<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
DIGITAL RIVER, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(6) Amount Previously Paid:
-----------------------------------------------------------------------
(7) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(8) Filing Party:
-----------------------------------------------------------------------
(9) Date Filed:
-----------------------------------------------------------------------
<PAGE>
[LOGO]
MARCH 23, 1999
Dear Stockholder:
On behalf of Digital River, Inc. (the "Company"), I cordially invite you to
attend the Annual Meeting of Stockholders, which will begin at 3:30 p.m. on
Tuesday, April 27, 1999, at the Radisson Hotel, 35 South 7th Street,
Minneapolis, Minnesota. At the meeting, stockholders will be asked to (i) elect
two directors to hold office until the 2002 Annual Meeting of Stockholders; (ii)
to approve the Company's 1998 Stock Option Plan, as amended; and (iii) to ratify
the selection of Arthur Andersen LLP as the Company's independent accountants
for the next fiscal year. The accompanying Notice and Proxy Statement describe
those proposals.
The directors and officers of the Company hope that as many stockholders as
possible will be present at the meeting. Because the vote of each stockholder is
important, we ask that you sign and return the enclosed proxy card in the
envelope provided or if eligible, cast your vote via the Internet in accordance
with the instructions on the enclosed proxy card, whether or not you plan to
attend the meeting. This will not limit your right to change your vote prior to
or at the meeting.
We appreciate your interest in the Company. To assist us in preparation for
the meeting, please return your proxy card or if eligible, cast your Internet
vote in accordance with the instructions on the enclosed proxy card at your
earliest convenience.
Very truly yours,
[SIGNATURE]
JOEL A. RONNING
CHIEF EXECUTIVE OFFICER
<PAGE>
DIGITAL RIVER, INC.
9625 WEST 76TH STREET, SUITE 150
EDEN PRAIRIE, MN 55344
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 27, 1999
------------------------
TO THE STOCKHOLDERS OF DIGITAL RIVER, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Digital
River, Inc., a Delaware corporation (the "Company"), will be held on Tuesday,
April 27, 1999 at 3:30 p.m. local time at the Radisson Hotel, 35 South 7th
Street, Minneapolis, Minnesota for the following purposes:
1. To elect two directors to hold office until the 2002 Annual Meeting of
Stockholders.
2. To approve an amendment to the Company's 1998 Stock Option Plan to
increase the aggregate number of shares of Common Stock authorized for
issuance under such plan by 950,000 shares.
3. To ratify the selection of Arthur Andersen LLP as independent
accountants of the Company for its fiscal year ending December 31, 1999.
4. To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on March 12, 1999, as
the record date for the determination of stockholders entitled to notice of and
to vote at this Annual Meeting of Stockholders and at any adjournment or
postponement thereof.
By Order of the Board of Directors
[SIGNATURE]
GREGORY R.L. SMITH
SECRETARY
Eden Prairie, Minnesota
March 23, 1999
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER
OR NOT YOU EXPECT TO ATTEND THE MEETING, WE HOPE YOU WILL VOTE AS SOON AS
POSSIBLE IN ORDER TO ENSURE YOUR REPRESENTATION AT THE MEETING. IF ELIGIBLE, YOU
MAY VOTE OVER THE INTERNET IN ACCORDANCE WITH THE INSTRUCTIONS ON THE ENCLOSED
PROXY CARD, AS WELL AS BY MAILING A TRADITIONAL PROXY CARD. EVEN IF YOU HAVE
GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE
NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER
NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD
HOLDER A PROXY ISSUED IN YOUR NAME.
<PAGE>
DIGITAL RIVER, INC.
9625 WEST 76TH STREET, SUITE 150
EDEN PRAIRIE, MN 55344
------------------------
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
APRIL 27, 1999
------------------------
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
Digital River, Inc., a Delaware corporation (the "Company"), for use at the
Annual Meeting of Stockholders to be held on April 27, 1999 at 3:30 p.m. local
time (the "Annual Meeting"), or at any adjournment or postponement thereof, for
the purposes set forth herein and in the accompanying Notice of Annual Meeting.
The Annual Meeting will be held at the Radisson Hotel, 35 South 7th Street,
Minneapolis, Minnesota. The Company intends to mail this proxy statement and
accompanying proxy card on or about March 23, 1999, to all stockholders entitled
to vote at the Annual Meeting.
SOLICITATION
The Company will bear the entire cost of solicitation of proxies, including
preparation, assembly, printing and mailing of this proxy statement, the proxy
and any additional information furnished to stockholders. Copies of solicitation
materials will be furnished to banks, brokerage houses, fiduciaries and
custodians holding in their names shares of Common Stock beneficially owned by
others to forward to such beneficial owners. The Company may reimburse persons
representing beneficial owners of Common Stock for their costs of forwarding
solicitation materials to such beneficial owners. Original solicitation of
proxies by mail may be supplemented by telephone, telecopy or personal
solicitation by directors, officers or other regular employees of the Company.
No additional compensation will be paid to directors, officers or other regular
employees for such services.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Common Stock at the close of business on March 12,
1999 will be entitled to notice of and to vote at the Annual Meeting. At the
close of business on March 12, 1999 the Company had outstanding and entitled to
vote 19,697,330 shares of Common Stock.
Each holder of record of Common Stock on such date will be entitled to one
vote for each share held on all matters to be voted upon at the Annual Meeting.
All votes will be tabulated by the inspector of election appointed for the
meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions will be counted towards the
tabulation of votes cast on proposals presented to the stockholders and will
have the same effect as negative votes. Broker non-votes are counted towards a
quorum, but are not counted for any purpose in determining whether a matter has
been approved.
2
<PAGE>
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
Secretary of the Company at the Company's principal executive office, 9625 West
76th Street, Suite 150, Eden Prairie, MN 55344, a written notice of revocation
or a duly executed proxy bearing a later date, or it may be revoked by attending
the meeting and voting in person. Attendance at the meeting will not, by itself,
revoke a proxy.
STOCKHOLDER PROPOSALS
The deadline for submitting a stockholder proposal for inclusion in the
Company's proxy statement and form of proxy for the Company's 2000 Annual
Meeting of Stockholders pursuant to Rule 14a-8 of the Securities and Exchange
Commission (the "SEC") is November 24, 1999. Unless a stockholder who wishes to
bring a matter before the stockholders at the Company's 2000 Annual Meeting of
Stockholders notifies the Company of such matter prior to February 7, 2000,
management will have discretionary authority to vote all shares for which it has
proxies in opposition to such matter.
PROPOSAL 1
ELECTION OF DIRECTORS
The Company's Restated Certificate of Incorporation and Bylaws provide that
the Board of Directors (the "Board") shall be divided into three classes, each
class consisting, as nearly as possible, of one-third of the total number of
directors, with each class having a three-year term. Vacancies on the Board may
be filled only by persons elected by a majority of the remaining directors. A
director elected by the Board to fill a vacancy (including a vacancy created by
an increase in the Board) shall serve for the remainder of the full term of the
class of directors in which the vacancy occurred and until such director's
successor is elected and qualified.
The Board is presently composed of eight members. There are two directors in
the class whose term of office expires in 1999. Each of the nominees for
election to this class is currently a director of the Company. If elected at the
Annual Meeting, each of the nominees would serve until the 2002 annual meeting
and until his successor is elected and has qualified, or until such director's
earlier death, resignation or removal.
