<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission file number 000-24643
DIGITAL RIVER, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1901640
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9625 WEST 76TH STREET, SUITE 150
EDEN PRAIRIE, MINNESOTA 55344
(Address of principal executive offices)
--------------------------
(612) 253-1234
(Registrant's telephone number, including area code)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /x/ No / /
COMMON STOCK, $0.01 PAR VALUE 20,741,918 SHARES
----------------------------- ----------------------------------------
(Class) Outstanding as of November 5, 1999
<PAGE>
DIGITAL RIVER, INC.
Form 10-Q
Index
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at September 30, 1999 and December 31, 1998................................................ 3
Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 1999 and 1998............................ 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and 1998...................................... 5
Notes to Condensed Consolidated Financial Statements....................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................. 8
Item 3. Qualitative and Quantitative Disclosure about Market Risk.................................. 13
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.................................................. 14
Item 6. Exhibits and Reports on Form 8-K........................................................... 15
SIGNATURES................................................................................................ 16
EXHIBIT INDEX............................................................................................. 17
</TABLE>
2.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGITAL RIVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
September 30,
1999 December 31, 1998
--------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $10,730 $63,503
Short-term investments 47,537 10,894
Accounts receivable, net 2,091 1,487
Prepaid expenses and other 637 420
--------- --------
Total current assets 60,995 76,304
PROPERTY AND EQUIPMENT, NET 5,338 3,914
GOODWILL, NET AND OTHER ASSETS 20,752 110
--------- --------
$87,085 $80,328
--------- --------
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $8,839 $3,880
Accrued payroll 1,633 807
Other current liabilities 1,169 1,054
--------- --------
Total current liabilities 11,641 5,741
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding - -
Common Stock, $.01 par value; 45,000,000 shares authorized;
20,730,250 and 19,544,791 shares issued and outstanding 207 195
Additional paid-in capital 114,877 93,883
Deferred compensation (806) (1,368)
Accumulated deficit (38,834) (18,123)
--------- --------
Total stockholders' equity 75,444 74,587
--------- --------
$87,085 $80,328
--------- --------
--------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3.
<PAGE>
DIGITAL RIVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data; Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
1999 1998 1999 1998
----------- --------- ----------- ----------
<S> <C> <C> <C> <C>
SALES $20,068 $5,758 $47,589 $11,504
COST OF SALES 16,253 4,819 38,889 9,610
----------- --------- ----------- ----------
Gross profit 3,815 939 8,700 1,894
----------- --------- ----------- ----------
OPERATING EXPENSES:
Sales and marketing 4,857 3,105 12,826 6,538
Product development and operations 4,025 1,292 11,315 2,903
General and administrative 1,098 751 3,123 2,164
Amortization of goodwill and other acquisition related
costs 3,275 - 4,577 -
----------- --------- ----------- ----------
Total operating expenses 13,255 5,148 31,841 11,605
----------- --------- ----------- ----------
LOSS FROM OPERATIONS (9,440) (4,209) (23,141) (9,711)
INTEREST INCOME 752 269 2,430 419
----------- --------- ----------- ----------
Net loss $(8,688) $(3,940) $(20,711) $(9,292)
----------- --------- ----------- ----------
----------- --------- ----------- ----------
Basic and diluted net loss per share $(0.42) $(0.26) $(1.03) $(0.74)
----------- --------- ----------- ----------
----------- --------- ----------- ----------
Basic and diluted weighted average common shares outstanding 20,604 14,894 20,137 12,484
----------- --------- ----------- ----------
----------- --------- ----------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4.
<PAGE>
DIGITAL RIVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands; Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1999 1998
------------ --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(20,711) $(9,292)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of goodwill and other acquisition related costs 4,296 -
Depreciation and other amortization 1,238 439
Deferred compensation expense 672 959
Changes in assets and liabilities:
Accounts receivable and prepaid expenses (628) (1,278)
Accounts payable 3,392 1,935
Other current liabilities 925 605
------------ --------
Net cash used in operating activities (10,816) (6,632)
------------ --------
INVESTING ACTIVITIES:
Purchases of short-term investments (94,643) (10,840)
Proceeds from sales of investments 58,000 2,000
Acquisitions, net of cash received (3,320) -
Purchases of equipment (2,526) (2,548)
Patent acquisition costs (209) (44)
------------ --------
Net cash used in investing activities (42,698) (11,432)
------------ --------
FINANCING ACTIVITIES:
Sales of Common Stock 1,137 35,393
Payment of deferred costs and other (396) (44)
------------ --------
Net cash provided by financing activities 741 35,349
------------ --------
Net increase (decrease) in cash and cash equivalents (52,773) 17,285
CASH AND CASH EQUIVALENTS, beginning of period 63,503 2,126
------------ --------
CASH AND CASH EQUIVALENTS, end of period $10,730 $19,411
------------ --------
------------ --------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Issuance of Common Stock in connection with acquisitions and purchase of assets $18,713 $ -
------------ --------
------------ --------
Issuance of Common Stock in connection with earn-out payments $1,046 $ -
------------ --------
------------ --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5.
<PAGE>
DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The unaudited condensed consolidated financial statements included
herein reflect all adjustments, consisting only of normal recurring
adjustments, which in the opinion of management are necessary to fairly state
the Company's consolidated financial position, results of operations and cash
flows for the periods presented. These condensed consolidated financial
statements should be read in conjunction with the Company's audited
consolidated financial statements included in the Company's Form 10-K for the
year ended December 31, 1998 as filed with the Securities and Exchange
Commission. The results of operations for the period ended September 30, 1999
are not necessarily indicative of the results to be expected for any
subsequent quarter or for the entire fiscal year ending December 31, 1999.
The December 31, 1998 balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles.
2. PRINCIPLES OF CONSOLIDATION:
The condensed consolidated financial statements include the accounts of
Digital River, Inc. and its wholly owned subsidiaries. All intercompany
balances and transactions have been eliminated.
3. NET LOSS PER SHARE:
Basic loss per share is computed using the weighted-average number of
common shares outstanding excluding contingently issuable or returnable
shares, and diluted loss per share is computed using the weighted-average
number of common shares outstanding and dilutive potential common shares
outstanding. As a result of the losses incurred by the Company for the nine
months ended September 30, 1999 and 1998, respectively, all potential common
shares were anti-dilutive and were excluded from the diluted net loss per
share calculations.
