iii) methods used to resolve the interruption or failure.
(c) ENCRYPTION PROTOCOL REPORTS. Distributor shall provide an [ * ]
report to COREL of any breach of the encryption protocol, the cause of
said breach, the duration of the breach, and the methods used to
resolve the breach.
(d) All Quarterly Reports required under this Agreement are to be: (i) faxed
to COREL within thirty (30) business days after each quarter end; and
(ii) provided in electronic (diskette) format to COREL within thirty
(30) business days after each quarter end. COREL can request reasonable
changes in the format of the report upon thirty (30) days notice.
(e) All Failure Reports and Encryption Protocol Reports required under this
Agreement are to be: (i) faxed to COREL immediately; and (ii) provided
in electronic format to COREL within thirty (30) business days after the
occurrence of each failure or interruption. COREL can request
reasonable changes in the format of the report upon thirty (30) days
<PAGE>
*CONFIDENTIAL TREATMENT REQUESTED
notice.
B. DOWNTIME CHARGES
In the event that Customers are unable to establish a link to the Distributor
Web Site for a period of [ * ] or more consecutive [ * ], and such
inability is not the result of a failure or interruption in the Internet or its
related or supporting infrustructure or the Customers' software, equipment,
facilities, provider, or communications connection, or COREL's failure to
maintain a connection with Distributor, then Distributor shall pay to COREL an
amount equal to the amount paid by Distributor to COREL under this Agreement for
the Distribution of Schedule "A" Software and Schedule "B"
Software and Hard Goods purchased during a period of equal duration and time
as averaged over the four same days of the week next preceding the period.
In the event such downtime occurs for more than [ * ] in each of any
[ * ] consecutive months, Distributor shall pay to COREL an amount
equal to the amount paid by Distributor to COREL under this Agreement for the
Distribution of Schedule "A" Software and Schedule "B" Software and Hard
Goods purchased during a period of equal duration and time as averaged over
the four same days of the week next preceding those periods.
<PAGE>
EXHIBIT 10.5
FUJITSU MODIFICATION AGREEMENT
THIS AGREEMENT (the "AGREEMENT") is made effective as of the 11th day of
December 1997 among Digital River, Inc., a Minnesota corporation
("DR-MINNESOTA"), Digital River, Inc., a Delaware corporation ("DR-DELAWARE"),
Fujitsu Limited, a corporation organized under the laws of Japan ("FUJITSU") and
the undersigned parties who are parties to some or all of the documents
described herein (collectively "OTHER PARTIES").
WITNESSETH
WHEREAS, DR-Minnesota is being reincorporated in Delaware as DR-Delaware
and survives temporarily as a wholly-owned subsidiary of DR-Delaware for
technical reasons. It is intended that, as between DR-Minnesota and DR-
Delaware, DR-Delaware is the entity that may undertake an initial public
offering of its common stock at some future date. As used hereafter, "DR" shall
mean DR-Minnesota or DR-Delaware, as applicable and appropriate to carry out the
intent of this Agreement;
WHEREAS, DR, Fujitsu and the Other Parties have entered into various
agreements in the past in connection with an investment by Fujitsu in DR and now
desire to terminate such agreements, except as specifically provided herein;
WHEREAS, DR and Fujitsu desire to enter into a new agreement which will set
forth the terms of the ongoing relationship between DR and Fujitsu and, except
as explicitly provided herein, supercede the Prior Agreements (as defined
below); and
WHEREAS, the Other Parties desire to be released from the obligations
contained in and release their rights under the Prior Agreements between DR,
Fujitsu and the respective Other Parties.
NOW THEREFORE, in consideration of the foregoing and the covenants and
agreements hereinafter set forth, the parties agree as follows:
1. TERMINATION OF AGREEMENTS. Except as explicitly provided in Section 5 of
this Agreement, the following agreements (the "Prior Agreements") are
hereby: (i) terminated as of the effective date of this Agreement, (ii)
superceded in their entirety hereby, and (iii) the parties are hereby
released from all obligations under the Prior Agreements.
a. Stock Purchase Agreement dated August 30, 1994 between DR,
Fujitsu, Joel Ronning and MacUSA, Inc.;
b. Investors' Rights Agreement dated August 30, 1994 between DR,
Fujitsu and Joel Ronning;
c. Personal Guaranty and Stock Pledge Agreement dated August 30,
1994 for the benefit of DR and Fujitsu from Joel Ronning;
d. Employment and Non-Competition Agreement dated August 30, 1994
between DR and Joel Ronning;
e. Voting Agreement dated August 30, 1994 between DR, Fujitsu and
Joel Ronning;
<PAGE>
f. Memorandum of Understanding dated August 30, 1994 between DR,
Fujitsu, Joel Ronning and MacUSA, Inc.;
g. Non-Competition Agreement dated August 30, 1994 between DR, Joel
Ronning and MacUSA, Inc.; and
h. That certain letter agreement between DR and Fujitsu dated as of
October 17, 1997.
i. Any and all amendments or other modifications to any of the
foregoing agreements listed in a-h above, except for any modification
set forth in this Agreement.
2. ISSUANCE OF DR COMMON STOCK. As consideration for Fujitsu entering into
this agreement, DR, concurrent with the execution of this Agreement, will
issue to Fujitsu an additional total of 90,000 shares of DR Common Stock
(on a post-split basis). Following completion of the transaction
contemplated hereby, Fujitsu shall own beneficially and of record 3,290,000
shares of DR Common Stock (on a post-split basis).
3. DIRECTOR DESIGNEE. Until such time as Fujitsu owns less than ten percent
(10%) of the outstanding Common Stock of DR, Fujitsu shall be entitled to
designate one representative on the Board of Directors of DR. In
furtherance of such right:
a. Fujitsu shall be entitled to nominate one individual to the Board
of Directors of DR (the "Fujitsu Nominee"), which nominee shall be
presented to the shareholders of DR at the annual shareholder meeting
as a management nominee endorsed by the Board.
b. While the parties to this Agreement understand that there can be
no guarantee of the election of the Fujitsu Nominee by the
shareholders of DR, the Other Parties hereby agree to use their best
efforts to secure the presentation of the Fujitsu Nominee as a
management nominee endorsed by the Board for election by the
shareholders of DR and to secure the election of the Fujitsu Nominee
to the Board.
c. In addition, the Other Parties hereby agree that they will vote
any and all shares of DR Common Stock held by them of record or
beneficially in favor of the Fujitsu Nominee.
d. If and when DR's Board of Directors deems it appropriate, it will
consider naming a second Fujitsu designee to the Board.
e. In the event that the Fujitsu Nominee is not elected to the Board
of Directors of DR and Fujitsu (together with its affiliates,
successors, and assigns) holds at least ten percent (10%) of the
outstanding shares of Common Stock of DR, Fujitsu shall (i) be
entitled to notice of all meetings of the Board of Directors and to
receive a copy of all materials disseminated to the members of the
Board of Directors, have the right to send one representative to each
meeting of the Board of Directors as an observer; such observer shall
have the right to participate fully in all aspects of the Board
meeting but shall not have a right to vote and (ii) be entitled to
receive the following information:
i. ANNUAL REPORTS. As soon as practicable in any event
within 120 days after the end of each fiscal year of the DR, a
consolidated Balance Sheet as of the end of such fiscal year, a
consolidated Statement of Income and a consolidated Statement of
Cash Flows of the DR and its subsidiaries for such year, setting
forth in each case in
<PAGE>
comparative form the figures from the DR's previous fiscal year
(if any), all prepared in accordance with generally accepted
accounting principles and practices and audited by nationally
recognized independent certified public accountants (such
obligation may be satisfied by delivery to the Investor of a Form
10-K or Form 10-KSB as filed with the Securities and Exchange
Commission);
ii. QUARTERLY REPORTS. As soon as practicable, and in any
case within forty-five (45) days of the end of each fiscal
quarter of the DR (except the last quarter of the DR's fiscal
year), quarterly unaudited financial statements, including an
unaudited Balance Sheet, and an unaudited Statement of Income and
an unaudited Statement of Cash Flows, and commencing six (6)
months after the Effective Date a comparison to the DR's
operating plan and budget and statements of the Chief Financial
officer of the DR explaining any significant differences in the
statements from the DR's operating plan and budget for the period
and stating that such statements fairly present the consolidated
financial position and consolidated financial results of the DR
for the fiscal quarter covered (such obligation may be satisfied
by delivery to the Investor of a Form 10-Q for Form 10-QSB as
filed with the Securities and Exchange Commission);
iii. MONTHLY REPORTS. As soon as practicable, and in any
case within forty-five days of the end of each calendar month
(except that last month of the DR's fiscal year), monthly
unaudited financial statements, including an unaudited Balance
Sheet and an unaudited Statement of Income and an unaudited
Statement of Cash Flows, together with a comparison to the DR's
operating plan and budget and statements of the Chief Financial
Officer of the DR explaining any significant differences in the
statements from the DR's operating plan and budget for the month
covered and stating that such statements fairly present the
consolidated financial position and consolidated financial
results of the DR for the month covered; and
iv. ANNUAL BUDGET. As soon as practicable and in any event
no later than sixty (60) days after the close of each fiscal year
of the DR, an annual operating plan and budget, prepared on a
monthly basis, for the next immediate fiscal year. The DR shall
also furnish to such Investor, within a reasonable time of its
preparation, amendments to the annual budget, if any.
f. TERMINATION OF CERTAIN RIGHTS. The DR's obligations under
Section 3.e. above will terminate upon (i) the closing of the DR's
initial public offering of Common Stock pursuant to an effective
registration statement filed under the U.S. Securities Act of 1933, as
amended (the "Securities Act") in which the gross proceeds raised for
the DR's account (calculated before deduction of underwriters'
discounts and commissions) exceeds $5,000,000 and the per share price
exceeds $2.00; or (ii) the DR becoming subject to the reporting
requirements of the Exchange Act of 1934, whichever is sooner.
g. RULE 144A INFORMATION. The DR agrees to provide Investor, upon
request, with such written information as may be required in order to
permit such Investor to resell any shares of the DR's stock pursuant
to Rule 144A promulgated under the Securities Act, provided that no
interim audit is required to do so.
4. REGISTRATION RIGHTS.
a. Definitions. For purposes of this Section 4:
<PAGE>
i. REGISTRATION. The terms "REGISTER," "REGISTERED," and
"REGISTRATION" refer to a registration effected by preparing and
filing a registration statement in compliance with the Securities
Act, and the declaration or ordering of effectiveness of such
registration statement.
ii. REGISTRABLE SECURITIES. The term "REGISTRABLE
SECURITIES" means: (1) all the shares of Common Stock of DR owned
by Fujitsu or Fujitsu's assignee(s), and by Joel Ronning or his
assignee(s); and (2) any shares of Common Stock of DR issued as
(or issuable upon the conversion of exercise of any warrant,
right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in
replacement of, all such shares of Common Stock described in
clause (1) of this subsection (ii); EXCLUDING, however, any
Registrable Securities sold to the public or sold pursuant to
Rule 144 promulgated under the Securities Act.
iii. HOLDER. For purposes of this Section 4, the term
"Holder" means any person owning of record Registrable Securities
that have not been sold to the public or pursuant to Rule 144
promulgated under the Securities Act or any assignee or record of
such Registrable Securities to whom rights under this Section 4
have been duly assigned in accordance with this Agreement.
iv. FORM S-3. The term "Form S-3" means such form under
the Securities Act as is in effect on the date hereof or any
successor registration form under the Securities Act subsequently
adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by
DR with the SEC.
v. SEC. The term "SEC" or "Commission" means the U.S.
