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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
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.
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(Name of Registrant as Specified In Its Charter)
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(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)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(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):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / 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:
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(7) Form, Schedule or Registration Statement No.:
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(8) Filing Party:
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(9) Date Filed:
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[LOGO]
APRIL 3, 2000
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. local
time on Wednesday, May 3, 2000, at the Hilton Hotel, 1001 Marquette Avenue
South, Minneapolis, Minnesota. At the meeting, stockholders will be asked to
(i) elect three directors to hold office until the 2003 Annual Meeting of
Stockholders; (ii) approve the Company's 2000 Employee Stock Purchase Plan;
(iii) approve an amendment and restatement of the Company's Restated Certificate
of Incorporation to increase the authorized number of shares of Common Stock;
and (iv) 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,
/s/ Joel A. Ronning
JOEL A. RONNING
CHIEF EXECUTIVE OFFICER
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DIGITAL RIVER, INC.
9625 WEST 76TH STREET, SUITE 150
EDEN PRAIRIE, MN 55344
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 3, 2000
------------------------
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 Wednesday,
May 3, 2000 at 3:30 p.m. local time at the Hilton Hotel, 1001 Marquette Avenue
South, Minneapolis, Minnesota for the following purposes:
1. To elect three directors to hold office until the 2003 Annual Meeting of
Stockholders.
2. To approve the Company's 2000 Employee Stock Purchase Plan.
3. To approve an amendment and restatement of the Company's Restated
Certificate of Incorporation to increase the authorized Common Stock from
45,000,000 to 60,000,000 shares.
4. To ratify the selection of Arthur Andersen LLP as independent
accountants of the Company for its fiscal year ending December 31, 2000.
5. 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 15, 2000, 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
/s/ Gregory R.L. Smith
GREGORY R.L. SMITH
SECRETARY
Eden Prairie, Minnesota
April 3, 2000
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.
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DIGITAL RIVER, INC.
9625 WEST 76TH STREET, SUITE 150
EDEN PRAIRIE, MN 55344
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PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
MAY 3, 2000
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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 May 3, 2000 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 Hilton Hotel, 1001 Marquette Avenue South,
Minneapolis, Minnesota. The Company intends to mail this proxy statement and
accompanying proxy card on or about April 3, 2000, 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 15, 2000 will be entitled to notice of and to vote at the Annual Meeting.
At the close of business on March 15, 2000, the Company had outstanding and
entitled to vote 21,756,025 shares of Common Stock.
Each holder of record of shares 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.
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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 2001 Annual
Meeting of Stockholders pursuant to Rule 14a-8 of the Securities and Exchange
Commission (the "SEC") is November 23, 2000. Unless a stockholder who wishes to
bring a matter before the stockholders at the Company's 2001 Annual Meeting of
Stockholders notifies the Company of such matter prior to March 5, 2001,
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 seven members and there is currently one
vacant Board seat. There are three directors in the class whose term of office
expires in 2000. 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 2003 annual meeting and until his successor is elected and
has qualified, or until such director's earlier death, resignation or removal.
No one is standing for election to the vacant Board seat.
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 2003 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
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Micro Warehouse, Inc. from July 1997, when it acquired Online
Interactive, Inc., until February 1998. From February 1991 to May 1994,
Mr. Choate held various positions at Softdisk Publishing, LLC, most recently as
President. From February 1989 until February 1991, Mr. Choate was a Senior
Marketing Manager at Prodigy Services Company. Mr. Choate serves as a director
of FreeShop.com, Inc.
WILLIAM LANSING
Mr. Lansing has served as a director of the Company since November 1998. In
March 2000, Mr. Lansing joined NBC Internet, Inc. as Chief Executive Officer.
From May 1998 to March 2000, Mr. Lansing was an executive officer with Fingerhut
Companies, Inc. and most recently served as Chairman and Chief Executive
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 serves as a director of Net
Perceptions, Inc., Big Star Entertainment, Inc., FreeShop.com, Inc. and Select
Comfort Corporation. 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 online 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, an 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.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF EACH NAMED NOMINEE.