The following table summarizes securities outstanding as of each period
end which were not included in the calculation of diluted net loss per share
since their inclusion would be anti-dilutive:
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
-------------------- --------------------
<S> <C> <C>
Common Stock warrants 371,086 803,008
Common Stock options 3,460,985 2,321,093
</TABLE>
4. ACQUISITIONS AND PURCHASES OF ASSETS:
In April 1999, pursuant to an Agreement and Plan of Merger by and among
the Company, Maagnum Internet Group, a Connecticut corporation ("Maagnum"),
and Cyrus Maaghul, the sole shareholder of Maagnum, Maagnum merged with and
into the Company (the "Merger"). At the effective time of the Merger, Mr.
Maaghul's shares of Maagnum common stock converted into the right to receive
from the Company $2.5 million in cash, 88,809 shares of Common Stock of the
Company, and up to an additional 320,161 shares of Common Stock that may be
earned by Mr. Maaghul upon the achievement of certain business goals over the
24-month period following the closing date of the Merger. In addition,
pursuant to a Stock Purchase Agreement dated April 1, 1999 by and between the
Company and Meiman Kentjana, a key employee of Maagnum, in consideration for
Mr. Kentjana's agreement to waive certain rights with
6.
<PAGE>
respect to Maagnum, the Company issued to Mr. Kentjana on the closing date of
the Merger 22,841 shares of Common Stock and gave him the right to receive up
to an additional 192,374 shares of Common Stock that may be earned by Mr.
Kentjana upon the achievement of certain business goals over the 24-month
period following the closing date of the Merger.
In the quarter ended September 30, 1999, Messrs. Maaghul and Kentjana of
Maagnum collectively received earn-out payments of 48,095 shares of Common
Stock valued at $1,046,000. The Company charged to expense this amount and
such amount is included in the Condensed Consolidated Statements of
Operations.
Also in April 1999, pursuant to an Asset Purchase Agreement by and among
the Company, Public Software Library Ltd., a Texas limited partnership
("Seller"), and the partners of Seller, the Company purchased substantially
all of the assets and assumed certain liabilities of Seller in exchange for
an aggregate of 161,842 shares of Common Stock of the Company.
In June 1999, pursuant to an Agreement and Plan of Merger and
Reorganization by and among the Company, Universal Commerce, Incorporated, a
Delaware corporation ("RegNow"), certain stockholders of RegNow (the
"Stockholders"), RegNow merged with and into the Company (the "RegNow
Merger"). At the effective time of the RegNow Merger, the Stockholders
received from the Company $2.0 million in cash and 306,884 shares of Common
Stock of the Company in exchange for all outstanding RegNow shares. In
addition, the Stockholders may receive additional shares of Common Stock upon
the achievement of certain revenue goals over the 12-month period following
the closing date of the RegNow Merger. In addition, certain individuals who
are Stockholders are also eligible to receive up to an additional $2 million
in cash if they remain employees of the Company for a period of 12 months
following the closing date of the RegNow Merger.
Each of the above transactions was accounted for using the purchase
method. The purchase price in each transaction was allocated substantially to
goodwill and other intangibles, which are being amortized over three years.
If any earn-out payments, as listed above, are earned, they will be
recognized as compensation expense in the period in which the required
milestones are achieved.
The following unaudited pro forma condensed results of operations for
the nine months ended September 30, 1999 and 1998 have been prepared as if
each of the above three transactions had occurred on January 1, 1999 and
1998, respectively:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1999 1998
---------- ---------
(In Thousands)
<S> <C> <C>
Sales $51,557 $16,293
Loss from operations (25,544) (15,332)
Net loss (23,215) (15,081)
Basic and diluted loss per share $(1.13) $(1.15)
</TABLE>
This financial information does not purport to represent results that
would actually have been obtained if the transactions had been in effect on
January 1, 1999 and 1998 or any future results that may in fact be realized.
7.
<PAGE>
In July 1999, the Company entered into a definitive agreement with Tech
Squared Inc., an owner of approximately 15% of the Company's Common Stock,
whereby the Company will purchase certain Tech Squared assets consisting of
3.0 million shares of the Company's Common Stock and $1.2 million of cash in
exchange for 2.65 million shares of the Company's Common Stock, thus
resulting in a net 350,000 shares being retired from outstanding shares. The
transaction will be accounted for as a tax-free reorganization. The
transaction is subject to approval by the shareholders of Tech Squared and
other pre-closing conditions including the sale or liquidation of the
operations of Tech Squared. The Company may, under certain circumstances
prior to closing, cancel the transaction. The closing of this transaction is
anticipated to take place in the Company's fourth quarter of 1999.
5. STOCK OPTIONS:
In August, 1999, the Board of Directors adopted the 1999 Non-Officer
Stock Option Plan (the "Non-Officer Plan"). The Non-Officer Plan provides for
the issuance of nonstatutory stock options to selected employees and
consultants to purchase up to 1,300,000 shares of Common Stock. Terms and
conditions of the Non-Officer Plan are generally similar to the Company's
1998 Stock Option Plan.
6. SUBSEQUENT EVENT:
In October 1999, pursuant to an Asset Purchase Agreement by and among
the Company, Walnut Creek CDROM, Inc. ("Walnut Creek"), and the sole
shareholder of Walnut Creek, the Company purchased certain assets of Walnut
Creek in exchange for $1 million in cash and 143,885 shares of Common Stock
of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE COMPANY NOTES THAT, EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED
HEREIN, THE MATTERS DISCUSSED BELOW CONTAIN FORWARD-LOOKING STATEMENTS WHICH
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY
CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR
INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS,
PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. THE COMPANY EXPRESSLY DISCLAIMS ANY OBLIGATION TO UPDATE THIS
INFORMATION OR PUBLICLY RELEASE ANY REVISION OR REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE OF THIS REPORT. SUCH FACTORS INCLUDE, AMONG
OTHERS: THE COMPANY'S LIMITED OPERATING HISTORY AND VARIABILITY OF OPERATING
RESULTS, EXPECTATION OF FUTURE LOSSES, RISKS ASSOCIATED WITH ELECTRONIC
SOFTWARE DELIVERY, DEPENDENCE ON THE INTERNET AND GROWTH IN ELECTRONIC
COMMERCE AND INTERNET INFRASTRUCTURE DEVELOPMENT, DEPENDENCE ON SOFTWARE
PUBLISHERS, DEPENDENCE ON ONLINE RETAILERS, SYSTEM DEVELOPMENT AND ELECTRONIC
COMMERCE SECURITY RISKS, RAPID TECHNOLOGICAL CHANGES, COMPETITION IN THE
ELECTRONIC COMMERCE INDUSTRY, THE IMPORTANCE OF ATTRACTING AND RETAINING
PERSONNEL, MANAGEMENT OF THE COMPANY'S GROWTH, INTEGRATION OF ACQUIRED
COMPANIES, DEPENDENCE ON KEY EMPLOYEES AND OTHER RISK FACTORS REFERENCED IN
THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998.
