-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QCYi00QoZp+XQQY8hp4ExyhMQKiuwNE+faRp5G33rbyZMiloqLYSUTZCyk+fUuzn K6I007/IcGKNbVdu0mCqpw== 0000912057-99-005175.txt : 19991115 0000912057-99-005175.hdr.sgml : 19991115 ACCESSION NUMBER: 0000912057-99-005175 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL RIVER INC /DE CENTRAL INDEX KEY: 0001062530 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 411901640 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24643 FILM NUMBER: 99748692 BUSINESS ADDRESS: STREET 1: 9625 W 76TH STREET SUITE 150 CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 BUSINESS PHONE: 6122631234 MAIL ADDRESS: STREET 1: 9625 W 76TH STREET SUITE 150 CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q /x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ Commission file number 000-24643 DIGITAL RIVER, INC. (Exact name of registrant as specified in its charter) DELAWARE 41-1901640 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 9625 WEST 76TH STREET, SUITE 150 EDEN PRAIRIE, MINNESOTA 55344 (Address of principal executive offices) -------------------------- (612) 253-1234 (Registrant's telephone number, including area code) -------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / / COMMON STOCK, $0.01 PAR VALUE 20,741,918 SHARES ----------------------------- ---------------------------------------- (Class) Outstanding as of November 5, 1999 DIGITAL RIVER, INC. Form 10-Q Index PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Condensed Consolidated Balance Sheets at September 30, 1999 and December 31, 1998................................................ 3 Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 1999 and 1998............................ 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998...................................... 5 Notes to Condensed Consolidated Financial Statements....................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................................. 8 Item 3. Qualitative and Quantitative Disclosure about Market Risk.................................. 13 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds.................................................. 14 Item 6. Exhibits and Reports on Form 8-K........................................................... 15 SIGNATURES................................................................................................ 16 EXHIBIT INDEX............................................................................................. 17
2. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DIGITAL RIVER, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share Data)
September 30, 1999 December 31, 1998 --------------- ----------------- (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $10,730 $63,503 Short-term investments 47,537 10,894 Accounts receivable, net 2,091 1,487 Prepaid expenses and other 637 420 --------- -------- Total current assets 60,995 76,304 PROPERTY AND EQUIPMENT, NET 5,338 3,914 GOODWILL, NET AND OTHER ASSETS 20,752 110 --------- -------- $87,085 $80,328 --------- -------- --------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $8,839 $3,880 Accrued payroll 1,633 807 Other current liabilities 1,169 1,054 --------- -------- Total current liabilities 11,641 5,741 STOCKHOLDERS' EQUITY: Preferred Stock, $.01 par value; 5,000,000 shares authorized; no shares issued and outstanding - - Common Stock, $.01 par value; 45,000,000 shares authorized; 20,730,250 and 19,544,791 shares issued and outstanding 207 195 Additional paid-in capital 114,877 93,883 Deferred compensation (806) (1,368) Accumulated deficit (38,834) (18,123) --------- -------- Total stockholders' equity 75,444 74,587 --------- -------- $87,085 $80,328 --------- -------- --------- --------
See accompanying notes to condensed consolidated financial statements. 3. DIGITAL RIVER, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Data; Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ----------------------- 1999 1998 1999 1998 ----------- --------- ----------- ---------- SALES $20,068 $5,758 $47,589 $11,504 COST OF SALES 16,253 4,819 38,889 9,610 ----------- --------- ----------- ---------- Gross profit 3,815 939 8,700 1,894 ----------- --------- ----------- ---------- OPERATING EXPENSES: Sales and marketing 4,857 3,105 12,826 6,538 Product development and operations 4,025 1,292 11,315 2,903 General and administrative 1,098 751 3,123 2,164 Amortization of goodwill and other acquisition related costs 3,275 - 4,577 - ----------- --------- ----------- ---------- Total operating expenses 13,255 5,148 31,841 11,605 ----------- --------- ----------- ---------- LOSS FROM OPERATIONS (9,440) (4,209) (23,141) (9,711) INTEREST INCOME 752 269 2,430 419 ----------- --------- ----------- ---------- Net loss $(8,688) $(3,940) $(20,711) $(9,292) ----------- --------- ----------- ---------- ----------- --------- ----------- ---------- Basic and diluted net loss per share $(0.42) $(0.26) $(1.03) $(0.74) ----------- --------- ----------- ---------- ----------- --------- ----------- ---------- Basic and diluted weighted average common shares outstanding 20,604 14,894 20,137 12,484 ----------- --------- ----------- ---------- ----------- --------- ----------- ----------