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. From
May 1995 to December 1999, Mr. Ronning 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 President of Tech Squared.
Mr. Ronning founded MacUSA, Inc., a wholly-owned subsidiary of Tech Squared, and
served as a director of MacUSA, Inc. from April 1990 to December 1999. From
April 1990 to July 1998, Mr. Ronning also served as the Chief Executive Officer
of MacUSA. 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
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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 LapLink.com, Inc. and was a director of Tech Squared from
December 1998 to June 1999.
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.
DIRECTOR CONTINUING IN OFFICE UNTIL 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
December 1996 to March 1999, Mr. Madison served as Chairman of Communications
Holdings, Inc. Since August 1999, Mr. Madison has served as Chairman of
AetherWorks, Inc. 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., Reliant Energy Minnegasco,
ACI Telecentrics, Span Link Communications and Delaware Group of Funds.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended December 31, 1999, the Board held seven
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, recommend to the Board the independent accountants to be
retained and receive and consider 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 met three times
during the fiscal year ended December 31, 1999.
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 once during the fiscal
year ended December 31, 1999.
During the fiscal year ended December 31, 1999, all board members except
Mr. Lansing attended 75% or more of the aggregate meetings of the Board and of
the committees on which he served that were held during the period for which he
was a director or committee member, respectively.
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PROPOSAL 2
APPROVAL OF 2000 EMPLOYEE STOCK PURCHASE PLAN
In March 2000, the Board adopted the Company's 2000 Employee Stock Purchase
Plan ("Purchase Plan"), subject to stockholder approval. There are 200,000
shares of Common Stock reserved for issuance under the Purchase Plan.
As of March 15, 2000 no shares of the Company's Common Stock had been
granted under the Purchase Plan.
Stockholders are requested in this Proposal 2 to approve the Purchase Plan.
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 Purchase Plan. 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 this matter
has been approved.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 2.
The essential features of the Purchase Plan, as amended, are outlined below:
PURPOSE
The purpose of the Purchase Plan is to provide a means by which employees of
the Company (and any parent or subsidiary of the Company designated by the Board
to participate in the Purchase Plan) may be given an opportunity to purchase
Common Stock of the Company through payroll deductions in order to assist the
Company in retaining the services of its employees, to secure and retain the
services of new employees and provide incentives for such persons to exert
maximum efforts for the success of the Company. Substantially all employees of
the Company are eligible to participate in the Purchase Plan.
The rights to purchase Common Stock that will be granted under the Purchase
Plan are intended to qualify as options issued under an "employee stock purchase
plan" as that term is defined in Section 423(b) of the Internal Revenue Code of
1986, as amended (the "Code").
ADMINISTRATION
The Board administers the Purchase Plan and has the final authority to
construe and interpret both the Purchase Plan and the rights granted under it.
The Board has the authority, subject to the provisions of the Purchase Plan, to
determine when and how rights to purchase Common Stock of the Company will be
granted, the provisions of each offering of such rights (which need not be
identical) and whether employees of any parent or subsidiary of the Company will
be eligible to participate in the Purchase Plan.
The Board has the power, which it has not yet exercised, to delegate
administration of the Purchase Plan to a committee composed of not fewer than
two members of the Board. As used herein with respect to the Purchase Plan, the
"Board" refers to any committee the Board appoints as well as the Board itself.
OFFERINGS
The Purchase Plan will be implemented by offerings of rights to all eligible
employees from time to time by the Board. The Purchase Plan permits offerings up
to 27 months long. However, it is expected that each offering under the Purchase
Plan will be six months long.
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ELIGIBILITY
Any person who is customarily employed at least 20 hours per week and five
months per calendar year by the Company (or by any parent or subsidiary of the
Company designated by the Board) on the first day of an offering is eligible to
participate in that offering. Officers of the Company who are "highly
compensated" as defined in the Code are eligible to participate in the Purchase
Plan unless otherwise specified in the offering.