Securities and Exchange Commission.
b. PIGGYBACK REGISTRATIONS. DR shall notify all Holders of
Registrable Securities in writing at least thirty (30) days prior to
filing any registration statement under the Securities Act for
purposes of effecting a public offering of securities of DR
(including, but not limited to, registration statements relating to
offerings of securities of DR other than DR's initial public offering,
whether on behalf of DR or selling shareholders, but EXCLUDING
registration statements relating to any registration under Section
4.c. of this Agreement or to any employee benefit plan or a corporate
reorganization) and will afford each such Holder an opportunity to
include in such registration statement all or any part of the
Registrable Securities then held by such Holder. Each Holder desiring
to include in any such registration statement all or any part of the
Registrable Securities held by such Holder shall, within twenty (20)
days after receipt of the above-described notice from DR, so notify DR
in writing, and in such notice shall inform DR of the number of
Registrable Securities such Holder wishes to include in such
registration statement. If a Holder decides not to include all of its
Registrable Securities in any registration statement thereafter filed
by DR, such Holder shall nevertheless continue to have the right to
include any Registrable Securities in any subsequent registration
statement or registration statements as may be filed by DR with
respect to offerings of its securities, all upon the terms and
conditions set forth herein.
i. UNDERWRITING. If a registration statement under which
DR gives notice under this Section 4.b. is for an underwritten
offering, then DR shall so advise the Holders of Registrable
Securities. In such event, the right of any such Holder's
Registrable Securities to be included in a registration pursuant
to this Section 4.b. shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of
<PAGE>
such Holder's Registrable Securities in the underwriting to the
extent provided herein. All Holders proposing to distribute
their Registrable Securities through such underwriting shall
enter into an underwriting agreement in customary form with the
managing underwriter or underwriter(s) selected for such
underwriting. Notwithstanding any other provision of this
Agreement, if the managing underwriter determine(s) in good faith
that marketing factors require a limitation of the number of
shares to be underwritten, then the managing underwriter(s) may
exclude shares (including Registrable Securities) from the
registration and the underwriting, and the number of shares that
may be included in the registration and the underwriting shall be
allocated, FIRST, to DR; and SECOND, to each of the Holders
requesting inclusion of their Registrable Securities in such
registration statement on a pro rata basis based on the total
number of Registrable Securities then held by each such Holder;
PROVIDED, HOWEVER, that the right of the underwriters to exclude
shares (including Registrable Securities) from the registration
and underwriting as described above shall be restricted so that
all shares that are not Registrable Securities and are held or
controlled by individuals who are employees or directors of DR
(or any subsidiary of DR) shall first be excluded from such
registration and underwriting before any Registrable Securities
are so excluded. If any Holder disapproves of the terms of any
such underwriting, such Holder may elect to withdraw therefrom by
written notice to DR and the underwriter, provided that such
notice shall not be effective until ten (10) business days after
delivered to DR except that, if the registration statement has
been declared effective prior to the 10th day, such withdrawal
shall be of no effect. Any Registrable Securities excluded or
withdrawn from such underwriting shall be excluded and withdrawn
from the registration.
ii. EXPENSES. All expenses incurred in connection with a
registration pursuant to this Section 4.b. (excluding
underwriters' and brokers' discounts and commissions), including,
without limitation all federal and "blue sky" registration and
qualification fees, printers' and accounting fees, fees and
disbursements of counsel for DR and reasonable fees and
disbursements of one counsel for the selling Holders shall be
borne by DR to the extent permitted under federal and applicable
state laws.
c. FORM S-3 REGISTRATION. In case DR shall receive from any Holder
a written request or requests that DR effect a registration on Form
S-3 and any related qualification or compliance with respect to all or
a part of the Registrable Securities owned by such Holder or Holders,
then DR will:
i. NOTICE. Promptly give written notice of the purposed
registration and the Holder's or Holders' request therefor, and any
related qualification or compliance, to all other Holders or
Registrable Securities; and
ii. REGISTRATION. Use its diligent best efforts to effect such
registration as soon as possible and all such qualifications and
compliances as may be so requested and as would permit or facilitate
the sale and distribution of all or such portion of such Holder's or
Holders' Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any
other Holder or Holders joining in such request as are specified in a
written request given within twenty (20) days after receipt of such
written notice from DR; PROVIDED, HOWEVER, that DR shall not be
obligated to effect any such registration, qualification or compliance
pursuant to this Section 4.c.:
<PAGE>
(1) if Form S-3 is not available for such offering by the
Holders;
(2) if the Holders, together with the holders of any other
securities of DR 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
$500,000;
(3) if DR shall furnish to the Holders a certificate signed
by the President or Chief Executive Officer of DR stating that in
the good faith judgment of the Board of Directors of DR, it would
be seriously detrimental to DR and its shareholders for such Form
S-3 Registration to be effected at such time, in which event DR
shall have the right to defer the filing of the Form S- 3
registration statement no more than once during any twelve-month
period for a period of not more than one hundred twenty (120)
days after receipt of the request of the Holder or Holders under
this Section 4.c.
(4) if DR has within the twelve (12) month period preceding
the date of such request, already effected one (1) registration
on Form S-3 for the Holders pursuant to this Section 4.c.;
(5) in any particular jurisdiction in which DR 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
(6) for a period of up to ninety (90) days if the Chief
Executive Officer of DR certifies in writing to the Holders that
DR currently contemplates a public offering of its securities
within the next ninety (90) days.
iii. EXPENSES. Subject to the foregoing, DR shall file a
Form S-3 registration statement covering the Registrable
Securities and other securities so requested to be registered
pursuant to this Section 4.c. as soon as practicable after
receipt of the request or requests of the Holders for such
registration. DR shall pay all expenses incurred in connection
with each registration requested pursuant to this Section 4.c.
(excluding underwriters' or brokers' discounts and commissions),
including without limitation all filing, registration and
qualification, printers' and accounting fees and the reasonable
fees and disbursements of one counsel for the selling Holder or
Holders and counsel for DR.
d. OBLIGATIONS OF DR. Whenever required to effect the registration
of any Registrable Securities under this Agreement, DR shall, as
expeditiously as reasonably possible:
i. Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best
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
until all such Registrable Securities have been distributed,
whichever is shorter.
ii. Within such ninety (90) day period, 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.
<PAGE>
iii. Furnish to the Holders such number of copies of a
prospects, 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 the Registrable Securities owned by them that are
included in such registration.
iv. Use its 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 DR 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.
v. In the event of are 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.
vi. Notify each Holder of 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
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.
vii. Furnish, at the request of any Holder requesting
registration of Registrable Securities, on the date that such
Registrable Securities are delivered to underwriters for sale, if
such securities are being sold though underwriters, or, if such
securities are not being sold through underwriters, on the date
that the registration statement with respect to such securities
becomes effective, (i) an opinion, dated as of such date, of the
counsel representing DR for the purposes of such registration, in
form and substance as is customarily given to underwriters in an
underwritten public offering and reasonably satisfactory to a
majority in interest of the Holders requesting registration,
addressed to the underwriters, if any, and to the Holders
requesting registration of Registrable Securities and (ii) a
"comfort" letter dated as of such date, from the independent
certified public accountants of DR, in form and substance as is
customarily given by independent certified public accountants to
underwriters in an underwritten public offering and reasonably
satisfactory to a majority in interest of the Holders requesting
registration addressed to the underwriters, if any, and to the
Holders requesting registration of Registrable Securities.
e. FURNISH INFORMATION. It shall be a condition precedent to the
obligations of DR to take any action pursuant to Sections 4.b., 4.c or
4.d that the selling Holders shall furnish to DR such information
regarding themselves, the Registrable Securities held by them and the
intended method of disposition of such securities as shall be required
or reasonably requested to timely effect the registration of their
Registrable Securities.
f. INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under Sections 4.b., 4.c. or
4.d.:
i. By DR. To the extent permitted by law, DR will
indemnify and hold harmless each Holder, the partners, officers
and directors of each Holder, any underwriter
<PAGE>
(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 Securities Exchange Act
of 1934, as amended (the "1934 ACT"), against any losses, claims,
damages, or liabilities (joint or several) to which they may
become subject under the Securities Act, the 1934 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"):
(1) 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;
(2) 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
(3) any violation or alleged violation by DR of the
Securities Act, the 1934 Act, any federal or state securities law
or any rule or regulation promulgated under the Securities Act,
the 1934 Act or any federal or state securities law in connection
with the offering covered by such registration statement;
and DR will reimburse each such Holder, partner, officer or director,
underwriter or controlling person for any legal or other expenses reasonably
incurred by them, as incurred, in connection with investigating or defending any
such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the
indemnity agreement contained in this subsection 4.f.(i) 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 DR (which consent shall
not be unreasonably withheld), nor shall DR be liable in any 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.
ii. BY SELLING HOLDERS. To the extent permitted by law,
each selling Holder will indemnify and hold harmless DR, each of
its directors, each of its officers who have signed the
registration statement, each person, if any, who controls DR
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 within the meaning of the
Securities Act or the 1934 Act, against any losses, claims,
damages or liabilities (joint or several) to which DR or any such
director, officer, controlling person, underwriter or other such
Holder, partner or director, officer or controlling person of
such other Holder may become subject under the Securities Act,
the 1934 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 expressly for use in
connection with such registration; and each such Holder will
reimburse any legal or other expenses reasonably incurred by DR
or any such director, officer, controlling person, underwriter or
other Holder, partner, officer, director or controlling person of
such other Holder in connection with the investigating or
defending any such loss, claim, damage, liability or action;
PROVIDED, HOWEVER, that the
<PAGE>
indemnity agreement contained in this subsection 4.f.(ii) 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; and provided further, that the total
amounts payable in indemnity by a Holder under this Section
4.f.(ii) in respect of any Violation shall not exceed the net
proceeds received by such Holder in the registered offering out
of which such Violation arises.
iii. NOTICE. Promptly after receipt by an indemnified party
under this Section 4.f. 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 4.f., 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 conflict
of 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
prejudicial to its ability to defend such action, shall relieve
such indemnifying party of any liability to the indemnified party
under this Section 4.f., 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 4.f.
iv. DEFECT ELIMINATED IN FINAL PROSPECTUS. The foregoing
indemnity agreements of DR and Holders are subject to the
condition that, insofar as they relate to any Violation made in a
preliminary prospectus but eliminated or remedied in the amended
prospectus on file with the SEC at the time the registration
statement in question becomes effective or the amended prospectus
filed with the SEC pursuant to SEC Rule 424(b) (the "FINAL
PROSPECTUS"), such indemnity agreement shall not inure to the
benefit of any person if a copy of the Final Prospectus was
furnished to the indemnified party and was not furnished to the
person asserting the loss, liability, claim or damage at or prior
to the time such action is required by the Securities Act.
v. CONTRIBUTION. In order to provide for just and
equitable contribution to joint liability under the Securities
Act in any case in which either (i) any Holder exercising rights
under this Agreement, or any controlling person of any such
Holder, makes a claim for indemnification pursuant to this
Section 4.f. but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or the denial of the last right
of appeal) that such indemnification may not be enforced in such
case notwithstanding the fact that this Section 4.f. provides for
indemnification in such case, or (ii) contribution under the
Securities Act may be required on the part of any such selling
Holder or any such controlling person in circumstances for which
indemnification is provided under this Section 4.f.; then, and in
each such case, DR and such Holder will contribute to the
aggregate losses, claims, damages or liabilities to which they
may be subject (after contribution from others) in such
proportion so that such Holder is responsible for the
<PAGE>
portion represented by the percentage that the public offering
price of its Registrable Securities offered by and sold under the
registration statement bears to the public offering price of all
securities offered by and sold under such registration statement
and DR and other selling Holders are responsible for the
remaining portion; PROVIDED, HOWEVER, that, in any such case, (A)
no such Holder will be required to contribute any amount in
excess of the public offering price of all such Registrable
Securities offered and sold by such Holder pursuant to such
registration statement; and (B) no person or entity guilty of
fraudulent misrepresentation (within the meaning of Section 11(f)
of the Securities Act) will be entitled to contribution from any
person or entity who was not guilty of such fraudulent
misrepresentation.
vi. SURVIVAL. The obligations of DR and Holders under this
Section 4.f. shall survive the completion of any offering of
Registrable Securities in a registration statement and otherwise.
g. "MARKET STAND-OFF" AGREEMENT. Each Holder hereby agrees that it
or he shall not, to the extent requested by DR or an underwriter of
securities of DR, sell or otherwise transfer or dispose of any
Registrable Securities or other shares of stock of DR then owned by
such Holder (other than to donees who agree to be similarly bound) for
up to one hundred eighty (180) days following the effective date of a
registration statement of DR filed under the Securities Act; PROVIDED,
HOWEVER, that:
i. such agreement shall be applicable only to the first
such registration statement of DR which covers securities to be
sold on its behalf to the public in an underwritten offering but
not to Registrable Securities sold pursuant to such registration
statement; and
ii. all executive officers and directors and employees of
DR then holding Common Stock of DR enter into similar agreements.
In order to enforce the foregoing covenant, DR shall have the right to place
restrictive legends on the certificates representing the shares subject to this
Section and to impose stop transfer instructions with respect to the Registrable
Securities and such other shares of stock of each Holder and Ronning (and the
shares or securities of every other person subject to the foregoing restriction)
until the end of such period.
h. RULE 144 REPORTING. With a view to making available the benefits
of certain rules and regulations of the Commission which may at any
time permit the sale of the Registrable Securities to the public
without registration, after such time as a public market exists for
the Common Stock of DR, DR agrees to:
i. make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at
all times after the effective date of the first registration under the
Securities Act filed by DR for an offering of its securities to the
general public;
ii. use its best efforts to file with the Commission in a timely
manner all reports and other documents required of DR under the
Securities Act and the 1934 Act (at any time after it has become
subject to such reporting requirements); and
<PAGE>
iii. so long as a Holder owns any Registrable Securities, to
furnish to the Holder forthwith upon request a written statement by DR
as to its compliance with the reporting requirements of said Rule 144
(at any time after 90 days after the effective date of the first
registration statement filed by DR for an offering of its securities
to the general public), and of the Securities Act and the 1934 Act (at
any time after it has become subject to the reporting requirements of
the 1934 Act), a copy of the most recent annual or quarterly report of
DR, and such other reports and documents of DR as a Holder may
reasonably request in availing itself of any rule or regulation of the
Commission allowing a Holder to sell any such securities without
registration (at any time after DR has become subject to the reporting
requirements of the 1934 Act).