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 Commerce Network Server ("CNS") technology related
to electronic commerce. In 1996, the Company began to focus its business
development efforts on building its inventory of software products
8.
<PAGE>
through contracts with software publishers and in 1997, the Company began to
develop distribution relationships through contracts with online retailers.
In the second quarter of 1999 the Company added approximately 3,000 software
publisher clients through its acquisition of three commerce outsourcing
providers to the shareware publishing industry, Maagnum Internet Group,
Public Software Library and Universal Commerce, Incorporated. As of September
30, 1999, the Company had approximately 4,400 software publisher clients and
1,200 online retailer clients.
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 electronic software delivery ("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 substantially all sales. In early 1999, the
Company began formally offering a transaction fee based e-commerce service,
CommerceBridge, for products other than third-party software. There can be no
assurance that the Company will derive any significant revenue from this
service.
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 September 30, 1999, had an accumulated
deficit of approximately $38.8 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.
9.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
consolidated condensed statements of operations as a percentage of total
revenues for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
1999 1998 1999 1998
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 81.0 83.7 81.7 83.5
---------- ----------- ----------- ----------
Gross profit 19.0 16.3 18.3 16.5
---------- ----------- ----------- ----------
Operating expenses:
Sales and marketing 24.2 53.9 27.0 56.9
Product development and operations 20.1 22.5 23.8 25.2
General and administrative 5.5 13.0 6.5 18.8
Amortization of goodwill and other acquisition related
costs 16.3 - 9.6 -
---------- ----------- ----------- ----------
Total operating expenses (1) 66.1 89.4 66.9 100.9
---------- ----------- ----------- ----------
Loss from operations (47.1) (73.1) (48.6) (84.4)
---------- ----------- ----------- ----------
Interest income, net 3.8 4.7 5.1 3.6
---------- ----------- ----------- ----------
Net loss (43.3)% (68.4)% (43.5)% (80.8)%
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
(1) Operating expenses include non-cash employee stock compensation charges
of $175,000 and $270,000 (0.9% and 4.7% of sales, respectively) for the
three months ended September 30, 1999 and 1998, respectively, and
non-cash employee stock compensation charges of $672,000 and $959,000
(1.4% and 8.3% of sales, respectively) for the nine months ended
September 30, 1999 and 1998, respectively.
SALES
Sales increased to $20.1 million for the quarter ended September 30,
1999 from $5.8 million for the quarter ended September 30, 1998 and increased
to $47.6 million for the nine months ended September 30, 1999, up from $11.5
million for the same period of 1998. The increases were primarily 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 22% and 29% of sales for the
nine months ended September 30, 1999 and 1998, respectively.
GROSS PROFIT
Cost of sales increased to $16.3 million in the quarter ended September
30, 1999 from $4.8 million in the quarter ended September 30, 1998 and
increased to $38.9 million for the nine months ended September 30, 1999 from
$9.6 million for the same period of 1998. The increases reflect the Company's
growth in sales. The Company's gross profit margin increased to 19.0% in the
quarter ended September 30, 1999 versus 16.3% in the quarter ended September
30, 1998. This increase was due mainly to the increase in the number of
higher margin, fee based orders that the Company processed during the most
recent quarter. The Company believes that Internet commerce and related
services will
10.
<PAGE>
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 could reduce gross margins.
SALES AND MARKETING
Sales and marketing expense increased to $4.9 million in the quarter
ended September 30, 1999 from $3.1 million in the quarter ended September 30,
1998 and increased to $12.9 million for the nine months ended September 30,
1999 from $6.5 million for the same period of 1998. The increases resulted
from expanding the sales and marketing infrastructure required to increase
the number of and provide support to the Company's software publisher and
online retailer clients and variable expenses which increase in relation to
sales. The primary components of the increase for the comparable quarters
ended September 30 were an increase in wages and benefits of $941,000 and an
increase in credit card fees and chargeback costs of $801,000. As a
percentage of sales, sales and marketing expense decreased to 24.2% in the
quarter ended September 30, 1999 from 53.9% in the quarter ended September
30, 1998, primarily reflecting the Company's increased sales volume. 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 increased to $4.0 million in
the quarter ended September 30, 1999 from $1.3 million in the quarter ended
September 30, 1998 and increased to $11.3 million for the nine months ended
September 30, 1999 from $2.9 million for the same period of 1998. The
increases were primarily related to increased personnel and consulting costs
related to developing, enhancing and maintaining the Company's CNS and
related facilities and customer service related personnel costs. The primary
components of the increase for the comparable quarters ended September 30,
were an increase in consulting costs of $1.1 million, an increase in wages
and benefits of $834,000 and an increase in depreciation expense of $239,000.
As a percentage of sales, product development and operations expense
decreased to 20.1% in the quarter ended September 30, 1999 from 22.5% in the
quarter ended September 30, 1998. 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 increased to $1.1 million in the
quarter ended September 30, 1999 from $751,000 in the quarter ended September
30, 1998 and increased to $3.1 million for the nine months ended September
30, 1999 from $2.2 million for the same period of 1998. The increases were
primarily due to increased personnel and related expenses, legal expenses and
investor relations expenses. As a percentage of sales, general and
administrative expense decreased to 5.5% in the quarter ended September 30,
1999 from 13.0% in the quarter ended September 30, 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
Interest income consists of earnings on the Company's cash, cash
equivalents and short-term investments. The increase over the prior period
was attributable to interest received on higher average
11.
<PAGE>
cash and cash equivalent balances resulting from the sales of Common Stock in
the latter half of 1998. The Company expects interest income to decrease in
the future as cash is used to fund operations and is used for investments in
infrastructure.
INCOME TAXES
The Company paid no income taxes in any reported period. The Company has
incurred a net loss for each period since inception. As of September 30,
1999, the Company had approximately $42 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 that resulted from the sales of Common and Preferred Stock will
limit the future annual realization of the tax net operating loss
carryforwards to a specified percentage under Section 382 of the Internal
Revenue Code.
LIQUIDITY AND CAPITAL RESOURCES
In the first nine months of 1999, the Company used $10.8 million of cash
to fund operations and made additions of equipment and software totaling $2.5
million. The Company used $3.3 million for the acquisition of Maagnum
Internet Group, Public Software Library Ltd. and Universal Commerce,
Incorporated, net of cash received from the acquisitions completed during the
quarter. The Company also purchased $94.6 million in short-term investments
which were partially offset by $58.0 million in sales of investments. In the
same period for 1998, the Company used $6.6 million of cash to fund
operations, $2.5 million for addition of equipment and software and $10.8
million to purchase short-term investments which was partially offset by $2.0
million in sales of investments.