However, no employee is eligible to participate in the Purchase Plan if,
immediately after the grant of purchase rights, the employee would own, directly
or indirectly, stock possessing 5% or more of the total combined voting power or
value of all classes of stock of the Company or of any parent or subsidiary of
the Company (including any stock which such employee may purchase under all
outstanding rights and options). In addition, no employee may purchase more than
$25,000 worth of Common Stock (determined at the fair market value of the shares
at the time such rights are granted) under all employee stock purchase plans of
the Company and its affiliates in any calendar year.
PARTICIPATION IN THE PLAN
Eligible employees will enroll in the Purchase Plan by delivering to the
Company, prior to the date selected by the Board as each offering date for the
offering, an agreement authorizing payroll deductions of up to 15% of such
employees' compensation during the offering, excluding bonuses and certain other
forms of reimbursements and compensation, unless an offering specifies a smaller
percentage. Under the terms of the current offering, eligible employees may
elect to deduct up to 10% of such employees' compensation.
PURCHASE PRICE
The purchase price per share at which shares of Common Stock will be sold in
each offering under the Purchase Plan will be the lower of (i) 85% of the fair
market value of a share of Common Stock on the first day of the offering or
(ii) 85% of the fair market value of a share of Common Stock on the last day of
the offering.
PAYMENT OF PURCHASE PRICE; PAYROLL DEDUCTIONS
The purchase price of the shares will be accumulated by payroll deductions
over each offering. At any time during an offering, a participant may reduce or
terminate his or her payroll deductions as the Board provides in the offering. A
participant may not increase or begin such payroll deductions after the
beginning of the offering, except, if the Board provides, in the case of an
employee who first becomes eligible to participate as of a date specified during
the offering. All payroll deductions made for a participant will be credited to
his or her account under the Purchase Plan and deposited with the general funds
of the Company. Participants will not be permitted to make additional payments
into such accounts.
PURCHASE OF STOCK
By executing an agreement to participate in the Purchase Plan, the employee
will be entitled to purchase shares under the Purchase Plan. In connection with
offerings made under the Purchase Plan, the Board will specify a maximum number
of shares of Common Stock an employee may be granted the right to purchase and
the maximum aggregate number of shares of Common Stock that may be purchased
pursuant to such offering by all participants. If the aggregate number of shares
to be purchased upon exercise of rights granted in the offering would exceed the
maximum aggregate number of shares of Common Stock available, the Board would
make a pro rata allocation of available shares in a uniform and equitable
manner. Unless the employee's participation is discontinued, his or her right to
purchase shares will be exercised automatically at the end of the offering at
the applicable price. See "Withdrawal" below.
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WITHDRAWAL
While each participant in the Purchase Plan is required to sign an agreement
authorizing payroll deductions, the participant may withdraw from a given
offering by delivering to the Company a notice of withdrawal from the Purchase
Plan indicating that the participant is terminating his or her payroll
deductions. Such withdrawal may be elected at any time up to 15 days prior to
the end of the applicable offering.
Upon any withdrawal from an offering by the employee, the Company will
distribute to the employee his or her accumulated payroll deductions without
interest, less any accumulated deductions previously applied to the purchase of
shares of Common Stock on the employee's behalf during such offering, and such
employee's interest in the offering will be automatically terminated. The
employee is not entitled to again participate in that offering. However, an
employee's withdrawal from an offering will not have any effect upon such
employee's eligibility to participate in subsequent offerings under the Purchase
Plan.
TERMINATION OF EMPLOYMENT
Rights granted pursuant to any offering under the Purchase Plan terminate
immediately upon cessation of an employee's employment for any reason, and the
Company will distribute to such employee all of his or her accumulated payroll
deductions, without interest.
RESTRICTIONS ON TRANSFER
Rights granted under the Purchase Plan are not transferable and may be
exercised only by the person to whom such rights are granted.
DURATION, AMENDMENT AND TERMINATION
The Board may suspend or terminate the Purchase Plan at any time.