See accompanying notes to condensed consolidated financial statements. 4. DIGITAL RIVER, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands; Unaudited)
Nine Months Ended September 30, ---------------------- 1999 1998 ------------ -------- OPERATING ACTIVITIES: Net loss $(20,711) $(9,292) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of goodwill and other acquisition related costs 4,296 - Depreciation and other amortization 1,238 439 Deferred compensation expense 672 959 Changes in assets and liabilities: Accounts receivable and prepaid expenses (628) (1,278) Accounts payable 3,392 1,935 Other current liabilities 925 605 ------------ -------- Net cash used in operating activities (10,816) (6,632) ------------ -------- INVESTING ACTIVITIES: Purchases of short-term investments (94,643) (10,840) Proceeds from sales of investments 58,000 2,000 Acquisitions, net of cash received (3,320) - Purchases of equipment (2,526) (2,548) Patent acquisition costs (209) (44) ------------ -------- Net cash used in investing activities (42,698) (11,432) ------------ -------- FINANCING ACTIVITIES: Sales of Common Stock 1,137 35,393 Payment of deferred costs and other (396) (44) ------------ -------- Net cash provided by financing activities 741 35,349 ------------ -------- Net increase (decrease) in cash and cash equivalents (52,773) 17,285 CASH AND CASH EQUIVALENTS, beginning of period 63,503 2,126 ------------ -------- CASH AND CASH EQUIVALENTS, end of period $10,730 $19,411 ------------ -------- ------------ -------- SUPPLEMENTAL CASH FLOW DISCLOSURE: Issuance of Common Stock in connection with acquisitions and purchase of assets $18,713 $ - ------------ -------- ------------ -------- Issuance of Common Stock in connection with earn-out payments $1,046 $ - ------------ -------- ------------ --------
See accompanying notes to condensed consolidated financial statements. 5. DIGITAL RIVER, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: The unaudited condensed consolidated financial statements included herein reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to fairly state the Company's consolidated financial position, results of operations and cash flows for the periods presented. These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements included in the Company's Form 10-K for the year ended December 31, 1998 as filed with the Securities and Exchange Commission. The results of operations for the period ended September 30, 1999 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending December 31, 1999. The December 31, 1998 balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. 2. PRINCIPLES OF CONSOLIDATION: The condensed consolidated financial statements include the accounts of Digital River, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. 3. NET LOSS PER SHARE: Basic loss per share is computed using the weighted-average number of common shares outstanding excluding contingently issuable or returnable shares, and diluted loss per share is computed using the weighted-average number of common shares outstanding and dilutive potential common shares outstanding. As a result of the losses incurred by the Company for the nine months ended September 30, 1999 and 1998, respectively, all potential common shares were anti-dilutive and were excluded from the diluted net loss per share calculations. The following table summarizes securities outstanding as of each period end which were not included in the calculation of diluted net loss per share since their inclusion would be anti-dilutive:
September 30, 1999 September 30, 1998 -------------------- -------------------- Common Stock warrants 371,086 803,008 Common Stock options 3,460,985 2,321,093
4. ACQUISITIONS AND PURCHASES OF ASSETS: In April 1999, pursuant to an Agreement and Plan of Merger by and among the Company, Maagnum Internet Group, a Connecticut corporation ("Maagnum"), and Cyrus Maaghul, the sole shareholder of Maagnum, Maagnum merged with and into the Company (the "Merger"). At the effective time of the Merger, Mr. Maaghul's shares of Maagnum common stock converted into the right to receive from the Company $2.5 million in cash, 88,809 shares of Common Stock of the Company, and up to an additional 320,161 shares of Common Stock that may be earned by Mr. Maaghul upon the achievement of certain business goals over the 24-month period following the closing date of the Merger. In addition, pursuant to a Stock Purchase Agreement dated April 1, 1999 by and between the Company and Meiman Kentjana, a key employee of Maagnum, in consideration for Mr. Kentjana's agreement to waive certain rights with 6. respect to Maagnum, the Company issued to Mr. Kentjana on the closing date of the Merger 22,841 shares of Common Stock and gave him the right to receive up to an additional 192,374 shares of Common Stock that may be earned by Mr. Kentjana upon