DR shall have no further obligations pursuant to Section 4.h. when, in
the opinion of counsel to DR, all shares held by all Holders may be sold by
such Holders under Rule 144(k) under the Securities Act.
i. TERMINATION OF DR'S OBLIGATIONS. DR shall have no obligations
pursuant to Sections 4.b. and 4.c. with respect to: (i) any request or
requests for registration made by any Holder on a date more than five
(5) years after the closing date of DR's initial public offering; or
(ii) any Registrable Securities proposed to be sold by a Holder in a
registration pursuant to Section 4.b. or 4.c. if, in the opinion of
counsel to DR, all such Registrable Securities proposed to be sold by
a Holder may be sold in a three-month period without registration
under the Securities Act pursuant to Rule 144 under the Securities
Act.
j. LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after
the date of this Agreement, DR shall not, without the prior written
consent of the Holders, enter into any agreement with any holder or
prospective holder of any securities of DR which would give such
prospective shareholder registration rights superior to those granted
to the Holders hereunder or which would allow such holder or
prospective holder to include such securities in any registration
filed under Section 4.2 hereof, unless under the terms of such
agreement, such holder or prospective holder may include such
securities in any such registration only to the extent that the
inclusion of its securities will not reduce the amount of the
Registrable Securities of the Holders which is included; PROVIDED,
HOWEVER, that DR may, without consent of the Holders, grant senior
registration rights to the managing underwriter of DR's initial public
offering in connection with the issuance of a warrant to such
underwriter provided that such registration rights are in compliance
with the requirements of the National Association of Securities
Dealers.
5. TECHNOLOGY LICENSING AGREEMENT. The technology licensing agreement dated
August 30, 1994 previously executed between DR and Fujitsu shall remain in
full force and effect and all parties agree to be subject to the rights and
obligations flowing from the technology license agreement as amended below
("TECHNOLOGY LICENSE AGREEMENT"). The Technology License Agreement is
hereby amended as follows:
a. Fujitsu specifically acknowledges that the provisions of section
3.1 have been fully satisfied and no obligations remain.
b. The following sentence is added to Section 1.2: "The term "DR
Technology" is intended to include only the technology referred to by
the parties as the "Dolphin" technology and described in the patent
applications listed in Exhibit A.
<PAGE>
c. Fujitsu and DR agree that the Technology is not employed in the
current business conducted by DR relating to digital distribution of
software via the Internet.
d. Section 3.3(b) is deleted.
e. Section 8 is deleted.
The parties agree that the Technology License Agreement shall survive any
termination or expiration of this Agreement.
6. NON-COMPETITION AGREEMENT. Promptly following the execution of this
Agreement, DR and Joel Ronning will execute and deliver a non-competition
agreement in the form approved by DR's Board.
7. TERM AND TERMINATION. This Agreement will continue from its effective date
until terminated as follows:
a. By a party, effective immediately, if Fujitsu or DR should become
the subject of any voluntary or involuntary bankruptcy, receivership
or other insolvency proceedings or make an assignment or other
arrangement for the benefit of its creditors, or if Fujitsu or DR
should be nationalized or have any of its material assets
expropriated; or
b. The right of Fujitsu to have its Fujitsu Nominee elected to the
Board of DR granted under Section 3 hereof shall terminate as provided
in Section 3 or immediately upon the closing of an initial public
offering of the Common Stock of DR.
c. The registration rights granted under Section 4 hereof shall
terminate as provided in Section 4 or after a period of five (5) years
following the closing of an initial public offering of the Common
Stock of DR.
8. GOVERNING LAW. The validity, interpretation and performance of this
Agreement shall be governed by the laws of the State of Minnesota, without
regard to the choice of law principles thereunder.
9. DISPUTE RESOLUTION. Any controversy arising out of or relating to this
Agreement, any modification or extensions hereof, or any order, sale or
performance hereunder, including any claim for damages, rescission, or
both, shall be settled by binding arbitration with one (1) arbitrator in
Hennepin County, Minnesota, in accordance with the Commercial Rules then
pertaining of the American Arbitration Association. Judgment on the award
may be entered in any Court of competent jurisdiction. The parties consent
that any process or notice of motion or other application to either of said
courts, and any paper in connection with arbitration, may be served by
certified mail, return receipt requested, by personal service or in such
other manner as may be permissible under the rules of the applicable court
or arbitration tribunal, provided a reasonable time for appearance is
allowed. The parties further agree that arbitration proceedings must be
instituted within eighteen (18) months after the claimed breach occurred,
and that the failure to institute arbitration proceedings within such
period shall constitute an absolute bar to the institution of any
proceedings and a waiver of all such claims. The prevailing party in any
arbitration or other legal proceedings shall be entitled, in addition to
any other rights or remedies it may have, to reimbursement for its expenses
incurred thereby and in any subsequent enforcement of a judgment including
court and arbitration costs, reasonable attorneys' fees, and witness fees
including those of expert witnesses.
<PAGE>
10. SPECIFIC PERFORMANCE. Each party's obligation under this Agreement is
unique. If any party should default in its obligations under this
Agreement, the parties each acknowledge that it would be extremely
impracticable to measure the resulting damages. Accordingly, the
nondefaulting party, in addition to any other available rights or remedies,
may sue in equity for specific performance, and the parties each expressly
waive the defense that a remedy in damages will be adequate. In particular,
the parties agree that Fujitsu shall be entitled to specific performance
with respect to its rights under Section 3 (Election of Fujitsu Nominee to
DR Board) and Section 4 (Registration Rights).
11. ASSIGNMENT.
a. Fujitsu may freely assign its rights and obligations under this
Agreement and all shares of DR Common Stock Fujitsu owns to
wholly-owned affiliates of Fujitsu; PROVIDED, HOWEVER, that such
assignment and transfer shall only be permitted to the extent that
applicable United States laws, including, without limitation,
applicable state and federal securities laws, permit.
b. DR may freely assign its rights and obligations under this
Agreement in connection with a merger or acquisition of DR or
substantially all of its assets. DR may otherwise assign its rights
and obligations hereunder only with the prior written consent of
Fujitsu and the Other Parties, but only to the extent that such Other
Parties own or are transferees, beneficially or of record, of shares
of Common Stock of DR currently owned by Joel Ronning.
c. Joel Ronning may transfer all shares of DR Common Stock he owns,
along with any and all rights related thereto pursuant to this
Agreement or otherwise, to MacUSA, Inc., Tech Squared Inc. or any of
their wholly-owned subsidiaries; PROVIDED, HOWEVER, that such
assignment and transfer shall only be permitted: (i) to the extent
that applicable United States laws, including, without limitation,
applicable state and federal securities laws, permit and (ii) such
transferee is bound in writing by Ronning's obligations as a
shareholder for the election of the Fujitsu Nominee under Section 3
hereof.
d. Any assignment or transfer pursuant to this Section 8 shall only
be valid if the assignor/transferor party provides the other parties
to this Agreement with prior written notice of such assignment or
transfer.
12. WAIVER.
a. The failure of any party to exercise promptly any right granted
hereunder or to require strict performance of any obligation of such
other parties hereunder shall not be deemed to be a waiver of such
right or the right to demand subsequent performance of any and all
such obligations by the non-performing party.
b. Notwithstanding the foregoing, the parties hereby expressly waive
any failure by DR to obtain any consent required under the Prior
Agreements or any other breach thereof.
13. SEVERABILITY. All provisions of this Agreement shall be deemed severable.
The enforceability, illegality or invalidity of any provision herein or
portion thereof shall not affect the enforceability, legality or validity
of any other, further or additional provision hereof, all of which shall
remain valid, binding and enforceable in accordance with their terms.
Should any provision, term or condition of this Agreement be held
unenforceable, illegal or invalid as being too broad with respect to
duration, scope or subject matter, such provision, term or condition shall
be deemed and construed to be reduced to the maximum duration, scope or
subject matter allowable under applicable law.
<PAGE>
14. NOTICE. All notices under this Agreement shall be in writing and shall be
given by Federal Express, DHL, other internationally recognized courier, or
facsimile addressed to the respective parties at their addresses set forth
on the signature page below, or to such other address of which a party may
advise the others in writing. Notices will be deemed given when sent.
15. ENTIRE AGREEMENT. Except as explicitly referenced herein with respect to
the Technology License Agreement and the Distribution Agreement between DR
and Fujitsu Software Corporation, this Agreement embodies the whole
agreement of the parties with respect to the subject matter hereof. There
are no promises, terms, conditions or obligations other than those
contained herein. No modification of this Agreement or any of its terms
shall be effective unless in writing and executed by the duly authorized
representatives of the parties.
16. COUNTERPARTS. This Agreement may be executed in any number of counterparts
each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the
day and year first above written.
DIGITAL RIVER, INC. Fujitsu LIMITED
(a Delaware corporation)
By /s/ Joel A. Ronning By /s/ Makoto Yoshioka
Its President Its Associate General Mgr
5198 West 76th Street
Edina, MN 55434 -------------------------
-------------------------
DIGITAL RIVER, INC. MACUSA, INC.
(a Minnesota corporation)
By /s/ Gary Smith By /s/ Joel A. Ronning
Its Secretary Its President
5198 West 76th Street 5198 West 76th Street
Edina, MN 55434 Edina, MN 55434
JOEL RONNING
/s/ Joel Ronning
6300 Smithtown Road
Victoria, MN
<PAGE>
EXHIBIT 10.6
HEADS OF AGREEMENT FOR INTERNATIONAL AGREEMENT
BETWEEN CHRISTOPHER J. SHARPLES AND DAVID A. TAYLOR
AND DIGITAL RIVER, INC.
The undersigned parties agree to the following:
Digital River Inc. ("DR") is engaged in the business of electronic distribution
of mass market computer software products by means of encryption/decryption
technology.
DR wishes to establish an international operation.
Christopher J. Sharples ("CJS") and David A. Taylor ("DAT") agree to enter into
an International Agreement with DR to establish and oversee the international
operations of Digital River, Inc. ("DRI") for a term of three years. DAT will
devote the time to this that is consistent with his other duties.
In accordance with the Stock Subscription Warrant of even date between the
parties, DR agrees to issue immediately to each of CJS and DAT warrants to
purchase 150,000 shares of common stock of DR at an exercise price of $2.00 per
share in lieu of any other consideration.
DR, CJS and DAT agree to negotiate promptly in good faith an International
Agreement for DRI in terms substantially in accordance with the following:
Terms of International Agreement: DT will enter into an agreement with CJS
and DAT to have CJS and DAT oversee the
establishment and running of a DR
international operation ("DRI") to be
based in the UK. The operations of DRI
will be aimed at the European, Middle
East and African (EMEA) markets. CJS
and DAT will be responsible for
overseeing all aspects of establishing
the DRI entity, upon approval from DR
including set-up of a legal entity in
the UK, staffing, securing office space,
etc. On an ongoing basis, CJS and DAT
will be responsible for overseeing the
day to day operations of DRI as well as
the ultimate performance of DRI.
DRI operational aspects: DRI will be funded initially by DR at
$1,000,000 based on the initial budget
to be approved between DR, CJS and DAT.
DRI will submit budgets to DR for
approval and will be required to have DR
approval for large variances from the
agreed upon budget levels. CJS and DAT
will establish longer-range operational
goals for submission to DR. These goals
and programs toward them will be the
basis for further investment in DRI by
DR.
<PAGE>
DR agrees to nominate CJS to be elected to the Board of Directors of DR. Joel
Ronning and Tech Squared, Inc. agree to vote their shares in favour of this
nominee so long as CJS and DAT collectively own at least 50% of the shares owned
by them as of the date hereof.
DR agrees that said Director will be provided with all financial information
distributed to the Board of Directors which includes but is not limited to
monthly financial statements and budgets.
Dated: February 25, 1998
DIGITAL RIVER, INC.
/s/Joel Ronning /s/Christopher J. Sharples
- ----------------------------------- -----------------------------------
Joel Ronning Christopher J. Sharples
President
/s/David A. Taylor
-----------------------------------
David A. Taylor
/s/Joel Ronning
- -----------------------------------
Joel Ronning
CEO
2.
<PAGE>
Exhibit 10.8
April 30, 1998
Greg Smith
Digital River Inc.
5198 W. 76th Street
Edina, MN 55439
Re: Termination of Lease between Tech Squared Inc. and Digital River Inc.
Dated April 22, 1998
Dear Greg:
This is to confirm Digital River Inc.'s intention to terminate the sublease
agreement ("sublease") related to office and warehouse space at 5198 W. 76th
Street, Edina, MN 55439 between Tech Squared Inc. ("Tech") and Digital River
Inc. ("DR"). Whereas you have indicated your intention to vacate the office
and warehouse space at the above listed address under the following
assumptions and conditions:
It has been assumed that DR would occupy the office and warehouse space
throughout the rental agreement between Tech Squared Inc. and Duke Realty,
which currently expires June 1999. Under typical real estate terminations it
is likely the tenant would require at least a 6-month to one-year termination
notice. By DR's intention of vacating the space by the end of July 1997 Tech
is put into a difficult position to sublet the office space being vacated.