Directors are elected by a plurality of the votes present in person or
represented by proxy and entitled to vote at the meeting. Shares represented by
executed proxies will be voted, if authority to do so is not withheld, for the
election of the two nominees named below. In the event that any nominee should
be unavailable for election as a result of an unexpected occurrence, such shares
will be voted for the election of such substitute nominee as management may
propose. Each person nominated for election has agreed to serve if elected, and
management has no reason to believe that any nominee will be unable to serve.
Set forth below is biographical information for each person nominated and
each person whose term of office as a director will continue after the Annual
Meeting.
NOMINEES FOR ELECTION FOR A THREE-YEAR TERM EXPIRING AT THE 2002 ANNUAL MEETING
THOMAS F. MADISON
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.,
3
<PAGE>
Reliant Energy Minnegasco, a division of Reliant Energy, ACI Telecentrics, Span
Link Communications and Delaware Group of Funds.
CHARLES E. REESE, JR.
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. In March
1999, Mr. Reese was also named Chief Executive Officer of Tech Squared. 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.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF EACH NAMED NOMINEE.
DIRECTORS CONTINUING IN OFFICE UNTIL THE 2000 ANNUAL MEETING
TIMOTHY C. CHOATE
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.
WILLIAM LANSING
Mr. Lansing has served as a director of the Company since November 1998. In
May 1998, Mr. Lansing joined Fingerhut Companies, Inc. as President and Chief
Operating Officer. From October 1996 to May 1998, Mr. Lansing served as Vice
President for Business Development for General Electric Corporation. From
January 1996 to October 1996, he was Chief Operating Officer at Prodigy, an
online joint venture of IBM Corporation and Sears Roebuck and Co. From September
1986 to December 1995, Mr. Lansing was at McKinsey & Co. where he was a partner
leading the consulting firm's Internet practice. Mr. Lansing began his career in
1984 at Davis Polk & Wardwell as a securities lawyer.
CHRISTOPHER J. SHARPLES
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. From
November 1996 to December 1998, Mr. Sharples served as Chairman of Datastream
International Ltd., a supplier of on-line historical financial and economic
information to investment professionals. From 1981 to December 1998 Mr. Sharples
served as 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.
4
<PAGE>
DIRECTORS CONTINUING IN OFFICE UNTIL THE 2001 ANNUAL MEETING
JOEL A. RONNING
Mr. Ronning founded the Company in February 1994 and has been Chief
Executive Officer and a director of the Company since that time. From February
1994 to July 1998, Mr. Ronning was also President of the Company. Since May
1995, Mr. Ronning has served as Chairman of the Board of Directors of Tech
Squared, Inc., a direct catalog marketer of software and hardware products. From
May 1995 to July 1998, Mr. Ronning served as Chief Executive Officer, Chief
Financial Officer and Secretary of Tech Squared. 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 of MacUSA, Inc. since April 1990. From April 1990 to July
1998, Mr. Ronning also served as the Chief Executive Officer of MacUSA, Inc. Mr.
Ronning also serves as a director of the Software Publishers Association and
JASC, Inc.
PERRY W. STEINER
Mr. Steiner joined the Company in July 1998 as President and has served as a
director of the Company since April 1998. From January 1997 to July 1998, Mr.
Steiner served as Vice President of Wasserstein Perella & Co., Inc., an
investment banking firm, and 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. Steiner serves as a director of Tech Squared, Inc.
J. PAUL THORIN
Mr. Thorin has served as a director of the Company since June 1996. Since
April 1996, Mr. Thorin has served as 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.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended December 31, 1998 the Board held ten meetings.
The Board has an Audit Committee and a Compensation Committee.
The Audit Committee meets with the Company's independent accountants at
least annually to review the results of the annual audit and discuss the
financial statements, recommends to the Board the independent accountants to be
retained and receives and considers the accountants' comments as to controls,
adequacy of staff and management performance and procedures in connection with
audit and financial controls. The Audit Committee is composed of three
non-employee directors: Messrs. Choate, Madison and Thorin. It did not meet
during the fiscal year.
The Compensation Committee makes recommendations concerning salaries and
incentive compensation, awards stock options to employees and consultants under
the Company's stock option plans and otherwise determines compensation levels
and performs such other functions regarding compensation as the Board may
delegate. The Compensation Committee is composed of three non-employee
directors: Messrs. Lansing, Madison and Thorin. It met four times during such
fiscal year.
During the fiscal year ended December 31, 1998, each Board member attended
75% or more of the aggregate of the meetings of the Board and of the committees
on which he served, held during the period for which he was a director or
committee member, respectively.
5
<PAGE>
PROPOSAL 2
APPROVAL OF 1998 STOCK OPTION PLAN, AS AMENDED
In June 1998, the Board adopted, and the stockholders subsequently approved,
the Company's 1998 Stock Option Plan ("Option Plan"), which is an amended,
restated and retitled version of the Company's Amended and Restated 1994 Stock
Option Plan. There are currently 2,333,333 shares of Common Stock reserved for
issuance under the Option Plan.
In February 1999, the Board amended the Option Plan, subject to stockholder
approval, to increase the number of shares of Common Stock authorized for
issuance under the Option Plan from a total of 2,333,333 shares to a total of
3,283,333 shares. The Board adopted this amendment in order to ensure that the
Company can continue to grant stock options at levels determined appropriate by
the Board and the Compensation Committee.
As of February 1, 1999 options (net of canceled or expired options) covering
an aggregate of 2,080,707 shares of the Company's Common Stock had been granted
under the Option Plan and 252,626 shares of Common Stock (plus any shares that
might in the future be returned to the Option Plan as a result of cancellations
or expiration of options) remained available for future grant under the Option
Plan. During fiscal 1998, the Company granted to all current executive officers
as a group options to purchase 1,282,500 shares at exercise prices ranging from
$3.00 to $23.40 per share (including 605,882 shares granted outside the Option
Plan), to all current non-employee Directors as a group options to purchase
17,801 shares at exercise prices ranging from $3.00 to $12.50 per share, and to
all employees (excluding current executive officers) as a group options to
purchase 695,151 shares at exercise prices ranging from $3.00 to $23.40 per
share.
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and entitled to vote at the meeting will be
required to approve the amendment to the Option Plan. Abstentions will be
counted toward the tabulation of votes cast on proposals presented to the
stockholders and will have the same effect as negative votes. Broker non-votes
are counted towards a quorum, but are not counted for any purpose in determining
whether this matter has been approved.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 2.
The essential features of the Option Plan are outlined below:
GENERAL
The Option Plan provides for the grant of both incentive and non-qualified
stock options. Incentive stock options granted under the Option Plan are
intended to qualify as "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"). Nonstatutory
stock options granted under the Option Plan are not intended to qualify as
incentive stock options under the Code. See "Federal Income Tax Information" for
a discussion of the tax treatment of options.
PURPOSE
The Board adopted the Option Plan to provide a means by which employees,
directors and consultants of the Company and its affiliates may be given an
opportunity to purchase stock in the Company, to attract and retain the services
of persons with experience and ability and to associate the interests of such
persons with those of the Company's stockholders. Employees, directors and
consultants of the Company and its affiliates are eligible to participate in the
Option Plan.