The Board may amend the Purchase Plan at any time. Any amendment of the
Purchase Plan must be approved by the stockholders within 12 months of its
adoption by the Board if the amendment would (i) increase the number of shares
of Common Stock reserved for issuance under the Purchase Plan; (ii) modify the
requirements relating to eligibility for participation in the Purchase Plan; or
(iii) modify any other provision of the Purchase Plan, if such approval is
required in order to comply with the requirements of Rule 16b-3 under the
Securities Exchange Act of 1934, as amended, or under Section 423 of the Code.
Rights granted before amendment or termination of the Purchase Plan will not
be altered or impaired by any amendment or termination of the Purchase Plan
without consent of the employee to whom such rights were granted.
EFFECT OF CERTAIN CORPORATE EVENTS
In the event of a dissolution, liquidation or specified type of merger of
the Company, the surviving corporation either will assume the rights under the
Purchase Plan or substitute similar rights, or the exercise date of any ongoing
offering will be accelerated such that the outstanding rights may be exercised
immediately prior to any such event.
STOCK SUBJECT TO PURCHASE PLAN
An aggregate of 200,000 shares of Common Stock is reserved for issuance
under the Purchase Plan. If rights granted under the Purchase Plan expire, lapse
or otherwise terminate without being exercised, the shares of Common Stock not
purchased under such rights again becomes available for issuance under the
Purchase Plan.
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FEDERAL INCOME TAX INFORMATION
Rights granted under the Purchase Plan are intended to qualify for favorable
federal income tax treatment associated with rights granted under an employee
stock purchase plan that qualifies under provisions of Section 423 of the Code.
A participant will be taxed on amounts withheld for the purchase of shares
of Common Stock as if such amounts were actually received. Other than this, no
income will be taxable to a participant until disposition of the acquired
shares, and the method of taxation will depend upon the holding period of the
acquired shares.
If the stock is disposed of more than two years after the beginning of the
offering period and more than one year after the stock is transferred to the
participant, then the lesser of (i) the excess of the fair market value of the
stock at the time of such disposition over the exercise price or (ii) the excess
of the fair market value of the stock as of the beginning of the offering period
over the exercise price (determined as of the beginning of the offering period)
will be treated as ordinary income. Any further gain or any loss will be taxed
as a long-term capital gain or loss. Such capital gains currently are generally
subject to lower tax rates than ordinary income.
If the stock is sold or disposed of before the expiration of either of the
holding periods described above, then the excess of the fair market value of the
stock on the exercise date over the exercise price will be treated as ordinary
income at the time of such disposition. The balance of any gain will be treated
as capital gain. Even if the stock is later disposed of for less than its fair
market value on the exercise date, the same amount of ordinary income is
attributed to the participant, and a capital loss is recognized equal to the
difference between the sales price and the fair market value of the stock on
such exercise date. Any capital gain or loss will be short-term or long-term,
depending on how long the stock has been held.
There are no federal income tax consequences to the Company by reason of the
grant or exercise of rights under the Purchase Plan. The Company is entitled to
a deduction to the extent amounts are taxed as ordinary income to a participant
(subject to the requirement of reasonableness and the satisfaction of tax
reporting obligations).
PROPOSAL 3
APPROVAL OF INCREASE IN NUMBER OF AUTHORIZED
SHARES OF COMMON STOCK
The Board of Directors has adopted, subject to stockholder approval, an
amendment to the Company's Restated Certificate of Incorporation to increase the
Company's authorized number of shares of Common Stock from 45,000,000 to
60,000,000 shares.
The additional Common Stock to be authorized by adoption of the amendment
would have rights identical to the currently outstanding Common Stock of the
Company. Adoption of the proposed amendment and issuance of the Common Stock
would not affect the rights of the holders of currently outstanding Common Stock
of the Company, except for effects incidental to increasing the number of shares
of the Company's Common Stock outstanding, such as dilution of the earnings per
share and voting rights of current holders of Common Stock. If the amendment is
adopted, it will become effective upon filing of a Certificate of Amendment of
the Company's Restated Certificate of Incorporation with the Secretary of State
of the State of Delaware.