It is upper level office space with no direct access unless modifications are
made. Thus, Tech stands to lose over $100,000 of rental payments. In order
to minimize the financial impact to Tech and to conduct this transaction in
an equitable and mutually beneficial manner Tech proposes the following:
1. DR will pay rent at the current rate of thirteen thousand dollars
($13,000) per month through the month of departure. This does not include
the intercompany telephone charge allocated to DR each month which will
continue to be charged through the month of departure.
2. For the period of the first of the month following the month of
departure through December 31, 1998 or until a party is found by either Tech
or DR to sublease the vacated space, whichever is earlier, DR will be charged
four-thousand three hundred fifty-three dollars ($4,353) for office rent. In
the event that a party is found to occupy any of the vacated office space, DR
will be responsible for the entire month's rent if the tenant occupies the
space after the 15th of the month. If they take possession prior to the 15th
DR will not be responsible for any of that month's rent. Under no
circumstances will a tenant be allowed to occupy the premises earlier than
the termination date as specified by a signed termination notification from
DR and received and signed by Tech.
3. Digital River will continue to pay warehouse rent as long as Digital
River product (including owned, consigned or otherwise transacted) remains in
the warehouse. The formula that has been used in the past will continue to
be used, i.e., # of Bins holding Digital River product/Total Bin Space *
Total Warehouse square footage *7.25 psf. Tech will calculate the warehouse
rent using the above formula on the first of each month to determine the
warehouse rent due from Digital River.
4. Digital River agrees that, pursuant to the Rent Agreement (the "Rent
Agreement") signed between Tech Squared Inc. and Digital River Inc. dated
July 1, 1997, Tech Squared Inc. will continue to amortize the deposit made
against intercompany charges at the rate of $924 per month through the month
of departure. Digital River also acknowledges that according to item #2 in
the Rent Agreement the unamortized portion of the deposit will not be
refundable to Digital River under any circumstances, regardless of whether
they continue to occupy the space.
TECH SQUARED INC.: DIGITAL RIVER, INC.:
By: /s/ Jeffrey L. Abramovitz Date 5/4/98 By: /s/ Joel A. Ronning Date 5/4/98
-------------------------- ------ -------------------- ------
Its: Controller Its: President
-------------------------- --------------------
<PAGE>
EXHIBIT 10.15
CONSENT TO ASSIGNMENT AND ASSUMPTION OF LEASE
THIS CONSENT TO ASSIGNMENT AND ASSUMPTION OF LEASE ("Consent") is entered
into effective as of April 22, 1998 ("Effective Date"), by CSM INVESTORS,
INC., a Minnesota corporation ("Landlord"), in favor of INTRANET INTEGRATION
GROUP, INC., a Minnesota corporation d/b/a Technical Publishing Solutions,
Inc. ("Assignor") and DIGITAL RIVER, INC., a Delaware corporation
("Assignee").
RECITALS
A. Landlord and Assignor, as the Tenant, are parties to that certain
Lease dated April 24, 1996 (the "Lease") whereby Landlord leases to Assignor the
premises ("Premises") consisting of approximately 32,919 square feet of area in
the Golden Triangle Business Center located at 9625-9675 West 76th Street, Eden
Prairie, Minnesota (the "Project"), as more fully described in the Lease.
B. Assignor and Assignee have executed that certain Assignment of
Lease dated April 21, 1998 with an effective date of July 15, 1998 (the
"Effective Date"), a true and correct copy of which is attached hereto as
EXHIBIT A (the "Assignment") whereby Assignor has assigned to Assignee, and
Assignee has assumed, all of Assignor's right, title, interest and
obligations in, to and under the Lease, subject to the convenants, terms and
conditions set forth therein.
C. As a condition of the Assignment, Assignor and Assignee have requested
that Landlord consent to and approve of the Assignment.
D. Landlord is willing to do so conditioned upon and subject to the terms
and conditions set forth herein.
NOW THEREFORE, FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency
of which are hereby acknowledged, Landlord hereby agrees an follows:
CONSENT
1. Landlord hereby consents to and approves of the Assignment, subject to
the terms hereof.
2. Notwithstanding Landlord's consent to the Assignment, Landlord does
not agree to and nothing contained herein or in the Assignment shall be
construed as a release of Assignor from its obligations, convenants, duties and
liabilities under the Lease monetary or otherwise.
3. Assignor and Assignee agree that Assignee shall be responsible for any
sums owing Landlord, or shall receive the benefit of any sums due from Landlord,
if any, derived form Landlord's annual reconciliation of Operating Expenses
incurred in the year 1998, to be performed in accordance with the Lease in the
year 1999.
4. Landlord consents and agrees to the following:
a. NOTICE ADDRESS: From and after the Effective Date, the address
for notices to the Tenant under Section 14.5 of the Lease shall
be as follows:
Digital River, Inc.
9625 W. 76th Street
Suite 150
Eden Prairie, MN 55344
Attn: Joel A. Rooning
b. IMPROVEMENTS. Landlord consents to Assignee making the
alterations and Improvements described and/or shown in the
attached EXHIBIT B (the "Work"). The Work shall be
<PAGE>
performed at Assignee's sole cost and expense by licensed and
insured contractors and in accordance with all of the
requirements, terms and conditions of the Lease, including
without limitation, Section 6.2 of the Lease.
c. PERMITTED USE. Landlord agrees that the permitted uses under
Section 1.5 shall include the sale of products by internet
commerce, including but not limited to software and digital
products.
d. SIGNAGE. Landlord consents to changing the name of the business
operating at the Premises to "Digital River, Inc." or upon
request of Assignee, a substantially similar name, and subject to
the terms of Section 3.2 and Exhibit D of the Lease, to a change
in the signage for the Premises to reflect the name change.
5. Except as specifically provided herein, nothing contained in this
Consent shall be construed to modify or alter any of the terms, convenants or
conditions of the Lease and the Lease shall remain in full force and effect.
6. Nothing contained in this Consent shall be construed as a consent to
any future assignment or sublease of all or any portion of the Premises by
either Assignor or Assignee.
7. This Consent may be executed in any number of counterparts, each of
which when so executed and delivered shall be deemed an original, but together
shall constitute one and the same instrument.
8. This Consent is expressly conditioned upon execution of this Consent
by Landlord's mortgage lender for the Project, USG Annuity & Life Company, and
if this Consent is not so executed, both the Assignment and this Consent shall
be full and void and of no effect.
IN WITNESS WHEREOF, Landlord has executed this Consent effective as of the day
and year first above written.
LANDLORD:
CMS INVESTORS, INC.,
a Minnesota corporation
BY /s/ (Signature Illegible)
Title: V.P.
[stamped not shown]
CONSENT OF LENDER
The undersigned, being the present holder of an Assignment of Rents and Leases
dated September 5, 1996 executed by CSM Investors, Inc. in favor of the
undersigned, relative to the project commonly known as the Golden Triangle
Business Center located in Eden Prairie, Minnesota, hereby consents to the above
described Assignment, subject to and conditioned upon the same terms and
conditions as set forth hereinabove for Landlord's consent.
Dated: May 4, 1998 USG ANNUITY & LIFE COMPANY,
an Oklahoma corporation
Inc. Investment Management LLC,
its authorized representation
By: /s/ Daniel J. Foley
Daniel J. Foley
Its: Vice President
<PAGE>
ASSIGNMENT OF LEASE
THIS ASSIGNMENT is executed as of this 21st day of April, 1998, by INTRANET
INTEGRATION GROUP, INC., a Minnesota corporation ("Assignor"), in favor of
DIGITAL RIVER, INC., a Delaware corporation ("Assignee").
RECITALS
Assignor, as Tenant, and CSM Investors, Inc., a Minnesota corporation, as
Landlord ("Landlord") entered into that certain Lease (the "Lease") dated
April 24, 1996 regarding 32,919 square feet of space in the Golden Triangle
Business Center, located at 9625-9675 West 76th Street, Eden Prairie,
Minnesota (the "Premises").
Assignor desires to sell, transfer, convey and assign to Assignee, and
Assignee desires to acquire and assume Assignor's interest in the Lease,
according to the terms and conditions set forth hereinbelow.
NOW, THEREFORE, in consideration of the mutual promises herein and other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged by both parties, Assignor and Assignee agree as follows:
1.) RECITALS. The foregoing recitals are correct and are incorporated
herein.
2.) ASSIGNMENT AND ASSUMPTION. As of the Effective Date (defined below):
(i) Assignor hereby assigns, transfers and conveys the Tenant's interest in the
Lease to Assignee and (ii) Assignee hereby assumes and agrees to perform all of
the obligations of the Tenant under the Lease that arise from and after the
Effective Date hereof in accordance with the terms and conditions set forth in
the Lease.
3.) REPRESENTATIONS AND WARRANTIES. Assignor represents and warrants to
Assignee as follows:
a. A true and complete copy of the Lease is attached hereto as EXHIBIT
A and it is the only instrument and agreement in effect between Landlord
and Assignor. The Lease contains the entire agreement between Landlord
and Assignor concerning the Premises. The Lease is in full force and
effect and has not in any way been modified, amended, terminated or
rescinded.
(b) To the best of Assignor's knowledge, there exists no default nor any
event that, with the passing of time or delivery of notice or both, would
constitute a default under the Lease.
<PAGE>
(c) Rent and all other amounts due and payable by Assignor under the Lease
(collectively, the "Rent") are current and no Rent or other amount is
presently due and payable by Assignor to Landlord, including any
retroactive adjustments to Rent.
(d) Assignor has not issued or received any notice of cancellation,
termination or any other document affecting the Lease in any way, and has
no knowledge of any violation of any governmental statute, regulation or
ordinance relating to the Premises or the Lease.
(e) Assignor has good right to assign and transfer the Lease (subject to
obtaining the Consent of Landlord). The Lease is free and clear of all
charges and encumbrances.
(f) Assignor has received no notice of actual or threatened reduction or
curtailment of any utility service supplied to the Premises, nor of any
action or proceeding in condemnation, eminent domain, or foreclosure in
connection with or relating to the Premises.
(g) Assignor has no notice of any actual or threatened cancellation or
suspension of any certificates of occupancy for all or any portion of the
Premises.
(h) Assignor is not in default in any of its legal obligations or
liabilities regarding the Premises.
(i) To the best of Assignor's knowledge, Assignor's current use of the
Premises does not violate any federal, state, local or other governmental
building, zoning, health, accessibility, safety, planning, subdivision, or
other law, ordinance, or regulation, or any applicable private restriction,
and such use is a legal conforming use.
(j) Assignor has not received any notice of, nor is Assignor aware of, any
action, litigation, investigation, condemnation, violation, or proceeding
of any kind from any federal, state or local government entity against
Assignor relating to any portion of the Premises.
(k) Assignor is not aware of any defects in the structures cm other
improvements on the Premises, including but without limitation the roof,
fixtures, systems or structure of such improvements.
Assignee is relying on the accuracy of the foregoing representations and
warranties in entering into this Agreement. The foregoing representations and
warranties are a material inducement to Assignee to enter into this Agreement.
4.) EFFECTIVE DATE. The Effective Date of this Assignment shall be July
15, 1998, or such earlier date as may be mutually agreed by Assignor and
Assignee.
5.) DELIVERY OF OCCUPANCY.
(a) As of May 1, 1998, Assignee shall have access to approximately 1,500
square feet of the Premises as shown cross-hatched on the plan attached
hereto as EXHIBIT B (the
2.
<PAGE>
"Partial Premises"). Assignee shall pay rent to Assignor in the amount of
Three Thousand and no/100 Dollars ($3,000.00) in consideration for such
early occupancy, which amount shall be due and payable on or before May 1,
1998 and shall be considered gross rent, inclusive of all base rent,
additional rent, operating costs, real estate taxes, utility costs and all
other charges, fees, costs and expenses. Prior to May 1, 1998, Assignor
shall remove all personal property and all other items from the Partial
Premises and shall deliver the Partial Premises in broom/vacuum clean
condition, at Assignor's expense.
(b) Assignee shall pay all costs and expenses in connection with setting
up the Partial Premises for Assignee's use.
(c) During said early occupancy of the Partial Premises, Assignor will
make available to Assignee 20 of 24 frames on one of its T-1 Lines;
Assignee will work with the MIS Director of Assignor on accessing such line
to not disrupt Assignor's systems. Amy costs associated with activating
such T-1 Line shall be at the cost of Assignee and Assignee further agrees
to diligently work toward its own T-1 Line in a reasonable and timely
fashion.
(d) On the Effective Date, Assignor shall deliver all of the Premises to
Assignee in broom/vacuum clean condition. If such occupancy commences on a
date other than the first of a calendar month, then base rent, additional
rent and other charges under the Lease, and any other operating expenses in
connection with the Premises, shall be prorated between Assignor and
Assignee as of the date of such occupancy.
(e) The raised floor production area within the Premises shall remain
intact and shall not be altered by Assignor. Without limitation, the
raised floor, air conditioning equipment and fixtures, and fire safety
equipment and systems shall not be removed or altered by Assignor.