As of September 30, 1999 the Company had approximately $10.7 million of
cash and cash equivalents and $47.5 million of short-term investments. 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 expend
approximately $7.0 million over the next 15 months on capital expenditures
based on the Company's current anticipated growth rate. The Company further
anticipates that it will expend approximately $14.0 million over the next 15
months on product development based on the Company's current anticipated
growth rate in operations. The 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 existing sources of liquidity will
provide adequate cash to fund its operations for at least the next 15 months.
YEAR 2000 COMPLIANCE
Like many other companies, Year 2000 computer issues create certain
risks for the Company. If the Company's internal management information
systems and external electronic commerce information systems do not correctly
recognize and process date information beyond the Year 1999, there could be
an adverse impact on the Company's operations. To address these Year 2000
issues with its internal and external systems, the Company has evaluated such
systems. The Company believes it has completed all activities to remediate
Year 2000 issues as of September 30, 1999, although it will continue testing
throughout the next quarter. These activities are intended to encompass all
major categories of systems used by the Company, including electronic
commerce, sales processing, sales and financial systems. The
12.
<PAGE>
costs incurred to date related to these programs have been less than $25,000.
The total cost does not include potential costs related to any customer or
other claims or the cost of internal software and hardware replaced in the
normal course of business. The total cost is subject to change should events
arise that indicate a Year 2000 issue.
The Company is also working with key suppliers of products and services
to determine that their operations and products are Year 2000 Compliant or to
monitor their progress toward Year 2000 Compliance, as appropriate. The
failure of a major supplier to become Year 2000 Compliant 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.
In addition, the Company has completed internal discussions concerning
contingency planning to address potential problem areas with internal systems
and with suppliers and other third parties. It is expected that assessment,
remediation and contingency planning activities will be on-going throughout
calendar year 1999 with the goal of appropriately resolving all material
internal and external systems and third party issues.
As used by the Company, "Year 2000 Compliant" shall mean software that
can individually, and in combination and in conjunction with all other
systems, products or processes with which they are required or designed to
interface, continue to be used normally and to operate successfully (both in
functionality and performance in all material respects) over the transition
into the twenty first century when used in accordance with the documentation
relating to such software, including being able to, before, on and after
January 1, 2000 substantially conform to the following: (i) use logic
pertaining to dates which allow users to identify and/or use the century
portion of any date fields without special processing; and (ii) respond to
all date elements and date input so as to resolve any ambiguity as to century
in a disclosed, defined and pre-determined manner and provide date
information in ways which are unambiguous as to century, either by permitting
or requiring the century to be specified or where the data element is
represented without a century, the correct century is unambiguous for all
manipulations involving that element. Based on currently available
information, the Company does not believe that the Year 2000 matters
discussed above related to internal systems or products sold to customers
will have a material adverse impact on the its financial condition or overall
trends in results of operations; however, it is still uncertain to what
extent the Company may be affected by such matters. In addition, customers
may delay purchase decisions because of uncertainty about Year 2000 issues.
There also can be no assurance that the failure to ensure Year 2000
Compliance by a supplier or another third party would not have a material
adverse effect on the Company.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not enter into financial instruments for trading or
speculative purposes and does not currently utilize derivative financial
instruments. The operations of the Company are conducted primarily in the
United States and as such are not subject to material foreign currency
exchange rate risk. The Company has no long-term debt.
13.
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) In the quarter ended September 30, 1999, Messrs. Maaghul and
Kentjana of Maagnum collectively received earn-out payments of 48,095 shares
of unregistered Common Stock valued at $1,046,000.
The issuance and sale of the Common Stock was intended to be exempt from
registration and prospectus delivery requirements under the Securities Act of
1933, as amended (the "Securities Act"), by virtue of Section 4(2) thereof
due to, among other things, (i) the limited number of persons to whom the
Common Stock was issued, (ii) the distribution of disclosure documents to the
investor, (iii) the fact that such person represented and warranted to the
Company, among other things, that such person was acquiring the Common Stock
for investment only and not with a view to the resale or distribution
thereof, and (iv) the fact that a certificate representing the Common Stock
was issued with a legend to the effect that such Common Stock had not been
registered under the Securities Act or any state securities laws and could
not be sold or transferred in the absence of such registration or an
exemption therefrom.
(d) The effective date of the Company's registration statement, filed on Form
S-1 under the Securities Act (File No. 333-56787), was August 11, 1998 (the
"Registration Statement"). The class of securities registered was Common
Stock and all securities registered were sold in this initial public offering
(the "IPO"). The managing underwriters for the offering were BT Alex. Brown,
BancAmerica Robertson Stephens and Bear, Stearns & Co. Inc. Pursuant to the
Registration Statement, the Company sold 3,000,000 shares of its Common Stock
for an aggregate gross offering price of $25.5 million.
In connection with the IPO, the Company incurred expenses of
approximately $2.8 million, of which approximately $1.8 million represented
underwriting discounts and commissions and approximately $1 million
represented other expenses related to the offering. All such expenses were
direct or indirect payments to others. The net offering proceeds to the
Company were $22.7 million.
Through September 30, 1999, the Company has used $4.3 million of the net
proceeds from the IPO to purchase equipment and software, $3.3 million
related to acquisitions and $15.1 million of the net proceeds for working
capital and general corporate purposes. The use of the proceeds from the
offering does not represent a material change in the use of the proceeds
described in the Registration Statement.
14.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
<S> <C>
2.5 (1) Acquisition Agreement, dated as of July 11, 1999, by and among the
Registrant and Tech Squared Inc.
3.1 (2) Amended and Restated Certificate of Incorporation
3.2 (2) Bylaws of the Registrant
4.1 (2) Specimen Common Stock Certificate
10.17 1999 Non-Officer Stock Option Plan
10.18 Form of Non-Qualified Stock Option Agreement under the 1999
Non-Officer Stock Option Plan
11.1 (3) Statement of Computation of Per Share Earnings
27.1 Financial Data Schedule
</TABLE>
(1) Filed as an exhibit to the Company's current report on Form
8-K filed by the Company on July 16, 1999, incorporated
herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement
on Form S-1, File No. 333-56787, declared effective on
August 11, 1998, incorporated herein by reference.
(3) See Note 3 to Condensed Consolidated Financial Statements.