6
<PAGE>
ADMINISTRATION
The Board administers the Option Plan. Subject to the provisions of the
Option Plan, the Board has the power to construe and interpret the Option Plan
and to determine the persons to whom and the dates on which options will be
granted, the number of shares of Common Stock to be subject to each option, the
time or times during the term of each option within which all or a portion of
such option may be exercised, the exercise price, the type of consideration and
other terms of the option.
The Board has the power to delegate administration of the Option Plan to a
committee composed of two or more members of the Board. In the discretion of the
Board, a committee may consist solely of two or more outside directors in
accordance with Section 162(m) of the Code or solely of two or more non-employee
directors in accordance with Rule 16b-3 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). The Board has delegated administration of the
Option Plan to the Compensation Committee. As used herein with respect to the
Option Plan, the "Board" refers to any committee the Board appoints as well as
to the Board itself.
The regulations under Section 162(m) require that the directors who serve as
members of the committee must be "outside directors." The Option Plan provides
that, in the Board's discretion, directors serving on the committee may be
"outside directors" within the meaning of Section 162(m). This limitation would
exclude from the committee directors who are (i) current employees of the
Company or an affiliate, (ii) former employees of the Company or an affiliate
receiving compensation for past services (other than benefits under a
tax-qualified pension option plan), (iii) current and former officers of the
Company or an affiliate, (iv) directors currently receiving direct or indirect
remuneration from the Company or an affiliate in any capacity (other than as a
director), and (v) any other person who is otherwise considered an "outside
director" for purposes of Section 162(m). The definition of an "outside
director" under Section 162(m) is generally narrower than the definition of a
"non-employee director" under Rule 16b-3 of the Exchange Act.
In addition to the authority to delegate described above, the Board, or a
committee to which the Board has delegated the administration of the Option
Plan, may delegate to a committee composed of one or more members of the Board
who are not outside directors in accordance with Section 162(m) the authority to
grant options to eligible recipients other than the Chief Executive Officer of
the Company and the four other most highly compensated officers of the Company
or persons with respect to whom the Company wishes to comply with Section 162(m)
of the Code. The Board, or a committee to whom the Board has delegated
administration of the Option Plan, may also delegate to a committee composed of
one or more members of the Board who are not non-employee directors in
accordance with Rule 16b-3 of the Exchange Act the authority to grant options to
eligible recipients who are not then subject to Section 16 of the Exchange Act.
ELIGIBILITY
Incentive stock options may be granted under the Option Plan only to
employees (including officers) of the Company and its affiliates. Employees
(including officers), directors, and consultants of both the Company and its
affiliates are eligible to receive non-qualified stock options under the Option
Plan.
No incentive stock option may be granted under the Option Plan 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 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 optionholder during any calendar year (under the Option
Plan and all other such plans of the Company and its affiliates) may not exceed
$100,000.
7
<PAGE>
No employee may be granted options under the Option Plan exercisable for
more than 333,333 shares of Common Stock during any calendar year (the "Section
162(m) Limitation").
STOCK SUBJECT TO THE OPTION PLAN
Subject to the approval of this Proposal 2, an aggregate of 3,283,333 shares
of Common Stock is reserved for issuance under the Option Plan. If options
granted under the Option Plan expire or otherwise terminate for any reason
without being exercised in full, the shares of Common Stock not acquired
pursuant to such options again become available for issuance under the Option
Plan.
TERMS OF OPTIONS
The following is a description of the permissible terms of options under the
Option Plan. Individual option grants may be more restrictive as to any or all
of the permissible terms described below.
EXERCISE PRICE; PAYMENT. The exercise price of incentive stock options may
not be less than 100% of the fair market value of the stock subject to the
option on the date of the grant and, in some cases (see "Eligibility" above),
may not be less than 110% of such fair market value. The exercise price of non-
qualified options shall be determined by the Board and may be less than the fair
market value on the date of grant. If options are granted with exercise prices
below market value, deductions for compensation attributable to the exercise of
such options could be limited by Section 162(m) of the Code. See "Federal Income
Tax Information."
The exercise price of options granted under the Option Plan must be paid
either in cash at the time the option is exercised or, if specified in the
option agreement, by delivery of other shares of Common Stock of the Company
(which has been held for at least six months) or by a combination of cash and
shares of Common Stock.
OPTION EXERCISE. Options granted under the Option Plan may become
exercisable in cumulative increments ("vest") as determined by the Board at the
time of grant. Shares covered by currently outstanding options under the Option
Plan typically vest at the rate of 25% on the first anniversary of the vesting
commencement date and 25% annually thereafter until fully vested during the
optionholder's employment by, or service as a director or consultant for, the
Company or an affiliate (collectively, "service"). Shares covered by options
granted in the future under the Option Plan may be subject to different vesting
terms. The Board has the power to accelerate the time during which an option may
vest or be exercised and may also authorize modification of any outstanding
option with the consent of the optionholder. To the extent provided by the terms
of an option, an optionholder may satisfy any federal, state or local tax
withholding obligation relating to the exercise of such option by a cash payment
upon exercise, by authorizing the Company to withhold a portion of the stock
otherwise issuable to the optionholder, by delivering already-owned Common Stock
of the Company or by a combination of these means.
TERM. The maximum term of options under the Option Plan is 10 years, except
that in certain cases (see "Eligibility") the maximum term is five years. Vested
options under the Option Plan generally terminate at the time specified in the
option agreement following termination of the optionholder's service, which may
not exceed (a) three months if such termination is for any reason other than
death, permanent and total disability (as defined in the Code) or "for cause"
(as defined in the Option Plan) or (b) one year if such termination is due to
death or permanent and total disability. If no time for termination is specified
in the option agreement, then vested options shall automatically terminate (a)
at the time of termination of the optionholder's service if such termination is
for any reason other than death or permanent and total disability, (b) six
months following the optionholder's death, or (c) 30 days following the
optionholder's termination due to disability. In addition, vested options shall
terminate immediately upon an optionholder's termination of service "for cause."
In the case of an optionholder's
8
<PAGE>
death, an option may be exercised by the person or persons to whom the rights to
such option pass by will or by the laws of descent and distribution.
The option term generally is not extended in the event that exercise of the
option within these periods is prohibited.
RESTRICTIONS ON TRANSFER
The optionholder may not transfer an option otherwise than by will or by the
laws of descent and distribution. During the lifetime of the optionholder, only
the optionholder or the optionholder's guardian or legal representative may
exercise an option.
ADJUSTMENT PROVISIONS
Transactions not involving receipt of consideration by the Company, such as
a merger, consolidation, reorganization, recapitalization, reincorporation,
stock dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other similar transaction, may change the class and number of
shares of Common Stock subject to the Option Plan and outstanding options. In
that event, the Option Plan will be appropriately adjusted as to the class and
the maximum number of shares of Common Stock subject to the Option Plan and the
Section 162(m) Limitation, and outstanding options will be adjusted as to the
class, number of shares and price per share of Common Stock subject to such
options.
