SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
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Rule 14a-11(c) or Rule 14a-12
Digital Lava
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
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statement number, or the form or schedule and the date of its filing.
1) Amount previously paid:
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<PAGE>
DIGITAL LAVA INC.
10850 Wilshire Boulevard, Suite 1260
Los Angeles, CA 90024
(310) 470-1149
----------------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
----------------------------------------------------
NOTICE IS HEREBY GIVEN, that the Annual Meeting of the Stockholders of
Digital Lava Inc. (the "Company") will be held in Los Angeles, CA at 3:00 p.m.
on July 21, 1999 at the Marina del Rey Hotel, 13534 Bali Way, Marina Del Rey, CA
90292 (1) for the election of directors of Digital Lava to hold office until the
next annual meeting of the stockholders and until their successors are duly
elected and qualified; (2) to amend Digital Lava's 1996 Incentive and
Non-Qualified Stock Option Plan; and (3) to transact such other business as may
properly come before the meeting or any adjournment or adjournments thereof.
The board of directors has fixed the close of business on June 21,1999 as
the record date for the determination of stockholders entitled to notice of, and
to vote at, the Annual Meeting.
If you do not expect to be personally present at the meeting, but wish your
stock to be voted for the business to be transacted thereat, the board of
directors requests that you fill in, sign and date the enclosed proxy and
promptly return it by mail in the postage paid envelope provided.
BY ORDER OF THE BOARD OF DIRECTORS
Roger Berman
Chairman of the Board
June 23, 1999
PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND PROMPTLY RETURN IT IN THE
ENVELOPE PROVIDED. NO POSTAGE IS NECESSARY IF MAILED IN THE UNITED STATES.
<PAGE>
DIGITAL LAVA INC.
10850 Wilshire Boulevard
Los Angeles, CA 90024
(310) 470-1149
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
To be held on July 21, 1999
INTRODUCTION
The Annual Meeting is called to elect members of the board of directors,
and to amend Digital Lava's 1996 Incentive and Non-Qualified Stock Option Plan.
The Meeting, however, will be open for the transaction of such other business as
may properly come before it although, as of the date of this proxy statement,
management does not know of any other business that will come before the Annual
Meeting. If any other matters do come before the Annual Meeting, the persons
named in the enclosed form of proxy are expected to vote said proxy in
accordance with their judgment on such matters.
This proxy statement and the accompanying proxy card are first being mailed
to stockholders on or about June 23, 1999. A copy of the Annual Report for the
fiscal year ended December 31, 1998, which includes audited financial
statements, is included herewith for those stockholders of record as of June 21,
1999, the record date for the Annual Meeting.
The solicitation of proxies in the accompanying form is made by, and on
behalf of, the board of directors, and no compensation will be paid therefor.
There will be no solicitation of proxies other than by mail or personal
solicitation by officers and employees of Digital Lava. Digital Lava will make
arrangements with brokerage houses and other custodians, nominees and
fiduciaries for the forwarding of proxy material to the beneficial owners of
shares held of record by such persons, and such persons will be reimbursed for
reasonable expenses incurred by them in connection therewith. A stockholder
executing the accompanying proxy has the power to revoke it at any time prior to
the exercise thereof by filing with the Secretary of Digital Lava: (1) a duly
executed proxy bearing a later date; or (2) a written instrument revoking the
proxy.
With regard to the election of directors, votes may be cast in favor of or
withheld from each nominee. Abstention and "Broker Non-votes" (as defined below)
are counted for purposes of determining whether a quorum is present at the
Annual Meeting, but do not represent votes cast with respect to any proposal.
"Broker Non-votes" are shares held by a broker or nominee for which an executed
proxy is received by Digital Lava, but are not voted as to one or more proposals
because instructions have not been received from the beneficial owners or
persons entitled to vote and the broker or nominee does not have discretionary
voting power.
<PAGE>
VOTING SECURITIES
The board of directors has fixed the close of business on June 21, 1999 as
the record date for the determination of stockholders entitled to notice of, and
to vote at, the Annual Meeting.
As of June 1, 1999, the outstanding capital stock of Digital Lava consisted
of 4,636,885 shares of Common Stock. Each holder of Common Stock is entitled to
one vote for each share of Common Stock held by him or her at the close of
business on the record date.
The shares for which the accompanying proxy is solicited will be voted
providing the proxy is executed and returned by the stockholder prior to the
Annual Meeting.