(b) REPORTS ON FORM 8-K
The Company filed one current report on Form 8-K during the quarter
ended September 30, 1999. The report was filed on July 16, 1999 and reported
the purchase by the Company of substantially all of the assets of Tech
Squared Inc.
15.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 9, 1999 DIGITAL RIVER, INC.
By: /S/ ROBERT E. STRAWMAN
-------------------------
Robert E. Strawman
Chief Financial Officer
(Principal Financial and
Accounting Officer)
16.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
<S> <C>
2.5 (1) Acquisition Agreement, dated as of July 11, 1999, by and among the
Registrant and Tech Squared Inc.
3.1 (2) Amended and Restated Certificate of Incorporation
3.2 (2) Bylaws of the Registrant
4.1 (2) Specimen Common Stock Certificate
10.17 1999 Non-Officer Stock Option Plan
10.18 Form of Non-Qualified Stock Option Agreement under the 1999
Non-Officer Stock Option Plan
11.1 (3) Statement of Computation of Per Share Earnings
27.1 Financial Data Schedule
</TABLE>
(1) Filed as an exhibit to the Company's current report on Form
8-K filed by the Company on July 16, 1999, incorporated
herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement
on Form S-1, File No. 333-56787, declared effective on
August 11, 1998, incorporated herein by reference.
(3) See Note 3 to Condensed Consolidated Financial Statements.
17.
<PAGE>
DIGITAL RIVER, INC.
1999 NON-OFFICER STOCK OPTION PLAN
ADOPTED AUGUST 10, 1999
1. PURPOSES. The principal purposes of the Digital River, Inc. (the
"Corporation") 1999 Non-Officer Stock Option Plan (the "Plan") Plan are: (a) to
improve individual performance by providing long-term incentives and rewards to
Employees and Consultants who are not Officers or members of the Board of
Directors of the Corporation; (b) to assist the Corporation in attracting,
retaining and motivating Employees and Consultants with experience and ability;
and (c) to associate the interests of such persons with those of the
Corporation's stockholders.
Options granted under this Plan may be Non-Qualified Options.
2. DEFINITIONS. For purposes of this Plan, the following terms shall
have the meanings indicated below:
(a) "AFFILIATE" shall mean any parent corporation or subsidiary
corporation of the Corporation, whether now or hereafter existing, as those
terms are defined in Sections 424(e) and (f), respectively, of the Code.
(b) "BOARD" shall mean the Board of Directors of the Corporation.
(c) "CAPITAL STOCK" shall mean any of the Corporation's authorized but
unissued shares of voting common stock, par value of One Cent ($.01) per share.
(d) "CODE" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(e) "COMMITTEE" shall mean a committee comprised of one or more members
of the Board appointed by the Board in accordance with Section 4 of the Plan.
(f) "CONSULTANT" shall mean any person, including an advisor or other
form of independent contractor, engaged by the Corporation or an Affiliate to
render consulting services and who is compensated for such services (provided
that such services are not in connection with the offer or sale of securities in
a capital-raising transaction, and do not directly or indirectly promote or
maintain a market for the Corporation's securities), provided that the term
"Consultant" shall not include Employees, Officers, Directors, or stockholders
beneficially owning ten percent (10%) or more of the Corporation's Capital
Stock.
(g) "CONTINUOUS SERVICE" shall mean the Optionee's service with the
Corporation or an Affiliate, whether as an Employee, Director or Consultant, is
not interrupted or terminated. The Optionee's Continuous Service shall not be
deemed to have terminated merely because of a change in the capacity in which
the Optionee renders service to the Corporation or an Affiliate as an Employee,
Consultant or Director or a change in the entity for which the Optionee renders
such service, provided that there is no interruption or termination of the
Optionee's Continuous Service. For example, a change in status from an Employee
of the Corporation to a Consultant
1.
<PAGE>
of an Affiliate or a Director of the Corporation will not constitute an
interruption of Continuous Service. The Board or the chief executive officer
of the Corporation, in that party's sole discretion, may determine whether
Continuous Service shall be considered interrupted in the case of any leave
of absence approved by that party, including sick leave, military leave or
any other personal leave.
(h) "CORPORATION" shall mean Digital River, Inc., a Delaware
corporation and any of its Affiliates.
(i) "DIRECTOR" shall mean a member of the Board.
(j) "EMPLOYEE" shall mean any person employed by the Corporation or by
any Affiliate, excluding Officers and Directors of the Corporation (and of any
Affiliate which controls the Corporation) and excluding stockholders
beneficially owning ten percent (10%) or more of the Corporation's Capital
Stock.
(k) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
(l) "FAIR MARKET VALUE" shall mean the price per share determined as
follows: (a) if the security is listed for trading on one or more national
securities exchanges (including the NASDAQ National Market System), the reported
last sales price on such principal exchange on the date in question, or if such
security shall not have been traded on such principal exchange on such date, the
reported last sales price on such principal exchange on the first day prior
thereto on which such security was so traded; or (b) if the security is not
listed for trading on a national securities exchange (including the NASDAQ
National Market System) but is traded in the over-the-counter market, the mean
of the highest and lowest bid prices for such security on the date in question,
or if there are no such bid prices for such security on such date, the mean of
the highest and lowest bid prices on the first day prior thereto on which such
prices existed; or (c) if neither (a) nor (b) is applicable, by any means deemed
fair and reasonable by the Committee (as defined below) which determination
shall be final and binding on all parties.
(m) "NON-QUALIFIED STOCK OPTION" shall mean an Option, not intended to
qualify as an incentive stock option as defined in Section 422 of the Code, to
purchase Capital Stock of the Corporation.
(n) "OFFICER" shall mean a person who is an officer of the Corporation,
including any corporate officer with the title of vice president and above and
any other Employee of the Corporation whom the Board or the Committee classifies
as an "Officer".
(o) "OPTION" shall mean a Non-Qualified Stock Option granted pursuant
to the Plan.
(p) "OPTION AGREEMENT" shall mean a written agreement pursuant to which
the Corporation grants an option to an Optionee and sets the terms and
conditions of the Option.
(q) "OPTION DATE" shall mean the date upon which an option Agreement
for an Option granted pursuant to the Plan is duly executed by or on behalf of
the Corporation.
2.
<PAGE>
(r) "OPTION STOCK" shall mean the voting common stock of the
Corporation, par value of One Cent ($.01) per share (subject to adjustment as
described in Section 7) reserved for Options pursuant to this Plan, or any other
class of stock of the Corporation which may be substituted therefor by exchange,
stock split or otherwise.
(s) "OPTIONEE" shall mean an Employee or Consultant of the Corporation
or one of its Affiliates to whom an Option has been granted under the Plan.