EFFECT OF CERTAIN CORPORATE EVENTS
The Option Plan provides that, in the event of a sale of substantially all
of the assets of the Company, specified types of merger or consolidation with or
into any other entity or person in which the Company is not the continuing or
surviving entity, or acquisition in which in excess of 50% of the Company's
voting power is transferred ("change in control"), then any surviving
corporation shall either assume options outstanding under the Option Plan or
substitute similar options for those outstanding under the Option Plan
(including an award to acquire the same consideration paid to stockholders in a
change in control). If any surviving corporation declines to assume options
outstanding under the Option Plan, or to substitute similar options (or awards),
then, with respect to optionholders whose service has not terminated, the
vesting and the time during which such options may be exercised will be
accelerated in full and the options shall terminate if not exercised prior to
such change in control. Notwithstanding the foregoing, if the Company and the
other party involved in a change in control desire to account for such change in
control as a "pooling of interests" transaction, then no such acceleration of
vesting of options shall occur if the Company's and the other party's
independent public accountants determine that such acceleration would preclude
the use of "pooling of interests" accounting. The acceleration of an option in
the event of an acquisition or similar corporate event may be viewed as an
anti-takeover provision, which may have the effect of discouraging a proposal to
acquire or otherwise obtain control of the Company.
DURATION, AMENDMENT AND TERMINATION
The Board may suspend or terminate the Option Plan without stockholder
approval or ratification at any time or from time to time. Unless sooner
terminated, the Option Plan will terminate on June 9, 2008.
The Board may also amend the Option Plan at any time or from time to time.
However, no amendment will be effective unless approved by the stockholders of
the Company within 12 months before or after its adoption by the Board if the
amendment would (i) modify the requirements as to eligibility for participation
(to the extent such modification requires stockholder approval in order for the
Option Plan to satisfy Section 422 of the Code, if applicable, or Rule 16b-3 of
the Exchange Act); (ii) increase the number of shares reserved for issuance upon
exercise of options; or (iii) change any other provision of the Option Plan in
any other way if such modification requires stockholder approval in order to
comply with
9
<PAGE>
Rule 16b-3 of the Exchange Act or satisfy the requirements of Section 422 of the
Code or any securities exchange listing requirements. The Board may submit any
other amendment to the Option Plan for stockholder approval, including, but not
limited to, amendments intended to satisfy the requirements of Section 162(m) of
the Code regarding the exclusion of performance-based compensation from the
limitation on the deductibility of compensation paid to certain employees.
FEDERAL INCOME TAX INFORMATION
Long-term capital gains currently are generally subject to lower tax rates
than ordinary income or short-term capital gains. The maximum long-term capital
gains rate for federal income tax purposes is currently 20% while the maximum
ordinary income rate and short-term capital gains rate is effectively 39.6%.
Slightly different rules may apply to optionholders who acquire stock subject to
certain repurchase options or who are subject to Section 16(b) of the Exchange
Act.
INCENTIVE STOCK OPTIONS. Incentive stock options under the Option Plan are
intended to be eligible for the favorable federal income tax treatment accorded
"incentive stock options" under the Code.
There generally are no federal income tax consequences to the optionholder
or the Company by reason of the grant or exercise of an incentive stock option.
However, the exercise of an incentive stock option may increase the
optionholder's alternative minimum tax liability, if any.
If an optionholder holds stock acquired through exercise of an incentive
stock option for at least two years from the date on which the option is granted
and at least one year from the date on which the shares are transferred to the
optionholder upon exercise of the option, any gain or loss on a disposition of
such stock will be a long-term capital gain or loss.
Generally, if the optionholder disposes of the stock before the expiration
of either of these holding periods (a "disqualifying disposition"), then at the
time of disposition the optionholder will realize taxable ordinary income equal
to the lesser of (i) the excess of the stock's fair market value on the date of
exercise over the exercise price, or (ii) the optionholder's actual gain, if
any, on the purchase and sale. The optionholder's additional gain or any loss
upon the disqualifying disposition will be a capital gain or loss, which will be
long-term or short-term depending on whether the stock was held for more than
one year.
To the extent the optionholder recognizes ordinary income by reason of a
disqualifying disposition, the Company will generally be entitled (subject to
the requirement of reasonableness, the provisions of Section 162(m) of the Code
and the satisfaction of a tax reporting obligation) to a corresponding business
expense deduction in the tax year in which the disqualifying disposition occurs.
NONSTATUTORY STOCK OPTIONS. Nonstatutory stock options granted under the
Option Plan generally have the following federal income tax consequences:
There are no tax consequences to the optionholder or the Company by reason
of the grant of a non-qualified stock option. Upon exercise of a non-qualified
stock option, the optionholder normally will recognize taxable ordinary income
equal to the excess, if any, of the stock's fair market value on the date of
exercise over the option exercise price. However, to the extent the stock is
subject to certain types of vesting restrictions, the taxable event will be
delayed until the vesting restrictions lapse unless the participant elects to be
taxed on receipt of the stock. With respect to employees, the Company is
generally required to withhold from regular wages or supplemental wage payments
an amount based on the ordinary income recognized. Subject to the requirement of
reasonableness, the provisions of Section 162(m) of the Code and the
satisfaction of a tax reporting obligation, the Company will generally be
entitled to a business expense deduction equal to the taxable ordinary income
realized by the optionholder.
Upon disposition of the stock, the optionholder will recognize a capital
gain or loss equal to the difference between the selling price and the sum of
the amount paid for such stock plus any amount recognized as ordinary income
upon exercise of the option (or vesting of the stock). Such gain or loss will
10
<PAGE>
be long-term or short-term depending on whether the stock was held for more than
one year. Slightly different rules may apply to optionholders who acquire stock
subject to certain repurchase options or who are subject to Section 16(b) of the
Exchange Act.
POTENTIAL LIMITATION ON COMPANY DEDUCTIONS. Section 162(m) of the Code
denies a deduction to any publicly held corporation for compensation paid to
certain "covered employees" in a taxable year to the extent that compensation to
such covered employee exceeds $1 million. It is possible that compensation
attributable to stock options, when combined with all other types of
compensation received by a covered employee from the Company, may cause this
limitation to be exceeded in any particular year.
Certain kinds of compensation, including qualified "performance-based
compensation," are disregarded for purposes of the deduction limitation. In
accordance with Treasury regulations issued under Section 162(m), compensation
attributable to stock options will qualify as performance-based compensation if
the option is granted by a compensation committee comprised solely of "outside
directors" and either (i) the plan contains a per-employee limitation on the
number of shares for which options may be granted during a specified period, the
per-employee limitation is approved by the stockholders, and the exercise price
of the option is no less than the fair market value of the stock on the date of
grant, or (ii) the option is granted (or exercisable) only upon the achievement
(as certified in writing by the compensation committee) of an objective
performance goal established in writing by the compensation committee while the
outcome is substantially uncertain, and the option is approved by stockholders.
PROPOSAL 3
RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
The Board of Directors has selected Arthur Andersen LLP as the Company's
independent accountants for the fiscal year ending December 31, 1999 and has
further directed that management submit the selection of independent accountants
for ratification by the stockholders at the Annual Meeting. Representatives of
Arthur Andersen LLP are expected to be present at the Annual Meeting, will have
an opportunity to make a statement if they so desire and will be available to
respond to appropriate questions.