The following table sets forth certain information regarding the beneficial
ownership of the common stock, as of June 1, 1999 by (1) each person known by
Digital Lava to be the beneficial owner of more than 5% of the outstanding
shares of common stock, (2) each director of Digital Lava and (3) all executive
officers and directors of Digital Lava as a group.
Beneficial ownership has been determined in accordance with the rules of
the Securities and Exchange Commission and includes voting or investment power
with respect to shares. Unless otherwise indicated, the persons named in the
table have sole voting and investment power with respect to the number of shares
indicated as beneficially owned by them. The number of shares of common stock
outstanding used in calculating the percentage ownership for each listed person
includes the shares of common stock underlying options or warrants held by the
person and exercisable within 60 days of June, 1999 but excludes shares of
common stock underlying options or warrants held by any other person.
"Shares of Common Stock Beneficially Owned" includes "Shares Subject to
Options Held by Others" and "Shares Issuable Upon Exercise of Options." Unless
otherwise indicated, the address of each beneficial owner is 10850 Wilshire
Boulevard, Suite 1260, Los Angeles, CA 90024.
<TABLE>
<CAPTION>
Shares of Common Percentage of Shares Subject to Shares Issuable
Name and Address of Beneficial Stock Beneficially Common Stock Options Held by Upon Exercise of
Owner Owned Beneficially Owned Others Options
------------------------------ ------------------ ------------------ --------------- ----------------
<S> <C> <C> <C> <C>
Dr. James W. Stigler 249,246 5.38% 11,288 --
Thomas H. Stigler 206,164 4.45% 2,051 40,000
Roger Berman 166,164 3.59% 10,262 --
Joshua D.J. Sharfman 123,083 2.66% 1,026 40,000
Gerald Porter 83,330 1.80% -- 3,330
All executive officers and directors as a 867,686 18.72% 24,627 123,029
group (8 persons)
</TABLE>
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<PAGE>
SECTION 16 FILINGS
Section 16 of the Securities and Exchange Act of 1934 (the "Exchange Act")
requires Digital Lava's officers and directors, and persons who won more than
ten percent of a registered class of Digital Lava's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and greater than ten-percent stockholders are
required by SEC regulation to furnish Digital Lava with copies of all Section 16
reports that they file.
During 1998, Digital Lava was not required to file any reports pursuant to
Section 16 filings requirements. Based solely upon review of the copies of such
reports furnished to Digital Lava and written representations from certain of
Digital Lava's executive officers and directors that no other such reports were
required, Digital Lava believes that as of June 1, 1999 all Section 16 filing
requirements applicable to its officers, directors and greater than ten-percent
beneficial owners were complied with on a timely basis.
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<PAGE>
ITEM 1 - ELECTION OF DIRECTORS
Five directors are to be elected at the Annual Meeting to hold office until
the next annual meeting of stockholders and until their successors have been
duly elected and qualified. The election of directors requires the affirmative
vote of a plurality of shares cast of Common Stock voting together present or
represented at a meeting at which a quorum (one-third (1/3) of the outstanding
shares of Common Stock) is present or represented. Abstention and Broker
Non-votes are counted for purposes of determining whether a quorum is present,
but do not represent votes cast with respect to any proposal. It is the
intention of the persons named in the accompanying proxy form to vote FOR the
election of the five persons named in the table below as directors of Digital
Lava, unless authority to do so is withheld. Proxies cannot be voted for a
greater number of persons than the nominees named. In the event that any of the
below listed nominees for director should become unavailable for election for
any presently unforeseen reason, the persons named in the accompanying proxy
form have the right to use their discretion to vote for a substitute.
The following table sets forth the name, age and position of each nominee
for director and each executive officer:
Name Age Position
- ---- --- --------
Roger Berman 44 Chairman of the Board
Robert Greene 42 Chief Executive Officer and Director
Dr. James W. Stigler 44 Director
Gerald Porter 54 Director
John Carrington 55 Director
Joshua D.J. Sharfman 41 President
Thomas H. Stigler 42 Vice President, Sales and Business Strategy
Danny Gampe 44 Chief Financial Officer
Patricia Bodner 37 Vice President of Worldwide Marketing
Michael Goodell 43 Vice President of Consulting and Services
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<PAGE>
Roger Berman has served as a director of Digital Lava since its inception
in July 1995. If reelected, Mr. Berman will serve as the Chairman of the Board
of Directors. As of February 22, 1999, Mr. Berman ceased to be an employee of
Digital Lava. From July 1995 to December 1997, Mr. Berman was the President of
Digital Lava. Prior to joining Digital Lava, Mr. Berman served as President of
St. Eve International, Inc., an apparel company, from May 1992 to July 1995 and
Sherne Lingerie, Inc. from January 1986 to December 1991. Mr. Berman holds a B.A
degree from Hamilton College and an MBA from New York University.