the achievement of certain business goals over the 24-month period following the closing date of the Merger. In the quarter ended September 30, 1999, Messrs. Maaghul and Kentjana of Maagnum collectively received earn-out payments of 48,095 shares of Common Stock valued at $1,046,000. The Company charged to expense this amount and such amount is included in the Condensed Consolidated Statements of Operations. Also in April 1999, pursuant to an Asset Purchase Agreement by and among the Company, Public Software Library Ltd., a Texas limited partnership ("Seller"), and the partners of Seller, the Company purchased substantially all of the assets and assumed certain liabilities of Seller in exchange for an aggregate of 161,842 shares of Common Stock of the Company. In June 1999, pursuant to an Agreement and Plan of Merger and Reorganization by and among the Company, Universal Commerce, Incorporated, a Delaware corporation ("RegNow"), certain stockholders of RegNow (the "Stockholders"), RegNow merged with and into the Company (the "RegNow Merger"). At the effective time of the RegNow Merger, the Stockholders received from the Company $2.0 million in cash and 306,884 shares of Common Stock of the Company in exchange for all outstanding RegNow shares. In addition, the Stockholders may receive additional shares of Common Stock upon the achievement of certain revenue goals over the 12-month period following the closing date of the RegNow Merger. In addition, certain individuals who are Stockholders are also eligible to receive up to an additional $2 million in cash if they remain employees of the Company for a period of 12 months following the closing date of the RegNow Merger. Each of the above transactions was accounted for using the purchase method. The purchase price in each transaction was allocated substantially to goodwill and other intangibles, which are being amortized over three years. If any earn-out payments, as listed above, are earned, they will be recognized as compensation expense in the period in which the required milestones are achieved. The following unaudited pro forma condensed results of operations for the nine months ended September 30, 1999 and 1998 have been prepared as if each of the above three transactions had occurred on January 1, 1999 and 1998, respectively:
Nine Months Ended September 30, --------------------- 1999 1998 ---------- --------- (In Thousands) Sales $51,557 $16,293 Loss from operations (25,544) (15,332) Net loss (23,215) (15,081) Basic and diluted loss per share $(1.13) $(1.15)
This financial information does not purport to represent results that would actually have been obtained if the transactions had been in effect on January 1, 1999 and 1998 or any future results that may in fact be realized. 7. In July 1999, the Company entered into a definitive agreement with Tech Squared Inc., an owner of approximately 15% of the Company's Common Stock, whereby the Company will purchase certain Tech Squared assets consisting of 3.0 million shares of the Company's Common Stock and $1.2 million of cash in exchange for 2.65 million shares of the Company's Common Stock, thus resulting in a net 350,000 shares being retired from outstanding shares. The transaction will be accounted for as a tax-free reorganization. The transaction is subject to approval by the shareholders of Tech Squared and other pre-closing conditions including the sale or liquidation of the operations of Tech Squared. The Company may, under certain circumstances prior to closing, cancel the transaction. The closing of this transaction is anticipated to take place in the Company's fourth quarter of 1999. 5. STOCK OPTIONS: In August, 1999, the Board of Directors adopted the 1999 Non-Officer Stock Option Plan (the "Non-Officer Plan"). The Non-Officer Plan provides for the issuance of nonstatutory stock options to selected employees and consultants to purchase up to 1,300,000 shares of Common Stock. Terms and conditions of the Non-Officer Plan are generally similar to the Company's 1998 Stock Option Plan. 6. SUBSEQUENT EVENT: In October 1999, pursuant to an Asset Purchase Agreement by and among the Company, Walnut Creek CDROM, Inc. ("Walnut Creek"), and the sole shareholder of Walnut Creek, the Company purchased certain assets of Walnut Creek in exchange for $1 million in cash and 143,885 shares of Common Stock of the Company. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE COMPANY NOTES THAT, EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED BELOW CONTAIN FORWARD-LOOKING STATEMENTS WHICH INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY EXPRESSLY DISCLAIMS ANY OBLIGATION TO UPDATE THIS INFORMATION OR PUBLICLY RELEASE ANY REVISION OR REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS REPORT. SUCH FACTORS INCLUDE, AMONG OTHERS: THE COMPANY'S LIMITED OPERATING HISTORY AND VARIABILITY OF OPERATING RESULTS, EXPECTATION OF FUTURE LOSSES, RISKS ASSOCIATED WITH ELECTRONIC SOFTWARE DELIVERY, DEPENDENCE ON THE INTERNET AND GROWTH IN ELECTRONIC COMMERCE AND INTERNET INFRASTRUCTURE DEVELOPMENT, DEPENDENCE ON SOFTWARE PUBLISHERS, DEPENDENCE ON ONLINE RETAILERS, SYSTEM DEVELOPMENT AND ELECTRONIC COMMERCE SECURITY RISKS, RAPID TECHNOLOGICAL CHANGES, COMPETITION IN THE ELECTRONIC COMMERCE INDUSTRY, THE IMPORTANCE OF ATTRACTING AND RETAINING PERSONNEL, MANAGEMENT OF THE COMPANY'S GROWTH, INTEGRATION OF ACQUIRED COMPANIES, DEPENDENCE ON KEY EMPLOYEES AND OTHER RISK FACTORS REFERENCED IN THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998. OVERVIEW The Company is a leading provider of comprehensive electronic commerce outsourcing solutions to software publishers and online retailers. The Company was incorporated in February 1994 and commenced offering products for sale through its clients' Web stores in August 1996. From inception through August 1996, the Company had no sales, and its activities related primarily to the development of its Commerce Network Server ("CNS") technology related to electronic commerce. In 1996, the Company began to focus its business development efforts on building its inventory of software products 8. through contracts with software publishers and in 1997, the Company began to develop distribution relationships through contracts with online retailers. In the second quarter of 1999 the Company added approximately 3,000 software publisher clients through its acquisition of three commerce outsourcing providers to the shareware publishing industry, Maagnum Internet Group, Public Software Library and Universal Commerce, Incorporated. As of September 30, 1999, the Company had approximately 4,400 software publisher clients and 1,200 online retailer clients. The Company derives its revenue primarily from sales of third-party software. The Company has contractual relationships with its software publisher and online retailer clients which obligate the Company to pay to the client a specified percentage of each sale. Revenues from the sale of software products, net of estimated returns, are recognized upon either delivery through electronic software delivery ("ESD") or shipment of the physical product to the end-user. The amount payable to the software publisher or online retailer is reported as cost of sales. The Company bears full credit risk with respect to substantially all sales. In early 1999, the Company began formally offering a transaction fee based e-commerce service, CommerceBridge, for products other than third-party software. There can be no assurance that the Company will derive any significant revenue from this service. The Company has a limited operating history upon which investors may evaluate its business and prospects. Since inception, the Company has incurred significant losses, and as of September 30, 1999, had an accumulated deficit of approximately $38.8 million. The Company intends to expend significant financial and management resources on the development of additional services, sales and marketing, technology and operations to support larger-scale operations and greater service offerings. As a result, the Company expects to incur additional losses and continued negative cash flow from operations for the foreseeable future, and such losses are anticipated to increase significantly from current levels. There can be no assurance that the Company's sales will increase or even continue at their current level or that the Company will achieve or maintain profitability or generate cash from operations in future periods. The Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets such as electronic commerce. To address these risks, the Company must, among other things, maintain existing and develop new relationships with software publishers and online retailers, implement and successfully execute its business and marketing strategy, continue to develop and upgrade its technology and transaction-processing systems, provide superior customer service and order fulfillment, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance that the Company will be successful in addressing such risks, and the failure to do so would have a material adverse effect on the Company's business, financial condition and results of operations. The Company's current and future expense levels are based largely on its planned operations and estimates of future sales. Sales and operating results generally depend on the volume and timing of orders received, which are difficult to forecast. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in sales would have an immediate adverse effect on the Company's business, financial condition and results of operations. In view of the rapidly evolving nature of the Company's business and its limited operating history, the Company is unable to accurately forecast its sales and believes that period-to-period comparisons of its operating results are not necessarily meaningful and should not be relied upon as an indication of future performance. 9. RESULTS OF OPERATIONS The following table sets forth certain items from the Company's consolidated condensed statements of operations as a percentage of total revenues for the periods indicated.