Stockholder ratification of the selection of Arthur Andersen LLP as the
Company's independent accountants is not required by the Company's By-laws or
otherwise. However, the Board is submitting the selection of Arthur Andersen LLP
to the stockholders for ratification as a matter of good corporate practice. If
the stockholders fail to ratify the selection, the Audit Committee and the Board
will reconsider whether or not to retain that firm. Even if the selection is
ratified, the Audit Committee and the Board in their discretion may direct the
appointment of different independent accountants at any time during the year if
they determine that such a change would be in the best interests of the Company
and its stockholders.
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and entitled to vote at the Annual Meeting will
be required to ratify the selection of Arthur Andersen LLP. Abstentions will be
counted toward the tabulation of votes cast on proposals presented to the
stockholders and will have the same effect as negative votes. Broker non-votes
are counted towards a quorum, but are not counted for any purpose in determining
whether this matter has been approved.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 3
11
<PAGE>
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of February 1, 1999 by: (i) each director and
nominee for director; (ii) each of the executive officers named in the Summary
Compensation Table; (iii) all executive officers and directors of the Company as
a group; and (iv) all those known by the Company to be beneficial owners of more
than five percent of its Common Stock.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
------------------------------------
BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF TOTAL
- ----------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Joel A. Ronning (2)(3)..................................... 3,321,841 16.81
c/o Digital River, Inc.
9625 West 76th Street
Eden Prairie, Minnesota 55344
Tech Squared, Inc. (3)..................................... 3,000,000 15.31
5198 West 76th Street, Suite 220
Edina, Minnesota 55439
Fujitsu Limited............................................ 2,193,333 11.20
1-1 Kamikodanaka 4-Chome
Nakahara-Ku
Kawasaki 211 Japan
Essex Investment Management Company........................ 1,448,800 7.39
125 High Street
South Boston, Massachusetts 02110
Christopher J. Sharples (4)................................ 1,170,178 5.94
c/o GNI Ltd.
25 Dowgate Hill
London EC4R 2GN
United Kingdom
Wasserstein Adelson Ventures, L.P. (5)..................... 1,023,743 5.19
31 West 52nd Street
New York, New York 10019
Timothy C. Choate (6)...................................... 6,090 *
Draper M. Jaffray (7)...................................... 33,733 *
William Lansing (8)........................................ 10,000 *
Thomas F. Madison (9)...................................... 93,532 *
Charles E. Reese, Jr. (10)................................. 12,420 *
Perry W. Steiner (11)...................................... 252,000 1.27
Robert E. Strawman......................................... 2,666 *
J. Paul Thorin (12)........................................ 17,800 *
Kelly J. Wical (13)........................................ 16,175 *
All directors and executive officers as a group (13
persons) (14)............................................ 4,946,707 24.42
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1% of the outstanding shares of
the Company's Common Stock.
12
<PAGE>
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the SEC. Unless
otherwise indicated in the footnotes to this table and subject to community
property laws where applicable, the Company believes that each of the
stockholders named in this table has sole voting and investment power with
respect to the shares indicated as beneficially owned. Applicable
percentages are based on 19,594,097 shares outstanding on February 1, 1999,
adjusted as required by rules promulgated by the SEC.
(2) Includes 171,666 shares Mr. Ronning has the right to acquire pursuant to
options exercisable within 60 days of February 1, 1999.
(3) Includes 3,000,000 shares MacUSA, Inc., a wholly-owned subsidiary of Tech
Squared, Inc. 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 3,000,000 shares at the discretion of MacUSA, Inc.
(4) Includes 535,000, 10,843 and 524,335 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 535,000 shares of Common Stock registered in
the name of Latour Trustees (Jersey) Limited, 35,000 of such shares are
held by Mr. Sharples' wife. Of the 524,335 shares of Common Stock
registered in the name of Wilbro Nominees Limited, 3,002 of such shares are
held by Mr. Sharples' children. Also includes 100,000 shares Mr. Sharples
has the right to acquire pursuant to a warrant exercisable within 60 days
of February 1, 1999.
(5) Includes 150,000 shares Wasserstein Adelson Ventures, L.P. has the right to
acquire pursuant to warrants exercisable within 60 days of February 1,
1999.
(6) Includes 5,000 shares issuable upon exercise of options exercisable within
60 days of February 1, 1999.
(7) Includes 32,067 shares issuable upon exercise of options exercisable within
60 days of February 1, 1999.
(8) Includes 10,000 shares issuable upon exercise of options exercisable within
60 days of February 1, 1999.
(9) Includes 55,200 shares issuable upon exercise of options exercisable within
60 days of February 1, 1999.
(10) Includes 12,420 shares issuable upon exercise of options exercisable
within 60 days of February 1, 1999.
(11) Includes 111,500 shares issuable upon exercise of options exercisable
within 60 days of February 1, 1999, and 137,500 shares issuable to Mr.
Steiner pursuant to an option which is exercisable upon the earlier of (i)
the occurrence of certain events related to Mr. Steiner's relocation or
(ii) on the third anniversary of his first day of employment.
(12) Includes 13,800 shares issuable upon exercise of options exercisable
within 60 days of February 1, 1999.
(13) Includes 12,667 shares issuable upon exercise of options exercisable
within 60 days of February 1, 1999.
(14) Includes 566,592 shares issuable upon exercise of options exercisable
within 60 days of February 1, 1999, and 100,000 shares subject to
exercisable warrants.
13
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent of a registered
class of the Company's equity securities, to file with the SEC initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities of the Company. Officers, directors and greater than ten
percent stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1998, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with, except that Mr.
Lansing failed to file timely his initial report on Form 3.
14
<PAGE>
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
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 13,333 shares of the Company's Common
Stock at an exercise price of $0.38 per share. In September 1996, Messrs.
Madison and Reese were granted options to purchase 53,333 and 13,333 shares of
the Company's Common Stock, respectively, each at an exercise price of $1.13 per
share. In April 1998, Messrs. Madison, Reese and Thorin were granted options to
purchase 1,867, 467 and 467 shares of the Company's Common Stock, respectively,
each at an exercise price of $3.00 per share. In May 1998, Mr. Choate was
granted an option to purchase 5,000 shares of the Company's Common Stock at an
exercise price of $3.00 per share. In November 1998, Mr. Lansing was granted an
option to purchase 10,000 shares of the Company's Common Stock at an exercise
price of $12.50 per share. The Company may compensate non-employee directors in
the future for their attendance at Board and committee meetings.
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows for the fiscal years ended December 31, 1998 and
1997, compensation awarded or paid to, or earned by, the Company's Chief
Executive Officer and its other four most highly compensated executive officers
receiving compensation in excess of $100,000 in fiscal year 1998 (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -------------
------------------------------------------------ SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)(1)
- -------------------------------- --------- ---------- ------------- --------------------- ------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Joel A. Ronning................. 1998 $ 171,875 $ 225,000(2) -- 433,333 1,000
Chief Executive Officer 1997 140,000 -- -- -- 1,000
Perry W. Steiner................ 1998 63,718 100,000(3) -- 550,000 --
President 1997 -- -- -- -- --
Kelly J. Wical.................. 1998 110,000 35,000(3) -- 41,667 --
Chief Technology Officer 1997 63,814 35,000(4) -- 106,667 --
Draper M. Jaffray............... 1998 120,000 50,000(5) -- 10,000 --
Vice President of Business 1997 120,000 -- -- 80,267 --
Development
Robert E. Strawman.............. 1998 76,846 25,000(3) -- 90,000 --
Chief Financial Officer and 1997 -- -- -- -- --
Treasurer
</TABLE>
- ------------------------
(1) Represents insurance premiums paid by the Company with respect to insurance
for the benefit of the Named Executive Officer's family.