Dr. James W. Stigler has served as Chairman of the Board for Digital Lava
since its inception in July 1995. If Dr. Stigler is reelected, he will serve as
a director. As of February 22, 1999, Dr. Stigler ceased to be an employee of
Digital Lava. Dr. Stigler is a professor, author and researcher in the fields of
education, psychology and video research. Since 1991, Dr. Stigler has served as
a Professor at the University of California, Los Angeles. From 1983 to 1991, Dr.
Stigler served as an Associate Professor at the University of Chicago. Dr.
Stigler holds an A.B. degree from Brown University, a Masters degree from the
University of Pennsylvania and a Ph.D. from the University of Michigan. Dr.
Stigler is the brother of Thomas Stigler.
Gerald Porter has served as a director of Digital Lava since January 1996.
Mr. Porter has been a consultant in the software services industry since 1995.
From 1989 to 1995, Mr. Porter served as President of Systems and Computer
Technology Corp., a software development company. Prior to 1989, Mr. Porter held
several senior positions in the banking industry, including Senior Vice
President at Bank of America and Chief Operating Officer at American Security
Bank. Mr. Porter holds a B.A. degree from Edinboro University in Pennsylvania.
John Carrington has served as director of Digital Lava since April 1999.
From 1996 to 1998, Mr. Carrington served as Chairman, President and Chief
Executive Officer of Artios, Inc., a CAD/CAM software vendor. From 1991 to 1995,
he served as President and Chief Executive Officer of Digitalk, a cross-platform
object-oriented software firm. Prior to 1991, Mr. Carrington held several senior
positions in the computer software industry, including Chairman, President and
Chief Executive Officer of Cogensys Corporation and President and Chief
Executive Officer of Del Mar Group. Mr. Carrington holds a B.A. degree from the
University of Texas and an MBA from the Southern Methodist University.
Robert Greene has been appointed to the position of Chief Executive Officer
of Digital Lava as of June 28, 1999. Mr. Greene is a nominee for director. From
1995 to June 1999, Mr. Greene served as Senior Vice President of The Lightspan
Partnership Inc., an interactive educational software vendor. From 1982 to 1995,
Mr. Greene served as Senior Vice President and Zone General Manager of Showtime
Networks, Inc., a cable television network. Mr. Greene holds a B.A. degree from
the University of Virginia, a Certificate of Marketing Management and a
Speakeasy Senior Executive Certificate from the University of Denver.
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<PAGE>
Joshua D.J. Sharfman, the President of Digital Lava, served as Chief
Executive Officer and director of Digital Lava since May 1996. On June 28, 1999,
Mr. Greene will replace Mr. Sharfman as Chief Executive Officer. Mr. Sharfman
has served as President of Digital Lava since February 22, 1999 and will remain
as President. Mr. Sharfman will not stand for nomination as a director. From
1994 to 1996, Mr. Sharfman served as Vice President of Research and Development
at ParcPlace-Digitalk, Inc., a cross-platform object-oriented software firm.
From 1993 to 1994, he operated his own software development consulting firm.
From 1984 to 1993, Mr. Sharfman served as Executive Vice President of Research
and Development at Dassault Systemes USA, a wholly owned subsidiary of Dassault
Systemes SARL, and in a variety of marketing and development management
functions at CADAM Inc., both of which are CAD/CAM software vendors. From 1981
to 1984, Mr. Sharfman served as Section Head of the Electro-Optical and Data
Systems Group at Hughes Aircraft Company. Since 1980, Mr. Sharfman has also
served as an Adjunct Professor of Engineering at the University of Southern
California. Mr. Sharfman holds a B.S. degree from the University of California,
Los Angeles and a M.S. degree from the University of Southern California.
Thomas H. Stigler has served as Vice President, Sales and Business Strategy
and a director of Digital Lava since November 1995. Mr. Stigler will not stand
for nomination as a director. From January to November 1995, Mr. Stigler served
as an Account Executive at Sybase, Inc, a database software company. From
January 1993 to January 1995, Mr. Stigler served as District Manager of the Gulf
Coast Region for Hitachi Data Systems Corp. From December 1980 to January 1993,
Mr. Stigler held several sales and management positions at IBM Corporation
including Account Executive and Marketing Manager. Mr. Stigler holds a B.S.
degree in Radio, TV and Film from Northwestern University. Mr. Stigler is the
brother of Dr. James Stigler.