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ----------------------- 1999 1998 1999 1998 ---------- ----------- ----------- ---------- Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 81.0 83.7 81.7 83.5 ---------- ----------- ----------- ---------- Gross profit 19.0 16.3 18.3 16.5 ---------- ----------- ----------- ---------- Operating expenses: Sales and marketing 24.2 53.9 27.0 56.9 Product development and operations 20.1 22.5 23.8 25.2 General and administrative 5.5 13.0 6.5 18.8 Amortization of goodwill and other acquisition related costs 16.3 - 9.6 - ---------- ----------- ----------- ---------- Total operating expenses (1) 66.1 89.4 66.9 100.9 ---------- ----------- ----------- ---------- Loss from operations (47.1) (73.1) (48.6) (84.4) ---------- ----------- ----------- ---------- Interest income, net 3.8 4.7 5.1 3.6 ---------- ----------- ----------- ---------- Net loss (43.3)% (68.4)% (43.5)% (80.8)% ---------- ----------- ----------- ---------- ---------- ----------- ----------- ----------
(1) Operating expenses include non-cash employee stock compensation charges of $175,000 and $270,000 (0.9% and 4.7% of sales, respectively) for the three months ended September 30, 1999 and 1998, respectively, and non-cash employee stock compensation charges of $672,000 and $959,000 (1.4% and 8.3% of sales, respectively) for the nine months ended September 30, 1999 and 1998, respectively. SALES Sales increased to $20.1 million for the quarter ended September 30, 1999 from $5.8 million for the quarter ended September 30, 1998 and increased to $47.6 million for the nine months ended September 30, 1999, up from $11.5 million for the same period of 1998. The increases were primarily a result of significant growth in the number of the Company's software publisher and online retailer clients as well as increasing market acceptance of ESD. International sales represented approximately 22% and 29% of sales for the nine months ended September 30, 1999 and 1998, respectively. GROSS PROFIT Cost of sales increased to $16.3 million in the quarter ended September 30, 1999 from $4.8 million in the quarter ended September 30, 1998 and increased to $38.9 million for the nine months ended September 30, 1999 from $9.6 million for the same period of 1998. The increases reflect the Company's growth in sales. The Company's gross profit margin increased to 19.0% in the quarter ended September 30, 1999 versus 16.3% in the quarter ended September 30, 1998. This increase was due mainly to the increase in the number of higher margin, fee based orders that the Company processed during the most recent quarter. The Company believes that Internet commerce and related services will 10. become more competitive in the near future. Accordingly, the Company may reduce or alter its pricing structure and policies in the future and any such change could reduce gross margins. SALES AND MARKETING Sales and marketing expense increased to $4.9 million in the quarter ended September 30, 1999 from $3.1 million in the quarter ended September 30, 1998 and increased to $12.9 million for the nine months ended September 30, 1999 from $6.5 million for the same period of 1998. The increases resulted from expanding the sales and marketing infrastructure required to increase the number of and provide support to the Company's software publisher and online retailer clients and variable expenses which increase in relation to sales. The primary components of the increase for the comparable quarters ended September 30 were an increase in wages and benefits of $941,000 and an increase in credit card fees and chargeback costs of $801,000. As a percentage of sales, sales and marketing expense decreased to 24.2% in the quarter ended September 30, 1999 from 53.9% in the quarter ended September 30, 1998, primarily reflecting the Company's increased sales volume. The Company expects that sales and marketing expense will continue to increase in absolute dollars as the Company continues to build its sales and marketing infrastructure and to develop marketing programs. PRODUCT DEVELOPMENT AND OPERATIONS Product development and operations expense increased to $4.0 million in the quarter ended September 30, 1999 from $1.3 million in the quarter ended September 30, 1998 and increased to $11.3 million for the nine months ended September 30, 1999 from $2.9 million for the same period of 1998. The