(2) Includes $112,500 paid in February 1999 for performance in 1998.
(3) Paid in February 1999 for performance in 1998.
(4) Paid in March 1998 for performance in 1997.
(5) Includes $25,000 paid in February 1999 for performance in 1998.
15
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows for the fiscal year ended December 31, 1998,
certain information regarding options granted to the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES % OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED OPTION TERM(4)
OPTIONS TO EMPLOYEES IN EXERCISE PRICE EXPIRATION ----------------------
NAME GRANTED (#)(1) FISCAL YEAR(2) ($/SH)(3) DATE 5% ($) 10% ($)
- -------------------------- -------------- ----------------- --------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Joel A. Ronning........... 433,333 21.72% 3.00 5/7/03 359,166 793,662
Perry W. Steiner.......... 550,000 27.56 8.50 7/30/08 2,945,250 7,433,250
Kelly J. Wical............ 26,667 1.34 3.00 4/20/08 50,401 127,202
15,000 .75 23.40 12/14/08 221,130 558,090
Draper M. Jaffray......... 10,000 .50 23.40 12/14/08 147,420 372,060
Robert E. Strawman........ 80,000 4.01 3.00 4/27/08 151,200 381,600
10,000 .50 23.40 12/14/08 147,420 372,060
</TABLE>
- ------------------------
(1) Stock options generally 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. Mr. Ronning's stock option becomes exercisable at a rate of 25%
on the date of grant and 18.75% annually thereafter and expires five years
from the date of grant. Mr. Steiner's stock option vests 137,500 shares on
his first date of employment and options to purchase an additional 137,500
shares vest on the third anniversary of his date of employment; provided,
however, that the vesting of such options will accelerate if certain events
occur related to his relocation. Of the remaining options granted to Mr.
Steiner, options to purchase 91,666 shares will vest on the first
anniversary of his hire date, options to purchase 91,667 shares will vest on
the second anniversary of his hire date and options to purchase 91,667
shares will vest on the third anniversary of his hire date. The option
expires ten years from the date of grant.
(2) Based on options to purchase 1,995,452 shares of the Company's Common Stock
granted in fiscal year ended December 31, 1998.
(3) All options were granted at the fair market value of the Company's Common
Stock on the date of grant.
(4) The potential realizable value is calculated based on the term of the option
at its time of grant. It is calculated by assuming that the stock price on
the date of grant appreciates at the indicated annual rate, compounded
annually for the entire term of the option and that the option is exercised
and sold on the last day of its term for the appreciated stock price. No
gain to the option holder is possible unless the stock price increases over
the option term. The 5% and 10% assumed rates of appreciation are derived
from the rules of the SEC and do not represent the Company's estimate or
projection of the future Common Stock price.
16
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
This table discloses the aggregate dollar value realized upon exercise of
stock options in the last fiscal year by the Named Executive Officers. For each
Named Executive Officer, the table also includes the total number of unexercised
options and the aggregate dollar value of in-the-money unexercised options held
at the end of the last completed fiscal year, separately identifying the
exercisable and unexercisable options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE- MONEY OPTIONS AT
SHARES DECEMBER 31, 1998 DECEMBER 31, 1998 (2)
ACQUIRED VALUE -------------------------- ---------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) ($) (1) (#) (#) ($) ($)
- ----------------------------- ----------- ------------ ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Joel A. Ronning.............. 150,000 $ 3,225,000 171,666 325,000 $ 5,929,144 $ 10,562,500
Perry W. Steiner............. 23,000 381,000 114,500 412,500 3,091,500 11,137,500
Kelly J. Wical............... 14,000 305,375 12,667 111,668 428,303 2,705,000
Draper M. Jaffray............ 8,000 179,000 32,067 50,200 1,102,265 1,502,763
Robert E. Strawman........... -- -- -- 90,000 -- 2,721,000
</TABLE>
- ------------------------
(1) The value realized is based on the fair market value of the Company's
Common Stock on date of exercise minus the exercise price.
(2) The valuations are based on the fair market value of the Company's Common
Stock on December 31, 1998 of $35.50 minus the exercise price of the
options.
EMPLOYMENT AGREEMENTS
In May 1998, the Company entered into an employment and non-competition
agreement (the "Employment Agreement") with Joel A. Ronning, the Company's 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 $225,000. In addition, in 1998, Mr. Ronning received a bonus
consisting of 50% of his base salary upon the successful completion of the
Company's initial public offering and in February 1999, Mr. Ronning received an
additional bonus equal to 50% of his base salary in recognition of the Company's
successful achievement of 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 the event of a change of control, any
unvested and unexercised stock options held by Mr. Ronning will immediately vest
and become exercisable. Mr. Ronning has also agreed 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.
In July 1998, the Company entered into an employment agreement with Perry
Steiner, the Company's President. Mr. Steiner's compensation pursuant to his
employment agreement consists of base salary of $200,000. In addition, Mr.
Steiner was paid a bonus equal to 50% of his base salary pursuant to the terms
of his employment agreement. Future annual bonuses will be determined at the
discretion of the Board. Mr. Steiner also was granted options to purchase
550,000 shares of the Company's Common Stock at an exercise price equal to $8.50
per share. Options to purchase 137,500 shares of Common Stock vested on Mr.
Steiner's first day of employment with the Company and options to purchase an
additional 137,500 shares of Common Stock will vest on the third anniversary of
Mr. Steiner's date of employment; provided that vesting of such options will
accelerate if certain events occur related to Mr. Steiner's relocation. Of the
17
<PAGE>
remaining options, options to purchase 91,666 shares of Common stock will vest
on the first anniversary of Mr. Steiner's hire date, options to purchase 91,667
shares of Common Stock will vest on the second anniversary of his hire date and
options to purchase 91,667 shares of Common Stock will vest on the third
anniversary of his hire date. In the event of a change of control, as defined in
his employment agreement, any unvested stock options granted to Mr. Steiner in
connection with his employment agreement (except, in the case of a change of
control that occurs after April 1, 1999 for any options that have failed to vest
by April 1, 1999 as a result of a failure to relocate as described above) will
immediately vest and become exercisable. If Mr. Steiner is terminated
involuntarily other than for cause, he will be entitled to receive upon
execution of a one year noncompete agreement (i) salary continuation payments,
at his monthly base salary rate, for a period of twelve months after his date of
termination, (ii) acceleration of vesting for the next increment of outstanding
options that have not vested and (iii) a bonus for the year in which termination
occurred. If Mr. Steiner terminates his employment voluntarily, the Company has
the right to require Mr. Steiner to execute a noncompete agreement effective for
a period of one year from the date of termination. If the Company exercises this
option, Mr. Steiner will receive salary continuation payments, at his monthly
base salary rate, for a period of six months after his date of termination, if
termination occurs in his first year of employment, or for a period of twelve
months after his date of termination, if termination occurs subsequent to the
first anniversary of his hire date.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to April 1998, the Company did not have a Compensation Committee, and
the entire Board participated in all compensation decisions, except that Mr.