However, Assignor shall remove its computer equipment and personal
property.
6.) HVAC CERTIFICATION. Prior to the Effective Date, Assignor shall
deliver to Assignee a certification from a licensed, bonded and insured HVAC
contractor that all heating, ventilating and air conditioning equipment serving
the Premises is in proper working order.
7.) SECURITY DEPOSIT. Prior to the execution of this Agreement, Assignee
deposited with Assignor the sum of Twenty Thousand and no/100 Dollars
($20,000.00). Contemporaneously with the execution of this Assignment, Assignee
has deposited with Assignor an additional sum of Eleven Thousand and no/100
Dollars ($11,000.00). Said total of Thirty-one Thousand and no/100 Dollars
($31,000.00) shall be a security deposit for the performance by Assignee of the
terms and covenants of the Lease hereby assumed by Assignee. If Assignee fails
to keep and perform the terms and covenants of the Lease assumed by Assignee and
Assignor incurs loss or damage as a result of Landlord pursuing such payment or
performance from Assignor, then Assignor shall have the right to apply such
portion of said deposit as may be necessary to reimburse Assignor for such loss
or damage sustained. Said deposit shall be returned to Assignee, less any
depletion thereof as a result of the provisions of
3.
<PAGE>
this paragraph, upon the expiration or termination of the Lease. If, at any
time prior to the expiration or termination of the Lease, Assignor is released
from liability under the Lease, then the entire deposit shall be promptly
returned to Assignee.
8.) MISCELLANEOUS. The headings used herein are for convenience only and
are not to be used in interpreting this Agreement. This Agreement shall be
construed, enforced and interpreted under the laws of the State of Minnesota.
This Agreement is the entire agreement between Assignor and Assignee regarding
the subject matter hereof; any prior agreements are superseded hereby. This
Agreement may not be modified, amended or changed orally, but only by an
agreement in writing signed by the parties hereto. Neither party shall be
deemed to have waived any rights under this Agreement unless such waiver is
given in writing and signed by such party. If any provision of this Agreement
is invalid or unenforceable, such provision shall be deemed to be modified to be
within the limits of enforceability or validity, if feasible; however, if the
offending provision cannot be so modified, it shall be stricken and all other
provisions of this Agreement in all other respects shall remain valid and
enforceable. In the event of a breach or default under this Agreement, the
non-defaulting party shall be entitled to recover reasonable attorneys' fees and
court costs incurred to enforce its rights regarding such default or breach.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment of
Lease of the day and year first above written.
ASSIGNOR:
INTRANET INTEGRATION GROUP,
INC.
Dated: 4-21-98 By: /s/ (Signature Illegible)
Its: CFO
ASSIGNEE:
DIGITAL RIVER, INC.
Dated: 4-21-98 By: /s/ Joel A. Ronning
Its: President
<PAGE>
EXHIBIT A TO ASSIGNMENT OF LEASE
LEASE
ARTICLE 1. LEASE TERMS
1.1 LANDLORD AND TENANT. This lease ("Lease") is entered into this 24th day of
April, 1996 by and between CSM INVESTORS, INC., a Minnesota corporation,
("Landlord") and INTRANET INTEGRATION GROUP, INC. d/b/a TECHNICAL PUBLISHING
SOLUTIONS, INC., a Minnesota corporation, ("Tenant").
1.2 PREMISES. Landlord hereby rents, leases, lets and demises to Tenant the
following described property ("Premises") as illustrated on the site plan
attached hereto as EXHIBIT A: approximately 15,242 square feet of warehouse
space and 17,677 square feet of office space (32,919 total square feet) in the
GOLDEN TRIANGLE BUSINESS CENTER located at 9625-9675 West 76th Street in Eden
Prairie, Minnesota, and consisting of approximately 149,215 square feet
("Building"). A floor plan of the Premises and a description of improvements,
if any, to be constructed are attached hereto as
EXHIBITS B and C.
1.3 LEASE TERM. The term of this Lease shall commence on August 1, 1996
(Commencement Date") and shall terminate eighty-four (84) months thereafter on
July 31, 2003, unless sooner terminated as hereinafter provided. In the event
that Tenant does not vacate the Premises upon the expiration or termination of
this Lease, Tenant shall be a tenant at will for the holdover period and all of
the terms and provisions of this Lease shall be applicable during that period,
except that Tenant shall pay Landlord as base rental for the period of such
holdover an amount equal to two (2) times the base rent which would have been
payable by Tenant had the holdover period been a part of the original term of
this Lease, together with all additional rent as provided in this Lease. Tenant
agrees to vacate and deliver the Premises to Landlord upon Tenant's receipt of
notice from Landlord to vacate. The rental payable during the holdover period
shall be payable to Landlord on demand. No holding over by Tenant early
occupancy of the Premises on July 1, 1996 under the same terms and conditions
contained herein, exclusive of rent and operating expenses.
<TABLE>
<CAPTION>
1.4 BASE RENT. Base Rent is: Months Monthly Base Rent Per Sq. Ft.
------ ----------------- ----------
<S> <C> <C> <C>
1-84 $20,519.51 $7.48
</TABLE>
1.5 PERMITTED USE: Operation of a computer assisted, document based
printing facility, and distribution of hardware and
software products.
1.6 SECURITY DEPOSIT: None ($0.00)
1.7 PRO-RATA SHARE: Twenty-two and 06/100 percent (22.06%) subject to
adjustment as provided in Section 2.2 hereof.
1.8 ADDRESSES. LANDLORD'S ADDRESS: TENANT'S ADDRESS:
------------------ -----------------
CSM INVESTORS, INC. INTRANET INTEGRATION GROUP, INC.
2575 UNIVERSITY AVENUE WEST 9625 WEST 76TH STREET, SUITE 150
SUITE 150 EDEN PRAIRIE, MN 55344
ST. PAUL, MN 55114-1024
(612) 646-1717
ARTICLE 2. RENT, OPERATING EXPENSES AND SECURITY DEPOSIT
2.1 BASE RENT. Tenant agrees to pay monthly as base rent during the term of
this Lease the sum of money set forth in Section 1.4 of this Lease, which
amount shall be payable to Landlord at the address shown above. One monthly
installment shall be due and payable on or before the first day of each
calendar month succeeding the Commencement Date during the term of this
Lease; provided, if the Commencement Date should be a date other than the
first day of a calendar month, the monthly rental set forth above shall be
prorated to the end of that calendar month, and all succeeding installments
of rent shall be payable on or before the first day of each succeeding
calendar month during the term of this Lease. Tenant shall pay, as
additional rent, all other sums due under this Lease. Notwithstanding
anything in this Lease to the contrary, if Landlord, for any reason
whatsoever (other than Tenant's default), cannot deliver possession of the
Premises to the Tenant on the Commencement Date, this Lease shall not be void
or voidable, nor shall Landlord be liable for any loss or damage resulting
therefrom, nor shall the expiration of the term be extended, but all rent
<PAGE>
shall be abated until Landlord delivers possession. Notwithstanding the
above, in the event Landlord has not delivered the Premises to the Tenant on
or before September 1, 1996 due to non-Tenant caused delays, Tenant may
terminate this Lease with no further obligation.
Landlord and Tenant agree that the base rental rate contained herein is based on
construction costs estimated at $566,390.00. Tenant agrees to contribute
$75,000.00 towards construction of the Premises, payable to Landlord in
$25,000.00 lump sum payments, the first payable upon lease execution by both
parties, the second payable thirty (30) days following lease execution, and the
third due sixty (60) days after lease execution.
Construction cost increases of savings or $30,000.00 of less above or below the
estimated construction cost of $566,390.00 shall be amortized at nine percent
(9%) over the original term of this Lease and added or subtracted from the
monthly base rental. Tenant improvement cost savings above $30,000.00 shall
benefit the Landlord, and additional tenant improvement costs of more than
$30,000.00 over $566,390.00 shall be paid to Landlord upon finalization of
tenant improvement costs, at which time Landlord and Tenant agree to enter into
lease addendum depicting the new base rental rate, if such rate is adjusted as
contained in this section.
2.2 OPERATING EXPENSES. Tenant shall also pay as additional rent Tenant's pro
rata share of the operating expenses of Landlord for the Building. Landlord may
invoice Tenant monthly for Tenant's pro rata share of the estimated operating
expenses for each calendar year, which amount shall be adjusted from
time-to-time by Landlord based upon anticipated operating expenses. Within six
(6) months following the close of each calendar year, Landlord shall provide
Tenant an accounting showing in reasonable detail the computations of additional
rent due under this Section. In the event the accounting shows that the total
of the monthly payments made by Tenant exceeds the amount of additional rent due
by Tenant under this Section, the accounting shall be accompanied by evidence of
a credit to Tenant's account. In any event the accounting shows that the total
of the monthly payments made by Tenant is less than the amount of additional
rent due by Tenant under this Section, the accounting shall be accompanied by an
invoice for the additional rent. Notwithstanding any other provisions in this
Lease, during the year in which this Lease terminates, Landlord, prior to the
termination date, shall have the option to invoice Tenant for Tenant's pro rata
share of the operating expenses based upon the previous year's operating
expenses. If this Lease shall terminate on a day other than the last day of a
calendar year, the amount of any additional rent payable by Tenant applicable to
the year in which the termination shall occur shall be prorated on the ration
that the number of days from the commencement of the calendar year to and
including such termination date bears to 365. Tenant agrees to pay any
additional rent due under this Section within ten (10) days following receipt of
the invoice of accounting showing additional rent due. Tenant's pro rata share
set forth in Section 1.7 shall, subject to reasonable adjustment by Landlord, be
equal to a percentage based upon a fraction, the numerator of which is the total
area of the Premises as set forth in Article 1 and the demoninator of which
shall be the net rentable area of the Building, as the same may change from time
to time.
2.3 DEFINITION OF OPERATING EXPENSES. The term "operating expenses"
includes all expenses incurred by Landlord with respect to the maintenance
and operation of the Building, including, but not limited to, the following:
maintenance, repair and replacement costs; electricity, fuel, water, sewer,
gas and other common Building utility charges; equipment used for maintenance
and operation of the Building; operational expenses; exterior window washing
and janitorial services; trash and snow removal; landscaping and pest
control; management fees, not to exceed four percent (4%) of gross rents,
wages and benefits payable to employees of Landlord whose duties are directly
connected with the operation and maintenance of the Building; all services,
supplies, repairs, replacements or other expenses for maintaining and
operating the Building or project including parking and common areas;
improvements made to the Building which are required under any governmental
law or regulation that was not applicable to the Building at the time it was
constructed; installation of any device or other equipment which improves the
operating efficiency of any system within the Premises and thereby reduces
operating expenses; all other expenses which would
-1-
<PAGE>
generally be regarded as operating, repair, replacement and maintenance
expenses; all real property taxes and installments of special assessments,
including dues and assessments by means of deed restrictions and/or owner's
associations which accrue against the building during the term of this Lease and
legal fees incurred in connection with actions to reduce the same; and all
insurance premiums Landlord is required to pay or deems necessary to pay,
including fire and extended coverage, and rent loss and public liability
insurance, with respect to the Building. Operating expenses which, for tax
purposes would be considered capital improvements, will be amortized over the
useful life of the expense.
2.4 INCREASE IN INSURANCE PREMIUMS. If an increase in any insurance premiums
paid by Landlord for the Building is caused by Tenant's use of the Premises or
if Tenant vacates the Premises and causes an increase in such premiums, then
Tenant shall pay as additional rent the amount of such increase to Landlord.
ARTICLE 3. OCCUPANCY AND USE
3.1 USE. Tenant warrants and represents to Landlord that the Premises shall be
used and occupied only for the purpose as set forth in Section 1.5. Tenant shall
occupy the Premises, conduct its business and control its agents, employees,
invitees and visitors in such a manner as is lawful, reputable and will not
create a nuisance. Tenant shall not permit any operation which emits any odor
or matter which intrudes into other portions of the Building or otherwise
interfere with, annoy or disturb any other lessee in its normal business
operations or Landlord in its management of the Building. tenant shall not
permit any waste on the Premises to be used in any way which would, in the
opinion of Landlord, be extra hazardous on account of fire or which would, in
any way, increase or render void the fire insurance on the Building.
3.2 SIGNS. No sign of any type or description shall be erected, placed or
painted in about the Premises or Building which are visible from the exterior of
the Premises, except those signs submitted to Landlord in writing, and which
signs are in conformance with Landlord's sign criteria, which is attached hereto
as EXHIBIT D.
3.3 COMPLIANCE WITH LAWS, RULES AND REGULATIONS. Tenant, at Tenant's sole cost
and expense, shall comply with all laws, ordinances, orders, rules and
regulations of state, federal, municipal or other agencies or bodies having
jurisdiction over the use, condition or occupancy of the Premises. Tenant will
comply with the reasonable rules and regulations of the Building adopted by
Landlord. Landlord shall have the right at all times to change and amend the
rules and regulations in any reasonable manner as may be deemed advisable for
the safety, care, cleanliness, preservation of good order and operation or use
of the Building or the Premises. All rules and regulations of the Building will
be sent by Landlord to Tenant in writing and shall thereafter be carried out and
observed by Tenant.