Danny Gampe has served as Chief Financial Officer of Digital Lava since
January 1998. From 1997 to January 1998, Mr. Gampe served as Vice President of
Finance and Administration for eShare Technologies, an Internet software
development firm. From 1992 to 1997, Mr. Gampe served as Chief Financial Officer
of Robbins Research International, a seminar development company. From 1991 to
1992, Mr. Gampe served as Manager of Financial Planning & Analysis at Wahlco
Environmental Systems, Inc. Mr. Gampe holds a B.A. degree from the University of
California at Long Beach and an MBA from the University of Redlands. In
addition, Mr. Gampe has been a Certified Management Accountant since 1993.
Patricia Bodner has served as Vice President of Worldwide Marketing for
Digital Lava since May 1997. From September 1995 to December 1996, Ms. Bodner
served as Senior Vice President of Marketing for Inscape, a joint-venture
between Warner Music Group, HBO and Nash New Media. From November 1994 to August
1995, Ms. Bodner served as Vice President of Marketing for BMG Video, a division
of BMG Entertainment of North America. From November 1991 to November 1994, Ms.
Bodner served as Vice President of Marketing at New Line Home Video, a division
of Time Warner Inc. From September 1986 to November 1991, Ms. Bodner served as
National Sales Promotion Manager at Warner Home Video, a division of Time Warner
Inc. Ms. Bodner holds a B.A. degree from the University of Wisconsin-Madison.
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<PAGE>
Michael Goodell has served as Vice President of Consulting and Services for
Digital Lava since October 1997. From June 1979 to September 1997, Mr. Goodell
held several positions at IBM Corporation, including Principal of Consulting,
Manager of Industry Marketing, Marketing Manager and Senior Sales
Representative. Mr. Goodell holds a B.S. and a M.S. degree from Rice University.
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<PAGE>
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
During the 1998 fiscal year, there were no meetings of the board of
directors. As of June 1, 1999, there have been two meetings of the board of
directors. A quorum of directors was present, either in person or by telephonic
hookup, for the meetings. Actions were also taken during the year by the
unanimous written consent of the directors.
The members of the Audit Committee for 1999 are Gerald Porter and John
Carrington. The Audit Committee has the responsibility of reviewing with the
independent auditors the plans and results of the audit engagement, reviewing
the adequacy, scope and results of the internal accounting controls and
procedures, reviewing the degree of independence of the auditors, reviewing the
auditor's fees and recommending the engagement of the auditors to the full board
of directors.
The members of the Compensation Committee for 1999 are also Gerald Porter
and John Carrington. The Compensation Committee administers Digital Lava's stock
option plan and other corporate benefits programs. The Compensation Committee
also reviews and approves bonuses, stock option grants, compensation philosophy
and current competitive status, and executive officer compensation.
The board of directors does not have a standing nominating committee.
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<PAGE>
Executive Compensation
Summary Compensation. The following table sets forth the total compensation
paid during 1998 to Digital Lava's Chief Executive Officer and the other
executive officers whose 1998 compensation exceeded $100,000.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation Awards
------------------- -----------------------------
Securities
Name and Underlying All Other
Principal Position Salary($) Bonus ($) Options (#) Compensation
- ------------------ --------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Joshua Sharfman
Chief Executive Officer................ $230,000 -- -- --
Thomas Stigler
Vice President, Sales/
Business Strategy..................... 195,000 -- -- --
Patricia Bodner
Vice President, Worldwide
Marketing............................. 145,000 -- -- --
Danny Gampe
Chief Financial Officer................ 125,000 -- -- --
Michael Goodell
Vice President, Consulting/Services 115,000 -- -- --
</TABLE>
Option Grants. No options were granted in 1998 to any of the officers named
in the above table. Under their employment agreements, Mr. Sharfman and Mr.
Stigler each received options to purchase 40,000 shares of common stock at $7.50
per share in February 1999.
Option Exercises and Option Values. The table sets forth certain
information with respect to stock options held by the above-named officers on
December 31, 1998. These officers did not exercise any options in 1998. The
value of the options was based on the initial offering price of $7.50 per share
and the exercise price of the options at December 31, 1998. Ms. Bodner, Mr.