In addition to the 21,756,025 shares of Common Stock outstanding at
March 15, 2000, the Board has reserved 4,954,578 shares for issuance upon
exercise of options and rights granted under the Company's stock option plans
and 371,086 shares for issuance upon exercise of outstanding warrants to
purchase common stock. In addition the Board of Directors has reserved, subject
to stockholder approval, 200,000 shares under the Company's Employee Stock
Purchase Plan.
9
<PAGE>
Although at present the Board of Directors has no other plans to issue the
additional shares of Common Stock, it desires to have such shares available to
provide additional flexibility to use its capital stock for business and
financial purposes in the future. The additional shares may be used, without
further stockholder approval, for various purposes including, without
limitation, raising capital, providing equity incentives to employees, officers
or directors, establishing strategic relationships with other companies and
expanding the Company's business or product lines through the acquisition of
other businesses or products.
The additional shares of Common Stock that would become available for
issuance if the proposal were adopted could also be used by the Company to
oppose a hostile takeover attempt or delay or prevent changes in control or
management of the Company. For example, without further stockholder approval,
the Board could strategically sell shares of Common Stock in a private
transaction to purchasers who would oppose a takeover or favor the current
Board. Although this proposal to increase the authorized Common Stock has been
prompted by business and financial considerations and not by the threat of any
hostile takeover attempt (nor is the Board currently aware of any such attempts
directed at the Company), nevertheless, stockholders should be aware that
approval of this proposal could facilitate future efforts by the Company to
deter or prevent changes in control of the Company, including transactions in
which the stockholders might otherwise receive a premium for their shares over
then current market prices.
The affirmative vote of the holders of a majority of the shares of Common
Stock will be required to approve this amendment to the Company's Restated
Certificate of Incorporation. As a result, abstentions and broker non-votes will
have the same effect as negative votes.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 3.
PROPOSAL 4
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, 2000 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 Bylaws 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 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 this matter has been approved.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 4
10
<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, 2000 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. Unless otherwise indicated, the address
for each stockholder named below is: c/o Digital River, Inc. 9625 West 76th
Street, Suite 150, Eden Prairie, MN 55344.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
-----------------------------------
BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF TOTAL
- ---------------- ---------------- ----------------
<S> <C> <C>
Fujitsu Limited................................ 1,645,333 7.63%
1-1 Kamikodanaka 4-Chome
Nakahara-Ku
Kawasaki 211 Japan
Joel A. Ronning................................ 1,171,057 5.43
Christopher J. Sharples (2).................... 914,978 4.01
Timothy C. Choate (3).......................... 16,090 *
Jay A. Kerutis (4)............................. 37,500 *
William Lansing (5)............................ 23,000 *
Thomas F. Madison (6).......................... 93,532 *
Perry W. Steiner (7)........................... 313,166 1.43
Robert E. Strawman (8)......................... 17,666 *
J. Paul Thorin (9)............................. 21,800 *
Kelly J. Wical (10)............................ 3,750 *
All directors and executive officers as a group
(12 persons) (11)............................ 2,622,745 11.84
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1% of the outstanding shares of
the Company's Common Stock.
(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 21,568,683 shares outstanding on February 1, 2000,
adjusted as required by rules promulgated by the SEC.
(2) Includes 711,643 shares registered in the name of Latour Trustees (Jersey)
Limited and 3,002 shares registered in the name of Wilbro Nominees Limited,
respectively. Of the 711,643 shares of Common Stock registered in the name
of Latour Trustees (Jersey) Limited, 430,000 of such shares are held by
Mr. Sharples' spouse. The shares of Common Stock registered in the name of
Wilbro Nominees Limited are held for the benefit of 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, 2000 and 5,000
shares issuable upon exercise of options exercisable within 60 days of
February 1, 2000.
(3) Includes 15,000 shares issuable upon exercise of options exercisable within
60 days of February 1, 2000.
11
<PAGE>
(4) Includes 37,500 shares issuable upon exercise of options exercisable within
60 days of February 1, 2000.