3.4 WARRANTY OF POSSESSION. Landlord warrants that it has the right and
authority to execute this Lease, and Tenant, upon payment of the required rents
and subject to the terms, conditions, covenants and agreements contained in this
Lease, shall have possession of the Premises during the full term of this Lease
as well as any extension of renewal thereof. Landlord shall not be responsible
for the acts or omissions of any other lessee or third party that may interfere
with Tenant's use and enjoyment of the Premises, however, Landlord shall join
Tenant in protecting Tenant's rights to quiet enjoyment with respect to acts, of
any third party.
3.5 RIGHT OF ACCESS. Landlord or its authorized agents shall, during
reasonable business hours and in the presence of a Tenant representative,
except in the case of an emergency, have the right to enter the Premises to
inspect the same, to show the Premises to prospective purchasers, lessees,
mortgagees, insurers or other interested parties, and to alter, improve or
repair the Premises or any other portion of the Building. Tenant hereby
waives any claim for damages for injury or inconvenience to or interference
with Tenant's business, any loss of occupancy or use of the Premises, and any
other loss occasioned thereby. Tenant shall not change Landlord's lock
system or in any other manner prohibit Landlord form entering the Premises.
Landlord shall have the right to use any and all means which Landlord may
deem proper to open any door in an emergency without liability therefor.
Tenant shall permit Landlord to erect, use, maintain and repair pipes,
cables, conduits, plumbing, vents and wires in, to and through the Premises
as often and to the extent that Landlord may now or hereafter deem to be
necessary or appropriate for the proper use, operation and maintenance of the
Building.
ARTICLE 4. UTILITIES AND ACTS OF OTHERS
4.1 BUILDING SERVICES. Tenant shall pay when due, all charges for utilities
furnished to or for the use or benefit of Tenant or the Premises. Tenant shall
have no claim for rebate of rent on account of any interruption in service.
4.2 THEFT OR BURGLARY. Landlord shall not be liable to Tenant for losses to
Tenant's property or personal injury caused by criminal acts or entry by
unauthorized persons into the Premises or the Building, unless such loss or
injury is caused by the criminal act or gross negligence of the Landlord or its
representatives.
ARTICLE 5. REPAIRS AND MAINTENANCE
5.1 LANDLORD REPAIRS. Landlord shall not be required to make any improvements
replacements or repairs of any kind or character to the Premises or the Building
during the term of this Lease except as are set forth in this Section. Landlord
shall maintain only the roof, foundation, parking and common areas, the
structural soundness of the exterior walls, doors, corridors, and other
structures serving the Premises, provided, that Landlord's cost of maintaining,
replacing and repairing the items set forth in this Section are operating
expenses subject to the additional rent provisions in Section 2.2 and 2.3.
Landlord shall not be liable to Tenant, except as expressly provided in this
Lease, for any damage or inconvenience, and Tenant shall not be entitled to any
abatement or reduction of rent by reason of any repairs, alterations or
additions made by Landlord under this Lease.
5.2 TENANT REPAIRS. Tenant shall, at all times throughout the term of this
Lease, including renewals and extensions, and at its sole expense, keep and
maintain the Premises in a clean, safe, sanitary and first class condition and
in compliance with all applicable laws, codes, ordinances, rules and
regulations. Tenant's obligations hereunder shall include, but not be limited
to, the maintenance repair and replacement if necessary, of all heating,
ventilation, air conditioning lighting and plumbing fixtures and equipment,
fixtures, motors and machinery, all interior walls, partitions, doors and
windows, including the regular painting thereof, all exterior entrances,
windows, doors and docks and the replacement of all broken glass. When used in
this provision, the term "repairs" shall include replacements or renewals when
necessary, and all such repairs made by the Tenant shall be equal in quality and
class to the original work. The Tenant shall keep and maintain all portions of
the Premises and the sidewalk and areas adjoining the same in a clean and
orderly condition, free of accumulation of dirt, rubbish, snow and ice. If
Tenant fails, refuses or neglects to maintain or repair the premises as required
in this lease after notice shall have been given Tenant in accordance with this
Lease, Landlord may make such repairs without liability to Tenant for any loss
or damage that may accrue to Tenant's merchandise, fixtures or other property or
to Tenant's business by reason thereof, and upon completion thereof, Tenant
shall pay to Landlord all costs plus fifteen percent (15%) for overhead incurred
by Landlord in making such repairs upon presentation to Tenant of bill therefor.
Landlord agrees to assign all applicable warranties on equipment to Tenant upon
completion of the tenant improvements.
5.3 TENANT DAMAGES. Tenant shall not allow any damage to be committed on any
portion of the Premises or Building or common areas, and at the termination of
this lease, by lapse of time or otherwise, Tenant shall deliver the Premises to
Landlord in as good condition as existed at the Commencement Date of this Lease,
ordinary wear and tear excepted. The cost and expense of repairs necessary to
restore the condition of the Premises shall be borne by Tenant.
ARTICLE 6. ALTERATIONS AND IMPROVEMENTS
6.1 LANDLORD IMPROVEMENTS. If construction to the Premises is to be performed
by Landlord prior to or during Tenant's occupancy, Landlord will complete the
construction of the improvement to the Premises in accordance with plans and
specifications agreed to by Landlord and Tenant, which plans and specifications
are attached hereto as EXHIBITS B AND C. Within seven (7) days of receipt of
plans and specifications, Tenant shall execute a copy of the plans and
specifications and, if applicable, change orders setting forth the amount of any
costs to be borne by Tenant. In the event Tenant fails to execute the plans and
specifications and change orders within the seven (7) day period, Landlord may,
at its sole option, declare this Lease cancelled or notify Tenant that the base
rent shall commence on the completion date even though the improvements to be
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constructed by Landlord may not be complete. Any changes or modifications to
the approved plans and specifications shall be made and accepted by written
change orders or agreement signed by Landlord and Tenant and shall constitute an
amendment to this Lease. Tenant shall have the option to choose one contractor
to bid on the tenant improvement work depicted in EXHIBITS B AND C, subject to
Landlord's reasonable selection criteria, and Tenant shall have the right to
participate in the selection of the general contractor in cooperation with
Landlord.
6.2 TENANT IMPROVEMENTS. Tenant shall not make or allow to be made any
alterations or physical additions in or to the Premises without first obtaining
the written consent of Landlord, which consent may in the sole and absolute
discretion of Landlord be denied. Any alterations, physical additions or
improvements to the Premises made by Tenant shall at once become the property of
Landlord and shall be surrendered to Landlord upon the termination of this
Lease; provided, however, Landlord, at its option, may require Tenant to remove
any physical additions and/or repair any alterations to be borne by Tenant.
This clause shall not apply to moveable equipment or furniture owned by Tenant,
which may be removed by Tenant at the end of the term of this Lease if Tenant is
not then in default and if such equipment and furniture are not subject to any
other rights, liens and interestS of Landlord.
ARTICLE 7. CASUALTY AND INSURANCE
7.1 SUBSTANTIAL DESTRUCTION. If all or substantial portion of the Premises or
the Building should be totally destroyed by fire or other casualty, or if the
Premises or the Building should be damaged so that rebuilding cannot reasonably
be completed within one hundred eighty (180) working days after the date of
written notification by Tenant to Landlord of the destruction, or if insurance
proceeds are not made available to Landlord, or are inadequate, for restoration,
this Lease shall terminate at the option of Landlord by written notice to Tenant
within sixty (60) days following the occurrence, and the rent shall be abated
for the unexpired portion of the Lease effective as of the date of the written
notification.
7.2 PARTIAL DESTRUCTION. If the Premises should be partially damaged by fire
or other casualty, and rebuilding or repairs can reasonably be completed within
one hundred eighty (180) working days from the date of written notification by
Tenant to Landlord of the destruction, and insurance proceeds are adequate and
available to Landlord for restoration, this Lease shall not terminate, and
Landlord shall at its sole risk and expense proceed with reasonable diligence to
rebuild or repair the Building or other improvements to substantially the same
condition in which they existed prior to the damage. If the Premises are to be
rebuilt or repaired and are untenantable in whole or in part following the
damage, and the damage or destruction was not caused or contributed to by act or
negligence of Tenant, its agents, employees, invitees or those for whom Tenant
is responsible, the rent payable under this Lease during the period for which
the Premises are untenantable shall be adjusted to such an extent as may be fair
and reasonable under the circumstances. In the event that Landlord fails to
complete the necessary repairs or rebuilding within one hundred eighty (180)
working days from the date of written notification by Tenant to Landlord of the
destruction, Tenant may at its option terminate this Lease by delivering written
notice of termination to Landlord, whereupon all rights and obligations under
this Lease shall cease to exist.
7.3 PROPERTY INSURANCE. Landlord shall not be obligated in any way or manner
to insure any personal property (including, but not limited to, any furniture,
machinery, goods or supplies) of Tenant upon or within the Premises, any
fixtures installed or paid for by Tenant upon or within the Premises, or any
improvements which Tenant may construct on the Premises. Tenant shall maintain
property insurance on its personal property and shall also maintain plate glass
insurance. Tenant shall have no right in or claim to the proceeds of any policy
of insurance maintained by Landlord even if the cost of such insurance is borne
by Tenant as set forth in Article 2.
7.4 WAIVER OF SUBROGATION. Anything in this Lease to the contrary
withstanding, Landlord and Tenant hereby waive and release each other of and
from any and all right of recovery, claim, action or cause of action, against
each other, their agents, officers and employees, for any loss or damage that
may occur to the Premises, the improvements of the Building or personal
property within the Building, by reason of fire or the elements, regardless
of cause or origin, including negligence of Landlord or Tenant and their
agents, officers and employees. Landlord and Tenant agree immediately to
give their respective insurance companies which have issued policies of
insurance covering all risk of direct physical loss, written notice of the
terms of the mutual waivers contained in this Section.
7.5 HOLD HARMLESS. Landlord shall not be liable to Tenant's employees, agents,
invitees, licensees or visitors, or to any other person, for an injury to person
or damage to property on or about the Premises caused by any act or omission of
Tenant, its agents, servants or employees, or of any other person entering upon
the Premises under express or implied invitation by Tenant, or caused by the
improvements located on the Premises becoming out of repair, the failure or
cessation of any service provided by Landlord (including security service and
devices), or caused by leakage of gas, oil, water or steam or by electricity
emanating from the Premises. Tenant agrees to indemnify and hold harmless
Landlord of and from any loss, reasonable attorney's fees, expenses or claims
arising out of any such damage or injury.
7.6 PUBLIC LIABILITY INSURANCE. Tenant shall during the term hereof keep in
full force and effect at its expense a policy or policies of public liability
insurance with respect to the Premises and the business of Tenant, on terms and
with companies approved in writing by Landlord, in which both Tenant and
Landlord shall be covered by being named as insured parties under single limit
coverage for injury or death. Such policy or policies shall provide that thirty
(30) days' written notice must be given to Landlord prior to cancellation
thereof. Tenant shall furnish evidence satisfactory to Landlord at the time
this Lease is executed that such coverage is in full force and effect.
ARTICLE 8. CONDEMNATION
8.1 SUBSTANTIAL TAKING. If all or a substantial part of the Premises are taken
for any public or quasi-public use under any governmental law, ordinance or
regulation, or by right of eminent domain or by purchase in lieu thereof, and
the taking would prevent or materially interfere with the use of the Premises
for the purpose for which it is then being used, this Lease shall terminate and
the rent shall be abated during the unexpired portion of this Lease effective on
the date physical possession is taken by the condemning authority. Tenant shall
have no claim to the condemnation award or proceeds in lieu thereof, except that
Tenant shall be entitled to a separate award for the cost of removing and moving
its personal property.
8.2 PARTIAL TAKING. If all or a substantial part of the Premises are taken for
any public or quasi-public use under any governmental law, ordinance or
regulation, or by right of eminent domain or by purchase in lieu thereof, and
this Lease is not terminated as provided in Section 8.1 above, the rent payable
under this Lease during the unexpired portion of the term shall be adjusted to
such an extent as may be fair and reasonable under the circumstances. Tenant
shall have no claim to the condemnation award or proceeds in lieu thereof,
except that Tenant shall be entitled to a separate award for the cost of
removing and moving its personal property.
ARTICLE 9 ASSIGNMENT OR SUBLEASE
9.1 LANDLORD ASSIGNMENT. Landlord shall have the right to sell, transfer or
assign, in whole or in part, its rights and obligations under this Lease and in
the Building. Any such sale, transfer of assignment shall operate to release
Landlord from any and all liabilities under this Lease arising after the date of
such sale, assignment or transfer.