Gampe and Mr. Goodell have each received options to purchase an aggregate of
30,454 shares of common stock at $5.00 per share in March 1999. As of June 28,
1999, Mr. Greene received options to purchase 338,239 shares of common stock.
Number of Shares Value of Unexercised
Unexercised Options the-Money Options
at December 31, 1998 at December 31, 1998 ($)
------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Joshua Sharfman.......... -- -- -- --
Thomas Stigler........... -- -- -- --
Patricia Bodner.......... 3,830 3,830 -- --
Michael Goodell.......... 8,207 8,207 -- --
Danny Gampe.............. 1,368 4,104 -- --
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<PAGE>
EMPLOYMENT/CONSULTING CONTRACTS/DIRECTORS' COMPENSATION
Joshua D.J. Sharfman. Digital Lava entered into an employment agreement
with an initial two-year term ending February 22, 2001 with Mr. Sharfman. The
term automatically renews for additional one-year periods unless either Digital
Lava or Mr. Sharfman terminates the agreement at least 180 days prior to the
initial term or a renewal term. Mr. Sharfman is entitled to receive a severance
pay equal to his annual salary in the event of termination without cause or if
the material portion of his services are performed at a location more than 25
miles from Digital Lava's current location in Los Angeles, California. If Mr.
Sharfman elects to resign after the appointment of an executive officer senior
in position or responsibility to him or designation of another person as the
President or Chief Executive Officer, he will receive a severance payment equal
to eight months' pay, or pay through the end of the term if less than eight
months. Under the Agreement, Mr. Sharfman devotes his full time to serving as
President of Digital Lava. Mr. Sharfman's annual salary is $230,000.
Thomas H. Stigler. Digital Lava entered into an employment agreement with
an initial two-year term ending February 22, 2001 with Mr. Stigler. The term
automatically renews for additional one-year periods unless either Digital Lava
or Mr. Stigler terminates the agreement at least 180 days prior to the initial
term or a renewal term. Mr. Stigler is entitled to receive a severance pay equal
to his annual salary in the event of termination without cause or if the
material portion of his services are performed at a location more than 25 miles
from Digital Lava's current location in Los Angeles, California. If Mr. Stigler
elects to resign after the appointment of an executive officer in charge of
sales and marketing or designation of another person as Vice President of Sales
and Business Strategy, he will receive a severance payment equal to eight
months' pay, or pay through the end of the term if less than eight months. Under
the Agreement, Mr. Sharfman devotes his full time to serving as President of
Digital Lava. Mr. Stigler's annual salary is $230,000.
Robert F. Greene. Digital Lava entered into an employment agreement with a
three-year term ending June 28, 2002 with Mr. Greene. Mr. Greene is entitled to
receive a severance pay equal to his annual salary in the event of termination
without cause. Under the Agreement, Mr. Greene will devote his full time to
serving as Chief Executive Officer of Digital Lava. Mr. Greene is eligible to
receive an annual bonus of up to $100,000. Mr. Greene's annual salary is
$300,000.
James W. Stigler. In addition to serving a director of Digital Lava, Dr.
Stigler has provided consulting services under a consulting agreement with a
two-year term ending February 22, 2001. Under the agreement, Dr. Stigler is
required to render certain consulting services to Digital Lava, including
development, strategic and financial matters as the President or Chief Executive
Officer may request from time to time. Pursuant to the terms of this agreement,
Dr. Stigler receives an annual fee of $24,000.
Roger Berman. In addition to serving as a director of Digital Lava, Mr.
Berman has provided consulting services under a consulting agreement with a
two-year term ending February 22, 2001. Under the agreement, Mr. Berman in
required to render certain consulting services concerning financial matters as
the President or Chief Executive Officer may request from time to time. Pursuant
to the terms of this agreement, Mr. Berman receives an annual fee of $60,000.
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<PAGE>
Directors. Digital Lava's directors who are not full-time employees of
Digital Lava are entitled to receive $1,000 for attendance at each meeting of
the board of directors or any committee of the board and will be reimbursed for
their out-of-pocket expenses in connection with their attendance. No director's
fees have been paid to date.
Compensation Committee Report
The Compensation Committee of the board of directors establishes the
general compensation policies of Digital Lava, establishes the compensation
plans and specific compensation levels for executive officers, and administers
Digital Lava's 1996 Stock Option Plan. The Compensation Committee is composed of
two independent, non-employee directors who have no interlocking relationships
as defined by the Securities and Exchange Commission other than as described
below (see "Compensation Committee Interlocks and Insider Participation")
The Compensation Committee, being responsible for overseeing and approving
executive compensation and grants of stock options, is in a position to
appropriately balance the current cash compensation considerations with the
longer-range incentive-oriented growth outlook associated with stock options.