(5) Includes 20,000 shares issuable upon exercise of options exercisable within
60 days of February 1, 2000.
(6) Includes 45,200 shares issuable upon exercise of options exercisable within
60 days of February 1, 2000.
(7) Includes 289,666 shares issuable upon exercise of options exercisable
within 60 days of February 1, 2000.
(8) Includes 13,000 shares issuable upon exercise of options exercisable within
60 days of February 1, 2000.
(9) Includes 18,800 shares issuable upon exercise of options exercisable within
60 days of February 1, 2000.
(10) Includes 3,750 shares issuable upon exercise of options exercisable within
60 days of February 1, 2000.
(11) Includes 472,659 shares issuable upon exercise of options exercisable
within 60 days of February 1, 2000, and 100,000 shares subject to
exercisable warrants.
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, 1999, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with except that
Mr. Smith failed to file timely one report with respect to a stock option
exercise. Mr. Smith filed such report immediately after being notified of the
failure to file timely.
12
<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. During the last
fiscal year, Messrs. Lansing and Choate were each granted options to purchase
10,000 shares of the Company's Common Stock, Messrs. Sharples and Thorin were
each granted an option to purchase 5,000 shares of the Company's Common Stock
and Mr. Madison was granted options to purchase 15,000 shares of the Company's
Common Stock pursuant to the 1998 Stock Option Plan, as amended. The weighted
average exercise price per share of these grants is $19.5625 (based on the
closing sale prices depicted on the Nasdaq National Market on the date of each
grant). As of February 1, 2000, 52,133 options had been exercised by
non-employee directors. 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, 1999, 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 $100,000 in fiscal year 1999 (the "Named
Executive Officers").
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
------------------------------------------ SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)(1)
- --------------------------- -------- ---------- ---------- ---------------- ------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Joel A. Ronning............ 1999 $225,000 $112,500(2) -- -- $1,000
Chief Executive Officer 1998 171,875 225,000(4) -- 433,333 1,000
1997 140,000 -- -- -- 1,000
Perry W. Steiner........... 1999 200,000 100,000(2) -- 150,000 --
President 1998 63,718 100,000(5) -- 550,000 --
1997 -- -- -- -- --
Jay A. Kerutis............. 1999 171,124 87,850(3) -- 225,000 --
Executive Vice President, 1998 -- -- -- -- --
Software and Digital 1997 -- -- -- -- --
Commerce Services
Division
Kelly J. Wical............. 1999 123,018 35,000(2) -- 15,000 --
Chief Technology Officer 1998 110,000 35,000(5) -- 41,667 --
1997 63,814 35,000(6) -- 106,667 --
Robert E. Strawman......... 1999 120,000 50,000(2) -- 20,000 --
Chief Financial Officer 1998 76,846 25,000(5) -- 90,000 --
and Treasurer 1997 -- -- -- -- --
</TABLE>
- ------------------------
(1) Represents insurance premiums paid by the Company with respect to insurance
for the benefit of the Named Executive Officer's family.
(2) Paid in February 2000 for performance in 1999.
(3) Includes $70,000 paid in February 2000 for performance in 1999.
(4) Includes $112,500 paid in February 1999 for performance in 1998.
(5) Paid in February 1999 for performance in 1998.
(6) Paid in March 1998 for performance in 1997.
13
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows for the fiscal year ended December 31, 1999
certain information regarding options granted to the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
-------------------------------- AT ASSUMED ANNUAL RATES
NUMBER OF OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR OPTION
UNDERLYING OPTIONS GRANTED TERM(4)
OPTIONS TO EMPLOYEES IN EXERCISE PRICE EXPIRATION ---------------------------
NAME GRANTED (#)(1) FISCAL YEAR(2) ($/SH)(3) DATE 5% ($) 10% ($)
- ---- -------------- --------------- -------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Joel A. Ronning...... -- -- -- -- -- --
Perry W. Steiner..... 150,000 6.84% 19.5625 8/10/09 $1,848,656 $4,665,656
Jay A. Kerutis....... 150,000 6.84 29.1875 2/15/09 2,758,219 6,961,219
75,000 3.42 19.5625 8/10/99 924,328 2,332,828
Kelly J. Wical....... 15,000 .68 19.5625 8/10/09 184,866 466,566
Robert E. Strawman... 20,000 .91 19.5625 8/10/09 246,488 622,088
</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. Steiner's stock option vests 16.67% on each of the first
three anniversaries of the grant date and 50% on the fourth anniversary of
the grant date.