9.2 TENANT ASSIGNMENT. Tenant shall not assign, in whole or in part, this
Lease, or allow it to be assigned, in whole or in part, by operation of law
or otherwise (including without limitation by transfer of a majority interest
of stock, merger, or dissolution, which transfer of majority interest of
stock, merger or dissolution shall be deemed an assignment) or mortgage or
pledge the same, or sublet the Premises, in whole or in part, without the
prior written consent of Landlord, which consent shall not be unreasonably
withheld, and in no event shall said such assignment or sublease ever release
Tenant or any guarantor from of sublease any option or right of first refusal
granted to Tenant shall not be assignable by Tenant to any assignee or
sublessee. No assignee or sublessee of the Premises or any portion there may
assign or sublet the Premises or any portion thereof. Notwithstanding the
above, Landlord hereby consents to an assignment of this Lease to intranet
Solutions, Inc. upon finalization of the merger between intranet Integration
Group, Inc. and MacGregor Sports & Fitness, Inc.
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9.3 CONDITIONS OF ASSIGNMENT. If Tenant desires to assign or sublet all or any
part of the Premises, it shall so notify Landlord at least thirty (30) days in
advance of the date on which Tenant desires to make such assignment of sublease.
Tenant shall provide Landlord with a copy of the proposed assignment or sublease
and such information as Landlord might request concerning the proposed sublessee
or assignee to allow Landlord to make informed judgments as to the financial
condition reputation, operations and general desirability of the proposed
sublessee or assignee. Within fifteen (15) days after Landlord's receipt of
Tenant's proposed assignment of sublease and all required information concerning
the proposed sublease or assignee, Landlord shall have the following options:
(1) consent to the proposed assignment of sublease, and if the rent due and
payable by any assignee or sublessee under any such permitted assignment of
sublease (or a combination of the rent payable under such assignment of sublease
plus any bonus or any other consideration or any payment incident thereto)
exceeds the rent payable under this Lease for such space, Tenant shall pay to
Landlord all such excess rent and other excess consideration within ten (10)
days following receipt thereof by Tenant: or (2) refuse, with reasonable
judgement, to consent to the proposed assignment or sublease, which refusal
shall be deemed to have been exercised unless Landlord gives Tenant written
notice providing otherwise. Upon the occurrence of an event of default, if all
or any part of the Premises are then assigned or sublet, Landlord, in addition
to any other remedies provided by this Lease or provided by law, may, at its
option, collect directly from the assignee or sublessee all rents becoming due
to Tenant by reason of the assignment or sublease, and Landlord shall have a
security interest in all properties on the Premises to secure payment of such
sums. Any collection directly by Landlord from the assignee or sublessee shall
not be construed to constitute a novation or a release of Tenant or any
guarantor from the further performance of its obligations under this Lease.
9.4 RIGHTS OF MORTGAGE. Tenant accepts this Lease subject and subordinate to
any recorded mortgage presently existing or hereafter created upon the Building
and to all existing recorded restrictions, covenants, easements and agreements
with respect to the Building. Landlord is hereby irrevocably vested with full
power and authority to subordinate Tenant's interest under this Lease to any
first mortgage lien hereafter placed on the Premises, and Tenant agrees upon
demand to execute additional instruments subordinating this Lease as Landlord
may require. If the interests of Landlord under this Lease shall be transferred
by reason of foreclosure or other proceedings for enforcement of any first
mortgage or deed of trust on the Premises, Tenant shall be bound to the
transferee (sometimes called the "Purchaser") at the option of the Purchaser,
under the terms, covenants and conditions of this Lease for the balance of the
term remaining, including any extensions or renewals, with the same force and
effect as if the Purchaser were Landlord under this Lease, and, if requested by
the Purchaser, Tenant agrees to attorn to the Purchaser, including the first
mortgagee under any such mortgage if it be the Purchaser, as its Landlord.
Notwithstanding the foregoing, Tenant shall not be disturbed in its possession
of the Premises so long as Tenant is not in default hereunder.
9.5 TENANT'S STATEMENT. Tenant agrees to furnish, from time to time, within
ten (10) days after receipt of a request from Landlord or Landlord's mortgagee,
a statement certifying, if applicable, the following: Tenant is in possession of
the Premises; the Premises are acceptable; the Lease is in full force and
effect; the Lease is unmodified; Tenant claims no present charge, lien, or claim
or offset against rent; the rent is paid for the current month, but is not
prepaid for more than one month and will not be prepaid for more than one month
in advance; there is no existing default by reason of some act or omission by
Landlord; and such other matters as may be reasonably required by Landlord or
Landlord's mortgagee. Tenant's failure to deliver such statement, in addition
to being a default under this Lease shall be deemed to establish conclusively
that this Lease is in full force and effect except as declared by Landlord, that
Landlord is not in default of any of its obligations under this Lease, and that
Landlord has not received more than one month's rent in advance. Tenant agrees
to furnish, from time to time, within (10) days after receipt of a request from
Landlord, a current financial statement of Tenant, certified as true and correct
by Tenant.
ARTICLE 10. LANDLORD'S LIEN AND SECURITY AGREEMENT (Intentionally deleted)
ARTICLE 11. DEFAULT AND REMEDIES
11.1 DEFAULT BY TENANT. The following shall be deemed to be events of default
("Default") by Tenant under this Lease: (1) Tenant shall fail to pay when due
any installment of rent or any other payment required pursuant to this Lease;
(2) Tenant shall abandon any substantial portion of the Premises; (3) Tenant
shall fail to comply with any term provision or covenant of this Lease, other
than the payment of rent, and the failure is not cured within ten (10) days
after written notice to Tenant; (4) Tenant shall file a petition or an
involuntary petition is filed against Tenant under any applicable federal or
state bankruptcy or insolvency law or Tenant admits that it cannot meet its
financial obligations as they become due; or if a receiver or trustee shall be
appointed for all or substantially all of the assets of Tenant; or Tenant shall
make a transfer in fraud of creditors or shall make an assignment for the
benefit of creditors; or (5) Tenant shall do or permit to be done any act which
results in a lien being filed against the Premises or the Building and/or
project of which the Premises are a part, except that Tenant shall have the
right to seek satisfaction of said lien after posting a bond of one hundred
twenty-five percent (125%) of the lien amount.
In the event that an order for relief is entered in any case under Title 11,
U.S.C. (the "Bankruptcy Code") in which Tenant is the debtor and: (A) Tenant as
debtor-in-possession, or any trustee who may be appointed in the case (the
"Trustee") seeks to assume the lease, then Tenant, or Trustee if applicable, in
addition to providing adequate assurance described in applicable provisions of
the Bankruptcy Code, shall provide adequate assurance to Landlord of Tenant's
future performance under the Lease by depositing with Landlord a sum equal to
the lesser of twenty-five percent (25%) of the rental and other charges due for
the balance of the Lease term or six (6) months' rent ("Security"), to be held
(without any allowance for interest thereon) to secure Tenant's obligation under
the Lease, and (B) Tenant, or Trustee if applicable, seeks to assign the Lease
after assumption of the same, then Tenant, in addition to providing adequate
assurance described in applicable provisions of the Bankruptcy Code, shall
provide adequate assurance to Landlord of the proposed assignee's future
performance under the Lease by depositing with Landlord a sum equal to the
Security to be held (without any allowance or interest thereon) to secure
performance under the Lease. Nothing contained herein expresses or implies, or
shall be construed to express or imply, that Landlord is consenting to
assumption and/or assignment of the Lease by Tenant, and Landlord expressly
reserves all of its rights to object to any assumption and/or assignment of the
Lease. Neither Tenant nor any Trustee shall conduct or permit the conduct of
any "fire", "bankruptcy", "going out of business" or auction sale in or from the
Premises.
11.2 REMEDIES FOR TENANT'S DEFAULT. Upon the occurrence of a Default as defined
above, Landlord may elect either (i) to cancel and terminate this Lease and this
Lease shall not be treated as an asset of Tenant's bankruptcy estate, or (ii) to
terminate Tenant's right to possession only without cancelling and terminating
Tenant's continued liability under this Lease. Notwithstanding the fact that
initially Landlord elects under (ii) to terminate Tenant's right to possession
only, Landlord shall have the continuing right to cancel and terminate this
Lease by giving ten (10) days' written notice to Tenant of such further
election, and shall have the right to pursue any remedy at law or in equity that
may be available to Landlord.
In the event of election under (ii) to terminate Tenant's right to possession
only, Landlord may, at Landlord's option, enter the Premises and take and
hold possession thereof, without such entry into possession terminating this
Lease or releasing Tenant in whole or in part from Tenant's obligation to pay
all amounts hereunder for the full stated term. Upon such reentry, Landlord
may remove all persons and property from the Premises and such property may
be removed and stored in a public warehouse or elsewhere at the cost and for
the account of Tenant, without becoming liable for any loss or damage which
may be occasioned thereby. Such reentry shall be conducted in the following
manner: without resort to judicial process or notice of any kind if Tenant
has abandoned or voluntarily surrendered possession of the Premises; and,
otherwise, by resort to judicial process. Upon and after entry into
possession without termination of the Lease, Landlord may, but is not
obligated to, relet the Premises, or an part thereof, to any one other than
the Tenant, for such time and upon such terms as Landlord, in Landlord's sole
discretion, shall determine. Landlord may make repairs to the Premises to
the extent deemed by Landlord necessary or desirable to relet the Premises.
Upon such reentry, Tenant shall be liable to Landlord as follows:
A. For all attorneys' fees incurred by Landlord in connection with
exercising any remedy hereunder;
B. For the unpaid installments of base rent, additional rent or other
unpaid sums which were due prior to such reentry, including interest
and late payment fees, which sums shall be payable immediately.
C. For the installments of base rent, additional rent, and other sums
falling due pursuant to the provisions of this Lease for the period
after reentry during which the Premises remain vacant, including late
payment charges and interest, which sums shall be payable as they
become due hereunder.
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D. For all expenses incurred in releasing the Premises, including leasing
commissions, attorneys' fees, and costs of alteration or repairs,
which shall be payable by Tenant as they are incurred by Landlord; and
E. While the Premises are subject to any new lease or leases made
pursuant to this Section, for the amount by which the monthly
installments payable under such new lease or leases is less than the
monthly installment for all charges payable to this Lease, which
deficiencies shall be payable monthly.
Notwithstanding Landlord's election to terminate Tenant's right to possession
only, and notwithstanding any reletting without termination, Landlord, at any
time thereafter, may elect to terminate this Lease, and to recover (in lieu of
the amounts which would thereafter be payable pursuant to the foregoing, but not
in diminution of the amounts payable as provided above before termination), as
damages for loss of bargain and not as a penalty, an aggregate sum equal to the
amount by which the rental value of the portion of the term unexpired at the
time of such election is less than an amount equal to the unpaid base rent,
percentage rent, and additional rent and all other charges which would have been
payable by Tenant for the unexpired portion of the term of this Lease, which
deficiency and all expenses incident thereto, including commissions, attorneys'
fees, expenses of alterations and repairs, shall be due to Landlord as of the
time Landlord exercises said election, notwithstanding that the term had not
expired. If Landlord, after such reentry, leases the Premises, then the rent
payable under such new lease shall be conclusive evidence of the rental value of
the unexpired portion of the term of this Lease.
If this Lease shall be terminated by reason of bankruptcy or insolvency of
Tenant, Landlord shall be entitled to recover from Tenant or Tenant's estate, as
liquidated damages for loss of bargain and not as a penalty, the amount
determined by the immediately preceding paragraph.
11.3 LANDLORD'S RIGHT TO PERFORM FOR ACCOUNT OF TENANT. If Tenant shall be in
Default under this Lease, Landlord may cure the Default at any time for the
account and at the expense of Tenant. If Landlord cures a Default on the part
of Tenant, Tenant shall reimburse Landlord upon demand for any amount expended
by Landlord in connection with the cure, including, without limitation,
attorneys' fees and interest.
11.4 INTEREST, ATTORNEY'S FEES AND LATE CHARGE. In the event of a Default by
Tenant: (1) if a monetary default, interest shall accrue on any sum due and
unpaid at the rate of the lesser of eighteen percent (18%) per annum or the
highest rate permitted by law and, if Landlord places in the hands of an
attorney the enforcement of all or any part of this Lease, the collection of any
rent due or to become due or recovery of the possession of the Premises, Tenant
agrees to pay Landlord's costs of collection, including reasonable attorneys'
fees for the services of the attorney, whether suit is actually filed or not.
Other remedies for nonpayment of rent notwithstanding, if the monthly rental
payment due from Tenant to Landlord is not received by Landlord on or before the
fifth (5th) day of the month for which the rent is due, a late payment charge of
five percent (5%) of such past due amount shall become due and payable in
addition to such amounts owed under this Lease.
11.5 ADDITIONAL REMEDIES, WAIVERS, ETC.
A. The rights and remedies of Landlord and Tenant set forth herein shall
be in addition to any other right and remedy now and hereafter
provided by law. All rights and remedies shall be cumulative and not
exclusive of each other. Landlord or Tenant may exercise its rights
and remedies at any times, in any order, to any extent, and as often
as Landlord or Tenant deems advisable without regard to whether the
exercise of one right or remedy precedes, concurs with or succeeds the
exercise of another.