The main objectives of Digital Lava's compensation structure include rewarding
individuals for their respective contributions to Digital Lava's performance,
providing executive officers with a stake in the long-term success of Digital
Lava and providing compensation policies that will attract and retain qualified
executive personnel.
The Compensation Committee believes that the chief executive officer's
(CEO) compensation should be heavily influenced by Company performance. The
Committee determines the appropriate level of bonuses and increases to salary,
if any, based in large part on Company performance. The Committee also considers
the salaries of CEOs of comparably-sized companies and their performance.
Stock options are granted to the CEO, and to other executives, primarily
based on the executive's ability to influence the Company's long-term growth.
The Compensation Committee has adopted similar policies with respect to
compensation of other officers of the Company. The Committee establishes base
salaries that are within the range of salaries for persons holding similarly
responsible positions at other companies. In addition, the Committee considers
factors such as relative Company performance, the individual's past performance
and future potential in establishing the base salaries of executive officers.
As with the CEO, the number of options granted to the other officers is
determined by the subjective evaluation of the executive's ability to influence
the Company's long-term growth. All options are granted at no less than the
current market price. Since the value of an option bears a direct relationship
to the Company's stock price, it is an effective incentive for managers to
create value for stockholders. The Committee therefore views stock options as an
important component of its long-term, performance-based compensation philosophy.
From the Members of the Compensation Committee: Gerald Porter and John
Carrington.
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<PAGE>
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee for 1999 are Messrs. Gerald
Porter and John Carrington. There have been no interlocks on the Compensation
Committee during 1999.
PERFORMANCE GRAPH
For 1999 Proxy:
The following graph compares Digital Lava's cumulative stockholder's return
for the period beginning February 17, 1999 (date in which Digital Lava's Common
Stock was first publicly traded) and ending May 26, 1999 with the cumulative
total return of the Amex Composite Index over the same period.
<TABLE>
<CAPTION>
2/17/99 3/3/99 3/17/99 3/31/99 4/14/99 4/28/99 5/1/99 5/26/99 6/8/99
------- ------ ------- ------- ------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amex Composite 1.0000 1.0084 1.0395 1.0314 1.0689 1.1293 1.1593 1.1365 1.1224
Digital Lava 0.8750 0.6750 0.6750 1.5000 1.5667 1.2667 1.1333 0.8500 0.9667
</TABLE>
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<PAGE>
Certain Relationships and Related Transactions
The law firm of Ehrenreich Eilenberg Krause & Zivian LLP has performed
legal services for Digital Lava and may perform legal services for Digital Lava
in the future. In 1996 and 1997, Digital Lava issued to Eilenberg & Zivian, an
affiliate of Ehrenreich Eilenberg Krause & Zivian LLP, warrants to purchase an
aggregate of 23,212 shares of common stock at an exercise price of $6.46.
Eilenberg & Zivian is also the owner of 9,334 shares of common stock which it
received from Digital Lava in exchange for services in 1995. Under an agreement
dated as of December 1, 1997, E&Z Investments, an affiliate of Ehrenreich
Eilenberg Krause & Zivian LLP, has currently exercisable options to purchase an
aggregate of 16,420 shares of common stock at an exercise price of $.91 per
share from Messrs. James Stigler and Berman. E&Z Investments also has currently
exercisable options, to purchase an aggregate of 8,207 shares of common stock
from Messrs. James Stigler, Thomas Stigler, Berman and Sharfman at an exercise
price of $.91 per share.
Digital Lava issued a $20,000 promissory note to James Stigler in October
1998. The note bears interest at 12% per annum and is payable in October 1999.
In December 1998, Digital Lava issued a $300,000 promissory note to Henry
Stigler, father of James and Thomas Stigler. The note was paid in full on
February 22, 1999. Mr. Stigler also received warrants to purchase 150,000 shares
of common stock at $9.75 per share.
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<PAGE>
ITEM 2 - PROPOSAL TO AMEND THE INCENTIVE AND NON-QUALIFIED
STOCK OPTION PLAN
The board of directors has adopted, subject to stockholder approval, an
amendment (the "Amendment") to the 1996 Incentive and Non-Qualified Stock Option
Plan ("1996 Plan") authorizing the issuance of an additional 750,000 shares
under such plan, thereby increasing the aggregate number of shares issuable
under such plan from 250,000 to 1,000,000.