Ronning did not participate in decisions relating to his compensation. In April
1998, the Board formed the Compensation Committee to review and recommend to the
Board the compensation and benefits for the Company's executive officers and
administer the Company's Option Plan. No current member of the Compensation
Committee is an officer or employee of the Company and no executive officer of
the Company serves as a member of a compensation committee of any entity that
has one or more executive officers serving as a member of the Compensation
Committee.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION (1)
INTRODUCTION
The Company's executive compensation policies and practices are approved by
the Compensation Committee of the Board of Directors (the "Committee"). The
Committee consists of three directors who are not employees of the Company. The
Committee's determinations on compensation of the Chief Executive Officer and
other executive officers are reviewed with all the non-employee directors.
PHILOSOPHY
The Committee has implemented compensation policies, plans and programs
which seek to enhance stockholder value by aligning the financial interests of
the executive officers with those of its stockholders. Annual base salaries are
generally set at market-based competitive median levels. The Company relies on
annual incentive compensation and stock options to attract, retain, motivate and
reward executive officers and other key employees. Incentive compensation is
variable and tied to corporate performance. The plans are designed to provide an
incentive to management to grow revenues, provide quality returns on investment,
enhance stockholder value and contribute to the long-term growth of the Company.
All incentive compensation plans are reviewed at least annually to assure they
meet the current strategies and needs of the business.
- ------------------------
(1) The material in this report is not "soliciting material," is not deemed
"filed" with the SEC, and is not to be incorporated by reference into any
filing of the Company under the Securities Act of 1933, as amended or
Exchange Act, whether made before or after the date hereof and irrespective
of any general incorporation language contained in such filing.
18
<PAGE>
COMPENSATION PLANS
The Company's executive compensation is based on three components, each of
which is intended to support the overall compensation philosophy.
BASE SALARY. Base salary is targeted at the median level for emerging
Internet companies of similar characteristics such as sales volume,
capitalization and financial performance. Salaries for executive officers are
reviewed by the Committee on an annual basis and may be changed based on the
individual's performance or a change in competitive pay levels in the
marketplace.
The Committee reviews with the Chief Executive Officer an annual salary plan
for the Company's executive officers (other than the Chief Executive Officer).
The salary plan is modified as deemed appropriate and approved by the Committee.
The annual salary plan is developed by the Company's Chief Executive Officer
based on publicly available information on organizations with similar
characteristics and on performance judgments as to the past and expected future
contributions of the individual executive. The Committee reviews and establishes
the base salary of the Chief Executive Officer based on similar competitive
compensation data and the Committee's assessment of his past performance and its
expectation as to his future contributions in directing the long-term success of
the Company.
The Committee increased the Chief Executive Officer's salary in August 1998
to the current level of $225,000 per year. The salary increase reflected the
Committee's desire to adjust Mr. Ronning's salary to a competitive level, as
well as reward Mr. Ronning for his performance in bringing the Company out of
its development stage and in completing its initial public offering.
ANNUAL INCENTIVES. The Company's short-term incentives are paid pursuant to
annual bonus plans agreed to by the Committee and the executive at the beginning
of the year. The Committee believes that the annual bonus of key employees,
including executive officers, should be based on optimizing revenues and
margins, and prudent management of the expenses of the business. Accordingly,
the bonus plan for 1998 was based on achieving certain revenue levels and taking
the Company public. The bonus of $225,000 paid to the Chief Executive Officer
for 1998 was based on the pre-established performance goals as described.
EQUITY INCENTIVES. Long-term equity incentives are provided through grants
of stock options to executive officers and other key employees pursuant to the
Plan. The stock component of compensation is intended to retain and motivate
employees to improve long-term stockholder value. Stock options are granted at
fair market value and have value only if the Company's stock price increases.
Stock options generally become exercisable at a rate of 25% beginning on the
first anniversary of the vesting commencement date and 25% annually thereafter.
The Committee believes this element of the total compensation program directly
links the participant's interests with those of the stockholders and the
long-term performance of the Company.
The Committee establishes the number and terms of options granted under the
Plan. The Committee encourages executives to build a substantial ownership
investment in the Company's common stock. The table on page 12 reflects the
ownership position of the directors and executive officers at February 1, 1999.
Outstanding performance by an individual executive officer is recognized through
larger option grants.
The Committee has delegated authority for granting certain options to a
Stock Option Committee made up of the Company's Chief Executive Officer and
President. All options granted by the Stock Option Committee require
ratification by the Board of Directors. The Compensation Committee retains the
authority to approve option grants to executive officers and directors of the
Company.
Out of a total of 1,995,452 options granted in 1998, executive officers of
the Company received grants for 1,282,500 shares, or approximately 64% of the
total options granted in 1998. The Chief Executive Officer was granted an option
in May 1998 to acquire 433,333 shares. The number of shares awarded in the 1998
grant recognizes the consistently improved performance of the Company's business
since 1996 under
19
<PAGE>
Mr. Ronning's leadership and is further incentive for Mr. Ronning to remain with
the Company through the option's vesting term of four years.
The Committee believes that the programs described above provide
compensation that is competitive with comparable emerging Internet companies,
links executive and stockholder interests and provides the basis for the Company
to attract and retain qualified executives. The Committee will continue to
monitor the relationship among executive compensation, the Company's performance
and stockholder value.
COMPENSATION COMMITTEE
Thomas F. Madison, Chairman
J. Paul Thorin
William Lansing
20
<PAGE>
PERFORMANCE MEASUREMENT COMPARISON (1)
The SEC requires a comparison on an indexed basis of cumulative total
stockholder return for the Company, a relevant broad equity market index and a
published industry line-of-business index. The following graph shows a
comparison of cumulative stockholder return of an investment of $100 in cash on
August 11, 1998 (the date the Company's Common Stock began trading on the Nasdaq
National Market), September 30, 1998 and December 31, 1998 in (i) the CRSP Total
Return Index for the Nasdaq Stock Market (U.S. Companies) (the "Nasdaq Composite
Index"), (ii) the Hambrecht & Quist ("H&Q") Technology Index, and (iii) the
Company's Common Stock. The H&Q Technology Index is composed of approximately
200 technology companies in the semiconductor, electronics, medical, and related
technology industries. Historic stock price performance is not necessarily
indicative of future stock price performance. All values assume reinvestment of
full amount of all dividends.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
DOLLARS DIGITAL RIVER, INC. NASDAQ STOCK MARKET (U.S.) HAMBRECHT & QUIST TECHNOLOGY
<S> <C> <C> <C>
8/11/98 100 100 100
9/30/98 103 96 93
12/31/98 418 124 132
</TABLE>
- ------------------------
(1) This section is not "soliciting material," is not deemed "filed" with the
SEC, and is not to be incorporated by reference in any filing of the Company
under the Securities Act of 1933, as amended, or the Exchange Act, whether
made before or after the date hereof and irrespective of any general
incorporation language in any such filing.
21
<PAGE>
CERTAIN TRANSACTIONS
TRANSACTIONS WITH TECH SQUARED, INC.