(t) "PLAN" shall mean this 1999 Non-Officer Stock Option Plan, as
amended hereafter from time to time.
(u) "SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
3. OPTIONS AVAILABLE UNDER PLAN. The Corporation's authorized Capital
Stock in an amount equal to One Million Three Hundred Thousand (1,300,000)
shares is hereby made available, and shall be reserved for issuance under
this Plan. The aggregate number of shares available under this Plan shall be
subject to adjustment on the occurrence of any of the events and in the
manner set forth in Section 7. Except as provided in Section 7, in no event
shall the number of shares reserved be reduced below the number of shares
issuable upon exercise of outstanding Options. If an option shall expire or
terminate for any reason without having been exercised in full, the
unpurchased shares, shall (unless the Plan shall have been terminated) become
available for other Options under the Plan.
4. ADMINISTRATION. The Plan shall be administered by the Committee. The
Corporation shall grant Options pursuant to the Plan upon determinations of
the Committee as to which of the eligible persons shall be granted Options,
the number of shares to be optioned and the term during which any such
Options may be exercised. The Committee may from time to time adopt rules and
regulations for carrying out the Plan and shall have authority and discretion
to interpret and construe any provision of the Plan. Each determination,
interpretation or other action made or taken by the Committee pursuant to the
provisions of the Plan shall be final and conclusive. No member of the
Committee will be liable for any action or determination made in good faith
with respect to the Plan or any Option granted under the Plan.
5. ELIGIBILITY FOR NON-QUALIFIED OPTIONS. Non-Qualified Options may be
granted only to an Employee or Consultant of the Corporation or an Affiliate.
Notwithstanding the foregoing, no Employee who is an Officer of the
Corporation (or of any Affiliate which controls the Corporation) or who is a
Director shall be eligible to receive the grant of an Option under the Plan.
No further restrictions are placed on the Committee in determining
eligibility for granting Non-Qualified Options.
6. TERMS AND CONDITIONS OF OPTIONS. Whenever the Committee shall
designate an Optionee, it shall communicate to the Secretary of the
Corporation the name of the Optionee, the number of shares to be optioned and
such other terms and conditions as it shall determine, not inconsistent with
the provisions of this Plan. The chief executive officer or other officer of
the Corporation shall then enter into an Option Agreement with the Optionee,
complying with and subject to the following terms and conditions and setting
forth such other terms and conditions of the Option as determined by the
Committee:
3.
<PAGE>
(a) NUMBER OF SHARES AND OPTION PRICE. The Option Agreement shall state
the total number of shares to which it pertains. The price of Option Stock for a
Non-Qualified Stock Option shall be determined by the Committee and may be less
than the Fair Market Value at the Option Date. The Option price shall be subject
to adjustment as provided in Section 7 hereof.
(b) TIME AND MANNER OF EXERCISE OF OPTION. Options granted hereunder
shall be exercisable as determined by the Committee at the time of the grant of
such Options. Notwithstanding the foregoing, no Option may be exercised after
ten (10) years from the date on which the option was granted.
(c) TERMINATION OF CONTINUOUS SERVICE, EXCEPT DEATH OR DISABILITY. In
the event that the continuous service of an Optionee shall cease for any reason
other than his or her death, disability or "for cause," any vested outstanding
Options shall terminate at the time specified in the Option Agreement; provided,
however, that such vested outstanding Options shall not be exercisable for a
period greater than three (3) months after the termination of Continuous
Service. Any vested Options not exercised within the period specified in the
Option Agreement shall terminate at the expiration of such period. If no such
period is specified in the Option Agreement, then any vested outstanding Options
shall terminate at the time of the Optionee's termination of continuous service.
In the event that Optionee shall be terminated "for cause" including but not
limited to: (i) willful breach of any agreement entered into with the
Corporation; (ii) misappropriation of the Corporation's property, fraud,
embezzlement, breach of fiduciary duty, other acts of dishonesty against the
Corporation; or (iii) conviction of any felony or crime involving moral
turpitude, the Option shall terminate as of the date of the Optionee's
termination of continuous service.
(d) DEATH OR DISABILITY OF OPTIONEE. If the Optionee shall die or
become disabled within the definition of Section 22(e)(3) of the Code while in
the employ of the Corporation or any Affiliate or if the Optionee shall die
within the period after the termination of his or her continuous service with
the Corporation or any Affiliate as provided in paragraph (c) of this section,
and in either case shall not have fully exercised his or her vested Options, any
vested Options granted pursuant to the Plan which were exercisable at the date
of termination of continuous service shall terminate at the time specified in
the option Agreement; provided, however, that such vested Options shall not be
exercisable for a period greater than one (1) year following his or her death or
date of disability. If no such periods are specified in the Option Agreement,
then any vested outstanding Options shall be exercisable only within: (i) six
(6) months following the optionee's death and (ii) thirty (30) days following
the Optionee's disability. In the case of death, such Option shall be exercised
pursuant to paragraph (e) of this Section by the person or persons to whom the
optionee's rights under the Option shall pass by the Optionee's will or by the
laws of descent and distribution, and only to the extent that such Options were
exercisable at the time of death.
(e) TRANSFER OF OPTION. Each Option granted hereunder shall, by its
terms, not be transferable by the Optionee other than by will or by the laws of
descent and distribution, and shall be, during the Optionee's lifetime,
exercisable only by the Optionee or Optionee's guardian or legal representative.
Except as permitted by the preceding sentence, each Option granted under the
Plan and the rights and privileges thereby conferred shall not be transferred,
assigned or pledged in any way (whether by operation of law or otherwise) and
shall not be subject to
4.
<PAGE>
execution, attachment or similar process. Upon any attempt to so transfer,
assign, pledge, or otherwise dispose of the option, or of any right or
privilege conferred thereby, contrary to the provisions of the Option or the
Plan, or upon levy of any attachment or similar process upon such rights and
privileges, the Option, and such rights and privileges, shall immediately
become null and void.
(f) MANNER OF EXERCISE OF OPTIONS. An Option may be exercised, in whole
or in part, at such time or times and with such rights with respect to such
shares which have accrued and are in effect. Such Option shall be exercisable
only by: (i) written notice to the Corporation of intent to exercise the Option
with respect to a specified number of shares of stock; (ii) tendering the
original Option Agreement to the Corporation; and (iii) payment to the
Corporation of the amount of the Option purchase price for the number of shares
of stock with respect to which the Option is then exercised. Payment of the
Option purchase price shall be made in the manner set forth in the Option
Agreement, which may be in: (i) cash, check or equivalent form; (ii) by delivery
of shares of common stock of the Corporation which have been owned for no less
than six (6) months, with a Fair Market Value equal to the Option purchase
price; (iii) by a combination of cash and shares of common stock of the
Corporation, which valued together shall equal the Option purchase price;
provided, however, that there shall be no such exercise at any time as to fewer
than one hundred (100) shares or all of the remaining shares then purchasable by
the Optionee or person exercising the Option. When all shares of Optioned stock
covered by the Option Agreement have been issued to the Optionee, or the Option
shall expire, the Option Agreement shall be canceled.