(2) Based on options to purchase 2,192,932 shares of the Company's Common Stock
granted in fiscal year ended December 31, 1999.
(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.
14
<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 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, 1999 DECEMBER 31, 1999 (2)
ACQUIRED VALUE --------------------------- ---------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) ($) (1) (#) (#) ($) ($)
- ---- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joel A. Ronning......... 252,916 $7,512,025 0 243,350 0 $7,388,063
Perry W. Steiner........ 54,000 1,243,812 289,666 333,334 $7,186,613 6,610,642
Jay A. Kerutis.......... -- -- -- 225,000 -- 1,649,438
Kelly J. Wical.......... 40,301 1,579,927 3,750 99,283 37,163 2,600,936
Robert E. Strawman...... 9,500 310,375 13,000 87,500 343,030 2,167,875
</TABLE>
- ------------------------
(1) The value realized is based on the fair market value of the Company's Common
Stock on the 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, 1999 of $33.31 minus the exercise price of the
options.
EMPLOYMENT AGREEMENTS
In May 1998, the Company entered into an employment and non-competition
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
12 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 a 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, options to purchase an
additional 137,500 shares of Common Stock vested upon Mr. Steiner's relocation
and options to purchase 91,666 vested on the one year anniversary of
Mr. Steiner's hire date. Of the remaining options, options to purchase 91,667
shares of
15
<PAGE>
Common Stock will vest on the second anniversary of Mr. Steiner's 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 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 12 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
The Company's Compensation Committee is composed of three non-employee
directors: Messrs. Lansing, Madison and Thorin. 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 that
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 ensure 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.
16
<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 elected to keep the Chief Executive Officer's salary in 1999
at the 1998 level of $225,000 per year. This reflected the Committee's belief
that Mr. Ronning's salary continued to be at a competitive level for similar
Internet companies.
ANNUAL INCENTIVES. The Company's short-term incentives are paid pursuant to
annual bonus plans agreed to by the Committee and the executive at or near the
beginning of the year. The Committee believes that the annual bonus of key
employees, including executive officers, should be based on optimizing revenues
while maintaining prudent management of gross margins and operating expenses.
Accordingly, the bonus plan for 1999 was based on achieving certain revenue
levels. The bonus of $112,500 paid to the Chief Executive Officer for 1999 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 reflects the
ownership position of the directors and executive officers at February 1, 2000.
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 2,192,932 options granted in 1999, executive officers of
the Company received grants for 450,000 shares, or approximately 21% of the
total options granted in 1999. The Chief Executive Officer was not granted stock
options in 1999. Although the Committee deemed Mr. Ronning's performance to be
excellent in 1999, the Committee had granted Mr. Ronning a stock option in
May 1998 to acquire 433,333
17
<PAGE>
shares and believes that this grant in combination with previous grants had
brought Mr. Ronning to a competitive level for similar Internet companies.
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
18
<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 total
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) for
(i) the Company's Common Stock; (ii) the CRSP Total Return Index for the Nasdaq
Stock Market (U.S. companies) (the "Nasdaq Composite Index"); and (iii) the
Hambrecht & Quist ("H&Q") Technology Index. 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 the 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
12/98 418 124 132
12/99 392 224 294
</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.
19
<PAGE>
CERTAIN TRANSACTIONS
TRANSACTIONS WITH TECH SQUARED, INC.