Joel A. Ronning is currently the Chairman of the Board of Directors of Tech
Squared, Inc. and owns approximately 46% of Tech Squared's outstanding Common
Stock as of December 31, 1998. In December 1995, Mr. Ronning issued an option to
MacUSA, Inc., a wholly-owned subsidiary of Tech Squared, Inc. to purchase
3,200,000 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. In
December 1998, MacUSA, Inc. exercised part of the option to purchase 200,000
shares which it subsequently sold in December 1998. During the term of the
option, Mr. Ronning has agreed to vote the remaining 3,000,000 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 remaining
option to purchase Mr. Ronning's interest in Digital River, it will own
approximately 15.4% of the outstanding capital stock of the Company as of
December 31, 1998. In addition, some of Mr. Ronning's time is spent fulfilling
his duties as Chairman of the Board of Directors of Tech Squared, Inc.
Mr. Reese, a director of the Company, is also President and Chief Executive
Officer and a director of Tech Squared, Inc.
In fiscal 1998, Tech Squared, Inc. provided office and warehouse space and
certain administrative, financial and software product fulfillment services for
the Company. Charges for these services totaled approximately $453,000 for
fiscal 1998.
TRANSACTIONS WITH FUJITSU LIMITED
Fujitsu Limited ("Fujitsu"), which owns 11.2% of the outstanding capital
stock of the Company as of December 31, 1998, purchased 2,133,333 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 bona fide third party offer or change
in control, respectively; and a perpetual, exclusive and royalty-free license to
use, develop, market and distribute certain encryption technologies, unrelated
to the current encryption technologies utilized by the Company relating to
electronic software delivery, 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 60,000 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 perpetual, exclusive and
royalty-free license to use, develop, market and distribute certain encryption
technologies, unrelated to the current encryption technologies utilized by the
Company relating to electronic software delivery, 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.
22
<PAGE>
Mr. Thorin, a director of the Company, is also Vice President and General
Counsel of Fujitsu America, Inc., a subsidiary of Fujitsu.
TRANSACTIONS WITH CHRISTOPHER J. SHARPLES
Christopher J. Sharples, a director and stockholder of the Company, has
purchased, in the aggregate, 1,234,666 shares of Common Stock for an aggregate
purchase price of $3,704,000 or $3.00 per share. Mr. Sharples subsequently sold
155,823 shares of Common Stock in December 1998. In addition, in February 1998,
Mr. Sharples and another stockholder (the "Sharples Team") 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, to be based in the United Kingdom, for a term of three years. As
consideration for their services, Mr. Sharples and the other stockholder each
received a warrant issuable for 100,000 shares of Common Stock, at a purchase
price of $3.00 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 (which converted into 1,000,000 shares of Common Stock
upon consummation of the Company's initial public offering). Wasserstein
subsequently sold 126,257 shares of Common Stock in December 1998. In connection
with the purchase of the Series A Preferred Stock, the Company issued to
Wasserstein a warrant to purchase 50,000 shares of Common Stock at $3.00 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 became exercisable as of the date of the Company's
initial public offering and expires on the fifth anniversary of the initial
public offering. The Conditional Warrant represents the right to purchase
100,000 shares of Common Stock at $3.00 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.
From January 1997 to July 1998, Mr. Steiner, the President and a director of
the Company, served as Vice President of Wasserstein Perella & Co., Inc. and
Wasserstein Perella Ventures, Inc., the general partner of Wasserstein.
23
<PAGE>
OTHER MATTERS
OTHER BUSINESS
The Board of Directors knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters are properly brought
before the meeting, it is the intention of the persons named in the accompanying
proxy to vote on such matters in accordance with their best judgment.
ANNUAL REPORT TO STOCKHOLDERS AND ANNUAL REPORT ON FORM 10-K
A copy of the 1998 Annual Report to Stockholders accompanies this Proxy
Statement. The Company's annual report on Form 10-K for the year ended December
31, 1998, as filed with the SEC, is available at no charge to stockholders upon
written request to the Company at its business address. Copies may also be
obtained without charge through the SEC's World Wide Web site at
http://www.sec.gov.
By Order of the Board of Directors
[SIGNATURE]
GREGORY R.L. SMITH
SECRETARY
March 23, 1999
24
<PAGE>
--------------------
COMPANY #
THERE ARE TWO WAYS TO VOTE YOUR PROXY CONTROL #
--------------------
YOUR INTERNET VOTE AUTHORIZES THE NAMED PROXIES TO VOTE YOUR SHARES IN THE
SAME MANNER AS IF YOU MARKED, SIGNED AND RETURNED YOUR PROXY CARD.
VOTE BY INTERNET -- http://www.eproxy.com/driv/ -- QUICK *** EASY *** IMMEDIATE
- - Use the Internet to vote your proxy 24 hours a day, 7 days a week.
- - You will be prompted to enter your 3-digit Company Number and your 7-digit
Control Number which is located above in the upper right hand corner to
obtain your records and create an electronic ballot.
VOTE BY MAIL
Mark, sign and date your proxy card and return it in the postage-paid
envelope we've provided or return it to Digital River, Inc., c/o Shareowner
Services-SM-, P.O. Box 64873, St. Paul, MN 55164-0873.
IF YOU VOTE BY INTERNET, PLEASE DO NOT MAIL YOUR PROXY CARD
PLEASE DETACH HERE
<TABLE>
<S> <C>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2, AND 3.
1. Election of directors: 01 Thomas F. Madison 02 Charles E. Reese Jr. / / Vote FOR / / Vote WITHHELD
all nominees from all nominees
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDICATED NOMINEE, ------------------------------------
WRITE THE NUMBER(S) OF THE NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT.) | |
------------------------------------
2. Approval of 1998 Stock Option Plan, As Amended / / For / / Against / / Abstain
3. Ratification of Selection of Independent Accountants / / For / / Against / / Abstain
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN, WILL BE VOTED FOR
EACH PROPOSAL.
Address Change? Mark Box / /
Indicate changes below:
Dated: _______________________, 1999
------------------------------------
| |
| |
------------------------------------
Signature(s) in Box
Please sign exactly as your name(s)
appear on Proxy. If held in joint
tenancy, all persons must sign.
Trustees, administrators, etc.,
should include title and authority.
Corporations should provide full name
of corporation and title of authorized
officer signing the proxy.
</TABLE>
<PAGE>
DIGITAL RIVER, INC.
ANNUAL MEETING OF STOCKHOLDERS
TUESDAY, APRIL 27, 1999
3:30 PM
RADISSON HOTEL
35 SOUTH 7TH STREET
MINNEAPOLIS, MN
DIGITAL RIVER, INC.
9625 W 76TH ST. SUITE 150 EDEN PRAIRIE, MN 55344 PROXY
- --------------------------------------------------------------------------------
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR USE AT THE ANNUAL
MEETING ON APRIL 27, 1999.
The shares of stock you hold in your account will be voted as you specify below.
IF NO CHOICE IS SPECIFIED, THE PROXY WILL BE VOTED "FOR" ITEMS 1, 2, AND 3.
By signing the proxy, you revoke all prior proxies and appoint Joel A.
Ronning, and Perry W. Steiner, and each of them, with full power of
substitution, to vote your shares on the matters shown on the reverse side
and any other matters which may come before the Annual Meeting and all
adjournments.
SEE REVERSE FOR VOTING INSTRUCTIONS