(g) OPTION CERTIFICATE. The Board of Directors shall have discretion to
issue a certificate representing an Option granted pursuant to this Plan. Such
certificate shall be surrendered to the Corporation upon exercise of the Option.
(h) DELIVERY OF CERTIFICATE. Except where shares are held for unpaid
withholding taxes, between fifteen (15) and thirty (30) days after receipt of
the written notice and payment specified above, the Corporation shall deliver to
the Optionee certificates for the number of shares with respect to which the
Option has been exercised, issued in the Optionee's name; provided, however,
that such delivery shall be deemed effected for all purposes when the
Corporation, or the stock transfer agent for the Corporation, shall have
deposited such certificates in the United States mail, postage prepaid,
addressed to the Optionee and the address specified in the written notice of
exercise.
(i) OTHER PROVISIONS. The Option Agreements under this Section shall
contain such other provisions as the Committee shall deem advisable.
7. ADJUSTMENTS.
(a) CAPITALIZATION ADJUSTMENTS. If any change is made in the Capital
Stock subject to the Plan, or subject to any Option, without the receipt of
consideration by the Corporation (through 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 transaction not involving the
receipt of consideration by the Corporation), the Plan will be appropriately
adjusted in the class(es) and
5.
<PAGE>
maximum number of shares subject to the Plan pursuant to Section 3 and the
maximum number of shares subject to award to any person pursuant to Sections
5 and 6, and the outstanding Options will be appropriately adjusted in the
class(es) and number of shares and price per share of stock subject to such
outstanding Options. Such adjustments shall be made by the Board of Directors
of the Corporation, the determination of which shall be final, binding and
conclusive. (The conversion of any convertible securities of the Corporation
shall not be treated as a transaction "without receipt of consideration" by
the Corporation.)
(b) CHANGE IN CONTROL--ASSET SALE, MERGER, CONSOLIDATION OR REVERSE
MERGER. In the event of (1) a sale of substantially all of the assets of the
Corporation, (2) a merger or consolidation in which the Corporation is not
the surviving corporation or (3) a reverse merger in which the Corporation is
the surviving corporation but the shares of Capital Stock outstanding
immediately preceding the merger are converted by virtue of the merger into
other property, whether in the form of securities, cash or otherwise, then
any surviving corporation or acquiring corporation shall assume any Options
outstanding under the Plan or shall substitute similar Options (including an
award to acquire the same consideration paid to the stockholders in the
transaction described in this Section 7, paragraph (b)) for those outstanding
under the Plan. In the event any surviving corporation or acquiring
corporation refuses to assume such Options or to substitute similar Options
for those outstanding under the Plan but subject to the restrictions in this
Section 7, paragraph (d), then with respect to Options held by Optionees
whose Continuous Service has not terminated, the vesting shall be accelerated
in full, and the Options shall terminate if not exercised at or prior to such
event. With respect to any other Options outstanding under the Plan, such
Options shall terminate if not exercised prior to such event.
(c) CHANGE IN CONTROL--SECURITIES ACQUISITION. In the event of an
acquisition by any person, entity or group within the meaning of Section
13(d) or 14(d) of the Exchange Act, or any comparable successor provisions
(excluding any employee benefit plan, or related trust, sponsored or
maintained by the Corporation or an Affiliate) of the beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act, or
comparable successor rule) of securities of the Corporation representing at
least fifty percent (50%) of the combined voting power entitled to vote in
the election of directors (other than an acquisition pursuant to Section 7,
paragraph (b) above), then with respect to Options held by Optionees whose
Continuous Service has not terminated and subject to the restrictions in
Section 7, paragraph (d), the vesting of such Options shall be accelerated in
full.
(d) POOLING OF INTERESTS. If the Corporation and the other party to the
transaction constituting a "change in control" as described in this Section 7
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 described in this Section 7 shall not
occur to the extent that the Corporation'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.
8. NO RIGHTS AS STOCKHOLDER. An Optionee shall not, by reason of any option
granted hereunder, have any right of a stockholder of the Corporation with
respect to the shares covered by his Option until such shares shall have been
issued to the Optionee.
6.
<PAGE>
9. NO OBLIGATION TO EXERCISE OPTION. The granting of an Option shall impose no
obligation upon the Optionee to exercise such option. Neither shall the Plan
confer upon the Optionee any rights respecting continued continuous service nor
limit the Optionee's rights or the Corporation's rights to terminate such
continuous service.
10. WITHHOLDING TAXES. Whenever under the Plan shares of Option Stock are to be
issued upon exercise of the Options granted hereunder, and prior to the delivery
of any certificate or certificates for said shares by the Corporation, the
Corporation shall have the right to require the Optionee to remit to the
Corporation an amount sufficient to satisfy any federal and state withholding or
other employment taxes resulting from such exercise. In the event that
withholding taxes are not paid within five days after the date of exercise, to
the extent permitted by law the Corporation shall have the right, but not the
obligation, to cause such withholding taxes to be satisfied by reducing the
number of shares of stock deliverable or by offsetting such withholding taxes
against amounts otherwise due from the Corporation to the Optionee; provided,
however, that no shares are withheld with a value exceeding the minimum amount
of tax required to be withheld by law. If withholding taxes are paid by
reduction of the number of shares deliverable to Optionee, such shares shall be
valued at the Fair Market Value as of the fifth business day following the date
of exercise.
11. MODIFICATION OF OUTSTANDING OPTIONS. The Committee may accelerate the
exercisability of an outstanding Option and may authorize modification of any
outstanding Option with the consent of the participant when and subject to such
conditions as are deemed to be in the best interests of the Corporation and in
accordance with the purposes of the Plan.
12. FOREIGN EMPLOYEES. Without amending the Plan, the Committee may grant
Options to eligible employees who are foreign nationals on such terms and
conditions different from those specified in this Plan as may in the judgment of
the Committee be necessary or desirable to foster and promote achievement of the
purposes of the Plan, and, in furtherance of such purposes the Committee may
make such modification, amendments, procedures, subplans and the like as may be
necessary or advisable to comply with provisions of laws in other countries in
which the Corporation operates or has employees.