On December 17, 1999, the Company closed a transaction with Tech
Squared, Inc., which owned approximately 14% of the outstanding shares of the
Company immediately prior to the closing. Prior to the closing of this
transaction (the "Closing"), MacUSA, Inc., a wholly-owned subsidiary of Tech
Squared, transferred its 3,000,000 shares of Common Stock of the Company to Tech
Squared through a merger of MacUSA with and into Tech Squared. At the Closing,
Tech Squared transferred such 3,000,000 shares and $1.2 million in cash to the
Company in exchange for the receipt of 2,650,000 newly issued shares of Company
Common Stock. Tech Squared subsequently engaged in a voluntary dissolution,
which dissolution included the distribution of the 2,650,000 shares of Company
Common Stock to the former stockholders of Tech Squared.
Joel A. Ronning, the Chief Executive Officer and a director of the Company,
served as the Chairman of the Board of Directors of Tech Squared and
beneficially owned approximately 43% of Tech Squared's outstanding common stock
immediately prior to the Closing. MacUSA acquired its 3,000,000 shares of Common
Stock of the Company in July 1999 by exercising an option granted to MacUSA by
Mr. Ronning in December 1995 to purchase 3,200,000 shares held by him for $1.00.
In December 1998, MacUSA exercised part of the option to purchase 200,000 shares
which it subsequently sold in December 1998. Under the terms of the option,
MacUSA agreed to reimburse Mr. Ronning for any tax liability that he incurred in
connection with the transfer of the shares of Common Stock of the Company
issuable upon exercise thereunder. In connection with the Closing and subsequent
dissolution of Tech Squared, Mr. Ronning received 1,060,882 shares of the
Company's Common Stock.
Mr. Reese, a former director of the Company who resigned his position in
July 1999, served as President, Chief Executive Officer and a director of Tech
Squared and beneficially owned approximately 6% of Tech Squared's outstanding
common stock immediately prior to the Closing. In connection with the Closing
and subsequent dissolution of Tech Squared, Mr. Reese received 105,247 shares of
the Company's Common Stock.
In fiscal 1999, Tech Squared provided office and warehouse space and certain
administrative, financial and software product fulfillment services for the
Company. Charges for these services totaled approximately $254,000 for fiscal
1999.
TRANSACTIONS WITH CHRISTOPHER J. SHARPLES
Christopher J. Sharples, a director and stockholder of the Company, along
with another stockholder (the "Sharples Team"), entered into a preliminary
agreement with the Company in February 1998 (the "International Agreement")
whereby the Sharples Team agreed to establish and oversee the international
operations of the Company, 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, the Company issued to Wasserstein Adelson Ventures, L.P.
("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.
20
<PAGE>
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.
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 1999 Annual Report to Stockholders accompanies this Proxy
Statement. The Company's annual report on Form 10-K for the year ended
December 31, 1999, 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
/s/ Gregory R.L. Smith
GREGORY R.L. SMITH
SECRETARY
April 3, 2000
21
<PAGE>
DIGITAL RIVER, INC.
ANNUAL MEETING OF STOCKHOLDERS
WEDNESDAY, MAY 3, 2000
3:30 PM
HILTON HOTEL
1001 MARQUETTE AVENUE SOUTH
MINNEAPOLIS, MN
[LOGO] 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 MAY 3, 2000.
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, 3, AND 4.
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.
SEE REVERSE FOR VOTING INSTRUCTIONS.
<PAGE>
-------------------
COMPANY #
CONTROL #
-------------------
THERE ARE TWO WAYS TO VOTE YOUR PROXY
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 Norwest
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 --
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2, 3 AND 4.
1. Election of directors: 01 Timothy C. Choate 03 Christopher J. Sharples
02 William Lansing
/ / Vote WITHHELD / / Vote FOR
from all nominees 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.)
----------------------------------------
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2. Approval of the Company's 2000 Employee Stock Purchase Plan
/ / For / / Against / / Abstain
3. Approval of an amendment and restatement of the Company's Restated
Certificate of Incorporation
/ / For / / Against / / Abstain
4. 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 / / Dated: , 2000
Indicate changes below: -------------------
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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.