B. A single or partial exercise of a right or remedy shall not preclude a
further exercise thereof, or the exercise of another right or remedy
from time to time.
C. No delay or omission by Landlord or Tenant in exercising a right or
remedy shall exhaust or impair the same or constitute a waiver of, or
acquiescence to, a Default.
D. No waiver of Default shall extend to or affect any other Default or
impair any right or remedy with respect thereto.
E. No action or inaction by Landlord or Tenant shall constitute a waiver
of Default.
F. No waiver of a Default shall be effective unless it is in writing and
signed by Landlord or Tenant.
ARTICLE 12. RELOCATION (Intentionally deleted)
ARTICLE 13. AMENDMENT AND LIMITATION OF WARRANTIES
13.1 ENTIRE AGREEMENT. IT IS EXPRESSLY AGREED BY TENANT, AS A MATERIAL
CONSIDERATION FOR THE EXECUTION OF THIS LEASE, THAT THIS LEASE, WITH THE
SPECIFIC REFERENCES TO WRITTEN EXTRINSIC DOCUMENTS, IS THE ENTIRE AGREEMENT OF
THE PARTIES: THAT THERE ARE, AND WERE, NO VERBAL REPRESENTATIONS, WARRANTIES,
UNDERSTANDINGS, STIPULATIONS, AGREEMENTS OR PROMISES PERTAINING TO THIS LEASE OR
TO THE EXPRESSLY MENTIONED WRITTEN EXTRINSIC DOCUMENTS NOT INCORPORATED IN
WRITING IN THIS LEASE.
13.2 AMENDMENT. THIS LEASE MAY NOT BE ALTERED, WAIVED, AMENDED OR EXTENDED
EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY LANDLORD AND TENANT.
13.3 LIMITATION OF WARRANTIES. LANDLORD AND TENANT EXPRESSLY AGREE THAT THERE
ARE AND SHALL BE NO IMPLIED WARRANTIES OR MERCHANTABILITY, HABITABILITY, FITNESS
FOR A PARTICULAR PURPOSE OR OF ANY OTHER KIND ARISING OUT OF THIS LEASE, AND
THERE ARE NO WARRANTIES WHICH EXTEND BEYOND THOSE EXPRESSLY SET FORTH IN THIS
LEASE. LANDLORD AGREES TO PROVIDE TENANT A COPY OF THE CERTIFICATE OF OCCUPANCY
UPON THE COMPLETION OF THE IMPROVEMENTS.
ARTICLE 14. MISCELLANEOUS
14.1 SUCCESSORS AND ASSIGNS. This Lease shall be binding upon and inure to the
benefit of Landlord and Tenant and their respective heirs, personal
representatives, successors and assigns. It is hereby covenanted and agreed
that should Landlord's interest in the Premises cease to exist for any reason
during this Lease, then notwithstanding the happening of such event this Lease
nevertheless shall remain unimpaired and in full force and effect, and Tenant
hereunder agrees to attorn to the then owner of the Premises.
14.2 USE OR RENT TAX. If applicable in the jurisdiction where the Premises are
issued, Tenant shall pay and be liable for all rental, sales and use taxes or
other similar taxes, if any, levied or imposed by any city, state, county or
other governmental body having authority, such payments to be in addition to all
other payments required to be paid to Landlord under the terms of this Lease.
Any such payment shall be paid concurrently with the payment of the rent,
additional rent, operating expenses or other charge upon which the tax is based
as set forth above.
14.3 ACT OF GOD. Landlord shall not be required to perform any covenant or
obligation in this Lease, or be liable in damages to Tenant, so long as the
performance or nonperformance of the covenant or obligation is delayed, caused
or prevented by an act of God, force majeure or by Tenant.
14.4 HEADINGS. The section headings appearing in this Lease are inserted only
as a matter of convenience and in no way define, limit, construe or describe the
scope or intent of any Section.
14.5 NOTICE. All rent and other payments required to be made by Tenant shall
be payable to Landlord at the address set forth in Section 1.8. All payments
required to be made by Landlord to Tenant shall be payable at the address set
forth in Section 1.8, or at any other address within the United States as
Tenant may specify from time to time by written notice. Any notice or
document required or permitted to be delivered by the terms of this Lease
shall be deemed to be delivered (whether or not actually received) when
deposited in the United States Mail, postage prepaid, certified mail, return
receipt requested, addressed to the parties at the respective addresses set
forth in Section 1.8.
-5-
<PAGE>
14.6 TENANT'S AUTHORITY. If Tenant executes this Lease as a corporation, each
of the persons executing this Lease on behalf of Tenant does hereby personally
represent and warrant that Tenant is a duly authorized and existing corporation,
that Tenant is qualified to do business in the state in which the Premises are
located, that the corporation has full right and authority to enter into this
Lease, and that each person signing on behalf of the corporation is authorized
to do so. In the event any representation or warranty is false, all persons who
execute this lease shall be liable, individually, as Tenant.
14.7 HAZARDOUS SUBSTANCES. Tenant, its agents or employees, shall not bring or
permit to remain on the premises or Building any asbestos, petroleum or
petroleum products, explosives, toxic materials, or substances defined as
hazardous wastes, hazardous materials, or hazardous substances under any
federal, state, or local law or regulation ("Hazardous Materials"). Tenant's
violation of the foregoing prohibition shall constitute a material breach and
default hereunder and Tenant shall indemnify, hold harmless and defend Landlord
from and against any claims, damages, penalties, liabilities, and costs
(including reasonable attorney fees and court costs) caused by or arising out of
(i) a violation of the foregoing probation by Tenant or (ii) the presence of any
Hazardous Materials on, under, or about the Premises or the Building during the
term of the Lease caused by or arising, in whole or in part, out of the actions
of Tenant, its agents or employees. Tenant shall clean up, remove, remediate
and repair any soil or ground water contamination and damage caused by the
presence and any release of any Hazardous Materials in, on, under or about the
Premises or the Building during the term of the Lease caused by or arising, in
whole or in part, out of the actions of Tenant, its agents or employees, in
conformance with the requirements of applicable law. Tenant shall immediately
give landlord written notice of any suspected breach of this paragraph; upon
learning of the presence of any release of any Hazardous Materials, and upon
receiving any notices from governmental agencies pertaining to Hazardous
Material which may affect the Premises or the Building. The obligations of
Tenant hereunder shall survive the expiration of earlier termination, for any
reason, of this Lease. Notwithstanding the above, Landlord agrees to hold
Tenant harmless for Hazardous Materials in, on or about the Building prior to or
during Tenant's occupancy, which were not caused or contributed by the Tenant,
its employees, customers or representatives.
14.8 SEVERABILITY. If any provision of this Lease or the application thereof to
any person or circumstances shall be invalid or unenforceable to any extent, the
remainder of this Lease and the application of such provisions to other persons
or circumstances shall not be affected thereby and shall be enforced to greatest
extent permitted by law.
14.9 LANDLORD'S LIABILITY. If Landlord shall be in default under this Lease
and, if as a consequence of such default, Tenant shall recover a money judgment
against Landlord, such judgment shall be satisfied only out of the right, title
and interest of Landlord in the Building as the same may then be encumbered and
neither Landlord nor any person entity comprising Landlord shall be liable for
any deficiency. In no event shall Tenant have the right to levy execution
against any property of Landlord nor any person or entity comprising Landlord
other than its interest in the Building as herein expressly provided. Landlord
agrees to maintain an equity interest of $200,000.00 in the Building at all
times during the term of this Lease.
14.10 BROKERAGE. Landlord and Tenant each represents and warrants to the
other that there is no obligation to pay any brokerage fee, commission,
finder's fee or other similar charge in connection with this Lease, other
than fees due to Gary Lally of Hoyt Properties, which are the responsibility
of Landlord. Each party covenants that it will defend, indemnify and hold
harmless the other party from and against any loss or liability by reason of
brokerage or similar services alleged to have been rendered to, at the
instance of, or agreed upon by said indemnifying party. Notwithstanding
anything herein to the contrary, Landlord and Tenant agree that there shall
be no brokerage fee or commission due on expansion, options or renewals by
Tenant.
14.11 MANAGEMENT AGENT. Landlord hereby notifies Tenant that the person
authorized to execute this Lease and manage the Premises is CSM Corporation,
a Minnesota corporation, which has been appointed to act as the agent in
leasing management and operation of the Building for owner and is authorized
to accept service of process and receive or give receipts for notices and
demands on behalf of Landlord. Landlord reserves the right to change the
identity and status of its duly authorized agent upon written notice to
Tenant.
14.12 SUBMISSION OF LEASE. Submission of this Lease to Tenant for signature
does not constitute a reservation of space or an option to lease. This Lease
is not effective until execution by and delivery to both Landlord and Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease effective the
day and year first above written.
LANDLORD: TENANT:
CSM INVESTORS, INC. INTRANET INTEGRATION GROUP, INC.
BY: /s/ David Carland BY: /s/ (Signature Illegible)
ITS: V.P. ITS: CFO & SECRETARY
-6-
<PAGE>
GUARANTEE OF LEASE
WHEREAS, INTRANET INTEGRATION GROUP, INC. d/b/a TECHNICAL PUBLISHING SOLUTIONS,
INC., a Minnesota corporation, hereinafter referred to as "Tenant" has requested
that a certain Lease of even date herewith be executed by and between Tenant and
CSM INVESTORS, INC., a Minnesota corporation, hereinafter referred to as
"Landlord". covering certain premises located at 9625 West 76th Street, Suite
150, in Eden Prairie, Minnesota.
WHEREAS, the Landlord requires as a condition to its execution of said Lease
that the undersigned ("Guarantor") guarantee the full performance of the
obligations of Tenant under said Lease; and
WHEREAS, the Guarantor is desirous that Landlord enter into said Lease with
Tenant.
NOW THEREFORE, to induce Landlord to enter into said Lease, and in consideration
of the execution of said Lease by Landlord, the Guarantor hereby unconditionally
guarantees the full performance of each and all of the terms, covenants and
conditions of said Lease to be kept and performed by said Tenant, including the
payment of all rentals and other charges to accrue thereunder, up to the total
value of Landlord's investment in tenant improvements to the Premises, and the
Guarantor agrees as follows:
1. That the covenants and agreement on its part shall continue in favor of the
Landlord notwithstanding any extension, modification, or alteration of said
Lease entered into by and between the parties thereto, or their successors
or assigns, or notwithstanding any assignment of said Lease, with or
without the consent of the above-referred to Lease shall in any manner
release or discharge the Guarantor, except as contained herein, and it does
hereby consent thereto.
2. That this Guarantee will continue unchanged by a (i) bankruptcy,
reorganization or insolvency of the Tenant or any successor or assignee
thereof or by any disaffirmance of abandonment by a trustee of Tenant, (ii)
disability or other defense of Tenant, or (iii) the cessation for any cause
from any cause whatsoever of the liability of Tenant.
3. That Tenant may not, without prior written approval of Landlord, assign
this Guarantee of Lease in whole or in part, and no assignment or transfer
of the Lease operate to extinguish or diminish the liability of the
Guarantor hereunder.
4. That the liability of the Guarantor under this Guarantee of Lease shall be
primary and that in any right of action which shall accrue to Landlord
under the Lease, the Landlord may at its option proceed against the
Guarantor without having commenced any action, or having obtained any
judgment against the Tenant.
5. That the Guarantor agrees to pay landlord's reasonable attorneys' fees and
all costs and other expenses incurred in any collection or attempted
collection or in any negotiations relative to the obligations hereby
guaranteed or enforcing this Guarantee of Lease against the Guarantor,
individually and jointly.
6. That it does hereby waive notice of any demand by the Landlord as well as
notice of default in the payment of rent or any other amounts contained or
reserved in this Lease.
7. Notwithstanding the above, this Guarantee to Lease shall become null and
void upon the earlier of the finalization of the merger between Intranet
Integration Group, Inc. and MacGregor Sports & Fitness, Inc., or receipt by
Intranet Integration Group, Inc. or its assignees of a minimum of
$3,000,000.00 of equity financing.
The use of the singular herein shall include the plural. The obligation of two
or more parties shall be joint and several. The terms and provisions of this
Guarantee shall be binding upon and inure to the benefit of the respective
successors and assigns of the parties herein named.
<PAGE>
IN WITNESS WHEREOF, the Guarantor has caused this Guarantee to be executed as of
the date set forth on Page 1 of the Lease (if Guarantor shall be a corporation,
the authorized officers must sign on behalf of the corporation. This Guarantee
must be executed by the president or vice president and the secretary or
assistant secretary).
By: /s/ Robert Olson
ROBERT OLSON
Home Address: 7073 Ticonderoga Trail, EP, MN 55346
Home Phone: 934-3141
Social Security #: ###-##-####
Date: 4-24-96
<PAGE>
EXHIBIT A
[SITE PLAN]
<PAGE>
EXHIBIT B
[SPACE PLAN]
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF DIGITAL RIVER, INC.
Digital River, Inc., a Minnesota Corporation
Digital River Limited
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
-----------------------------
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
June 12, 1998
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<PAGE>
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<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
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