13. LIQUIDATION. Upon the complete liquidation of the Corporation, any
unexercised Options theretofore granted under this Plan shall be deemed
canceled, except as otherwise provided in Section 7 in connection with a merger,
consolidation or reorganization of the Corporation.
CONDITIONS UPON ISSUANCE OF SHARES. The Corporation may
require the Optionee (or any person to whom an Option is transferred under
Section 6 paragraph (e)) to execute such documents and to provide such
representations, written assurances or information which the Corporation shall
determine is necessary, desirable or appropriate to comply with applicable
securities and other laws as a condition of granting an Option to such Optionee
or permitting the Optionee (or any person to whom an Option is transferred under
Section 6 paragraph (e)) to exercise such Option. The Corporation may, upon
advice of counsel to the Corporation, place legends on stock certificates issued
under the Plan as such counsel deems necessary or appropriate in order to comply
with applicable securities and other laws, including, but not limited to,
legends restricting the transfer of the Option Stock.
7.
<PAGE>
14. TERMINATION AND AMENDMENT OF THE PLAN. This Plan shall terminate when all
reserved Option Stock has been issued and cannot return to the reserve or at
such earlier time as the Board of Directors shall determine. Any termination
shall not affect any Options then outstanding under the Plan.
The Board or the Committee at any time, and from time to time, may
amend the Plan.
15. INDEMNIFICATION. In addition to such other rights of indemnification as they
may have and subject to limitations of applicable law, the members of the
Committee shall be indemnified by the Corporation against all costs and expenses
reasonably incurred by them in connection with any action, suit or proceeding to
which they or any of them may be a party by reason of any action taken or
failure to act under or in connection with the Plan or any rights granted
thereunder and against all amounts paid to them in settlement thereof or paid by
them in satisfaction of a judgment of any such action, suit or proceeding. The
Committee member or members shall notify the Corporation in writing, giving the
Corporation an opportunity at its own cost to defend the same before such
Committee member or members undertake to defend the same on their own behalf.
16. GENERAL PROVISIONS. If any day on or before which action under the Plan must
be taken falls on a Saturday, Sunday, or legal holiday, such action may be taken
on the next succeeding day not a Saturday, Sunday or legal holiday. To the
extent that federal laws do not otherwise control, the Plan and all
determinations made and actions taken pursuant hereto shall be governed by and
construed under the laws of the State of Delaware.
8.
<PAGE>
DIGITAL RIVER, INC.
NOTICE OF EXERCISE
Digital River, Inc.
Re: Exercise of Stock Options
1999 Non-Officer Stock Option Plan
Ladies and Gentlemen:
Pursuant to the terms of that certain Stock Option Agreement under the Digital
River, Inc. 1999 Non-Officer Stock Option Plan, this Letter is to notify you
that I hereby exercise my outstanding stock options to purchase_______________
shares of common stock (the "Shares") of Digital River, Inc. Attached is
(indicate by placing an "X" in the appropriate box):
(i) a check in the amount of $__________ made payable to Digital
River, Inc.;
(ii) another form of consideration acceptable to Digital River, Inc.
(explain below): _____________________________________________________________
in payment of the exercise price of $_________ per share.
I acknowledge prior receipt of a copy of the Digital River, Inc. 1999
Non-Officer Stock Option Plan. I understand that I may suffer adverse tax
consequences as the result of my purchase of Shares. I represent that I have
consulted with any tax consultants I deem advisable in connection with the
purchase or disposition of the Shares and that I am not relying on Digital
River, Inc. for any tax advice.
Very Truly Yours,
-------------------------------------
Signature
-------------------------------------
Print Name
Date: -------------------------------
<PAGE>
Exhibit 10.18
DIGITAL RIVER, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
UNDER THE 1999 NON-OFFICER STOCK OPTION PLAN
THIS AGREEMENT is made as of _________________, between DIGITAL RIVER,
INC., a Delaware corporation (the "Company"), and ___________________________
(the "Optionee").
THE PARTIES AGREE AS FOLLOWS:
1. OPTION GRANT. The Company hereby grants to the Optionee an option
(the "Option") to purchase the number of shares of the Company's voting common
stock (the "Shares"), for an exercise price per share (the "Option Price") and
based upon a Grant Date, all as set forth below:
Shares Under Option: ____________
Option Price Per Share: ____________
Grant Date: ____________
Vesting Commencement Date: ____________
Vesting Schedule (Cumulative): ____________
The Option will be subject to all of the terms and conditions set forth
herein and in the Company's 1999 Non-Officer Stock Option Plan (the "Non-Officer
Plan"), a copy of which is attached hereto and incorporated herein by reference.
The Option granted hereunder will be a Non-Qualified Stock Option, NOT intended
to qualify as an incentive stock option as defined in Section 422 of the
Internal Revenue Code of 1986, as amended.
2. STOCKHOLDER RIGHTS. No rights or privileges of a stockholder in the
Company are conferred by reason of the granting of the Option. Optionee will not
become a stockholder in the Company with respect to the Shares unless and until
the Option has been properly exercised and the Option Price fully paid as to the
portion of the Option exercised.
3. TERMINATION. Subject to earlier termination as provided in the
Non-Officer Plan, this Option will expire, unless previously exercised in full,
on the date ten (10) years from the Grant Date.
4. TERMS OF THE NON-OFFICER PLAN. The Optionee understands that the
Non-Officer Plan includes important terms and conditions that apply to this
Option. Those terms include (without limitation): important conditions on the
right of the Optionee to exercise the Option; important restrictions on the
ability of the Optionee to transfer the Option or to transfer Shares received
upon exercise of the Option; and early termination of the Option following the
occurrence of certain events, including the Optionee no longer being an
employee, director or consultant to or of the Company or its subsidiaries. The
Optionee acknowledges that he or she has read the Non-Officer Plan, agrees to be
bound by its terms, and makes each of the representations required to be made by
the Optionee under it.
1.
<PAGE>
5. MISCELLANEOUS. This Agreement (together with the Non-Officer Plan)
sets forth the complete agreement of the parties concerning the subject matter
hereof; superseding all prior agreements, negotiations and understandings. This
Agreement will be governed by the laws of the State of Minnesota irrespective of
such state's choice of law provisions, and may be executed in counterparts.
The parties hereby have entered into this Agreement as of the date set
forth above.
DIGITAL RIVER, INC.
By:
-------------------------------------
Title: President
"OPTIONEE"
-----------------------------------------
Attachments: (1) 1999 Non-Officer Stock Option Plan
(2) Notice of Exercise
2.
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
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<PERIOD-END> SEP-30-1999
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0
0
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