To date, options to purchase 242,897 shares of Digital Lava's Common Stock
have been granted under the 1996 Plan and none of such options have been
exercised or terminated.
The adoption of the Amendment by the board of directors reflects a
determination by the Board that ensuring the continued availability of a
sufficient number of options available for grant under the 1996 Plan is
important to Digital Lava's ongoing and continuing efforts to attract and retain
key senior management personnel and increase the interest of Digital Lava's
executive officers in Digital Lava's continuing success.
Since the granting of options under the 1996 Plan is discretionary, Digital
Lava cannot at present determine the number of options that will be granted in
the future to any person or group of persons or the terms of any future grant.
Future option grants and the terms thereof will be determined by the
Compensation Committee in accordance with the terms of the 1996 Plan.
Set forth below is certain information concerning the 1996 Plan. A copy of
the 1996 Plan is available upon written request to Digital Lava.
Description of 1996 Plan
The purpose of the 1996 Plan is to allow directors, officers, key employees
and consultants of Digital Lava and its subsidiaries to increase their
proprietary interest in, and to encourage such employees to remain in the employ
of, or maintain their relationship with, such entities. It is intended that
options granted under the 1996 Plan will qualify either as incentive stock
options under Section 422 of the Code or an non-qualified options. Options
granted under the 1996 Plan will only be exercisable for Common Stock.
The 1996 Plan is administered by a committee appointed by the board of
directors (the "Compensation Committee"). Members of the Compensation Committee
are not be eligible to receive options while they are members except to the
extent otherwise permitted under the requirements of Rule 16b-3 under the
Securities Exchange Act of 1934. The Compensation Committee designates the
persons to receive options, the number of shares subject to the options and the
terms of the options, including the option price and the duration of each
option, subject to certain limitations.
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The maximum number of shares of Common Stock available for issuance under
the 1996 Plan is 250,000 shares (1,000,000 if the Amendment is approved),
subject to adjustment in the event of stock splits, stock dividends, mergers,
consolidations and the like. Common Stock subject to options granted under the
1996 Plan that expire or terminate are available for options to be issued under
the 1996 Plan.
The price at which shares of Common Stock may be purchased upon exercise of
an incentive stock option must be at least 100% of the fair market value of
Common Stock on the date the option is granted (or at least 110% of fair market
value in the case of a person holding more than 10% of the outstanding shares of
Common Stock (a "10% Stockholder")).
The aggregate fair market value (determined at the time the option is
granted) of Common Stock with respect to which incentive stock options are
exercisable for the first time in any calendar year by an optionee under the
1996 Plan or any other plan of Digital Lava or a subsidiary, shall not exceed
$100,000. The Compensation Committee will fix the time or times when, and the
extent to which, an option is exercisable, provided that no option will be
exercisable earlier than one year or later than ten years after the date of
grant (or five years in the case of a 10% Stockholder). The option price is
payable in cash or by check. However, the Board of s may grant a loan to an
employee, pursuant to the loan provision of the 1996 Plan, for the purpose of
exercising an option or may permit the option price to be paid in shares of
Common Stock at the then current fair market value, as defined in the 1996 Plan.
Upon termination of an optionee's employment or consultancy, all options
held by such optionee will terminate, except that any option that was
exercisable on the date employment or consultancy terminated may, to the extent
then exercisable, be exercised within three months thereafter (or one year
thereafter if the termination is the result of permanent and total disability of
the holder), and except such three month period may be extended by the
Compensation Committee in its discretion. If an optionee dies while he is an
employee or a consultant or during such three-month period, the option may be
exercised within one year after death by the decedent's estate or his legatees
or distributees, but only to the extent exercisable at the time of death.
The 1996 Plan provides that outstanding options shall vest and become
immediately exercisable in the event of a "sale" of Digital Lava, including (1)
the sale of more than 75% of the voting power of Digital Lava in a single
transaction or a series of transactions, (2) the sale of substantially all
assets of Digital Lava, (3) approval by the stockholders of a reorganization,
merger or consolidation, as a result of which the stockholders of Digital Lava
will own less than 50% of the voting power of the reorganized, merged or
consolidated company.
The board of directors may amend, suspend or discontinue the 1996 Plan, but
it must obtain stockholder approval to (1) increase the number of shares subject
to the 1996 Plan, (2) change the designation of the class of persons eligible to
receive options, (3) decrease the price at which options may be granted, except
that the Board may, without stockholder approval accept the surrender of
outstanding options and authorize the granting of new options in substitution
therefor specifying a lower exercise price that is not less than the fair market
value of Common Stock on the date the new
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option is granted, (4) remove the administration of the 1996 Plan from the
Compensation Committee, (5) render any member of the Compensation Committee
eligible to receive an option under the 1996 Plan while serving thereon, or (6)
amend the 1996 Plan in such a manner that options issued under it intend to be
incentive stock options, fail to meet the requirements of Incentive Stock
Options as defined in Section 422 of the Code.
Under current federal income tax law, the grant of incentive stock options
under the 1996 Plan will not result in any taxable income to the optionee or any
deduction for Digital Lava at the time the options are granted. The optionee
recognizes no gain upon the exercise of an option. However the amount by which
the fair market value of Common Stock at the time the option is exercised
exceeds the option price is an "item of tax preference" of the optionee, which
may cause the optionee to be subject to the alternative minimum tax. If the
optionee holds the shares of Common Stock received on exercise of the option at
least one year from the date of exercise and two years from the date of grant,
he will be taxed at the time of sale at long-term capital gains rates, if any,
on the amount by which the proceeds of the sale exceed the option price. If the
optionee disposes of the Common Stock before the required holding period is
satisfied, ordinary income will generally be recognized in an amount equal to
the excess of the fair market value of the shares of Common Stock at the date of
exercise over the option price, or, if the disposition is a taxable sale or
exchange, the amount of gain realized on such sale or exchange if that is less.
If, as permitted by the 1996 Plan, the board of directors permits an optionee to
exercise an option by delivering already owned shares of Common Stock valued at
fair market value) the optionee will not recognize gain as a result of the
payment of the option price with such already owned shares. However, if such
shares were acquired pursuant to the previous exercise of an option, and were
held less than one year after acquisition or less than two years from the date
of grant, the exchange will constitute a disqualifying disposition resulting in
immediate taxation of the gain on the already owned shares as ordinary income.
It is not clear how the gain will be computed on the disposition of shares
acquired by payment with already owned shares.
Digital Lava is currently in discussions with several emerging
pharmaceutical and biotechnology companies about potential business and/or
product consolidations, joint ventures, acquisitions, mergers or other business
combinations. If any such transaction is consummated, the existence of these
additional outstanding stock options under the 1996 Plan could have the effect
of reducing the aggregate consideration received by existing stockholders in
such transaction.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE AMENDMENT (ITEM 2
ON THE ENCLOSED PROXY CARD) INCREASING THE NUMBER OF SHARES AUTHORIZED FOR
ISSUANCE UNDER THE 1996 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN BY 750,000
FROM 250,000 TO 1,000,000.
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INDEPENDENT PUBLIC ACCOUNTANTS
Digital Lava has appointed Price Waterhouse LLP as its independent public
accountants to examine the financial statements of Digital Lava for the current
fiscal year. The selection of Price Waterhouse LLP was approved by the board of
directors prior to their appointment. Price Waterhouse LLP has advised Digital
Lava that they do not have any material financial interests in, or any
connection with (other than as independent auditors, tax advisors and management
consultants), Digital Lava.
Price Waterhouse LLP is expected to be present at the Annual Meeting and
will have the opportunity to make a statement, if they desire to do so, and they
are expected to be available to respond to appropriate questions.
STOCKHOLDERS' PROPOSALS FOR 2000
ANNUAL MEETING OF STOCKHOLDERS
Proposals which stockholders intend to present at the 2000 annual meeting
of stockholders must be received by Digital Lava by March 1, 2000 to be eligible
for inclusion in the proxy material for that meeting.
ANNUAL REPORT ON FORM 10-K
Upon sending a written request to Digital Lava Inc., 10850 Wilshire
Boulevard, Suite 1260, Suite 1260, Los Angeles, CA 90024, Attention: President,
stockholders may obtain, free of charge, a copy of Digital Lava's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998, and any amendments
thereto, as filed with the Securities and Exchange Commission.
OTHER MATTERS
As of the date of this Proxy Statement, the only business which management
expects to be considered at the Annual Meeting is the election of directors and
the adoption of the incentive and non-qualified stock option plan. If any other
matters come before the meeting, the persons named in the enclosed form of proxy
are expected to vote the proxy in accordance with their best judgment on such
matters.
BY ORDER OF THE BOARD OF DIRECTORS
Roger Berman
Chairman of the Board
Dated: June 23, 1999
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