increases were primarily related to increased personnel and consulting costs related to developing, enhancing and maintaining the Company's CNS and related facilities and customer service related personnel costs. The primary components of the increase for the comparable quarters ended September 30, were an increase in consulting costs of $1.1 million, an increase in wages and benefits of $834,000 and an increase in depreciation expense of $239,000. As a percentage of sales, product development and operations expense decreased to 20.1% in the quarter ended September 30, 1999 from 22.5% in the quarter ended September 30, 1998. The Company believes that continued investment in product development and operations is critical to attaining its strategic objectives and, and as a result, expects product development and operations expenses will continue to increase in absolute dollars. As a percentage of sales, these expenses are expected to decrease as sales increase. GENERAL AND ADMINISTRATIVE General and administrative expense increased to $1.1 million in the quarter ended September 30, 1999 from $751,000 in the quarter ended September 30, 1998 and increased to $3.1 million for the nine months ended September 30, 1999 from $2.2 million for the same period of 1998. The increases were primarily due to increased personnel and related expenses, legal expenses and investor relations expenses. As a percentage of sales, general and administrative expense decreased to 5.5% in the quarter ended September 30, 1999 from 13.0% in the quarter ended September 30, 1998, primarily reflecting the Company's growth in sales. The Company expects general and administrative expense to increase in absolute dollars in the future, particularly as the Company continues to build infrastructure to support growth and incurs costs associated with being a public company. As a percentage of sales, these expenses are expected to decrease as sales increase. INTEREST INCOME Interest income consists of earnings on the Company's cash, cash equivalents and short-term investments. The increase over the prior period was attributable to interest received on higher average 11. cash and cash equivalent balances resulting from the sales of Common Stock in the latter half of 1998. The Company expects interest income to decrease in the future as cash is used to fund operations and is used for investments in infrastructure. INCOME TAXES The Company paid no income taxes in any reported period. The Company has incurred a net loss for each period since inception. As of September 30, 1999, the Company had approximately $42 million of net operating loss carryforwards for federal income tax purposes, which expire beginning in 2009. Due to the uncertainty of future profitability, a valuation allowance equal to the deferred tax asset has been recorded. Certain changes in ownership that resulted from the sales of Common and Preferred Stock will limit the future annual realization of the tax net operating loss carryforwards to a specified percentage under Section 382 of the Internal Revenue Code. LIQUIDITY AND CAPITAL RESOURCES In the first nine months of 1999, the Company used $10.8 million of cash to fund operations and made additions of equipment and software totaling $2.5 million. The Company used $3.3 million for the acquisition of Maagnum Internet Group, Public Software Library Ltd. and Universal Commerce, Incorporated, net of cash received from the acquisitions completed during the quarter. The Company also purchased $94.6 million in short-term investments which were partially offset by $58.0 million in sales of investments. In the same period for 1998, the Company used $6.6 million of cash to fund operations, $2.5 million for addition of equipment and software and $10.8 million to purchase short-term investments which was partially offset by $2.0 million in sales of investments. As of September 30, 1999 the Company had approximately $10.7 million of cash and cash equivalents and $47.5 million of short-term investments. The Company's principal commitments consisted of obligations outstanding under operating leases. Although the Company has no material commitments for capital expenditures, it anticipates an increase in the rate of capital expenditures consistent with its anticipated growth in operations, infrastructure and personnel. The Company anticipates that it will expend approximately $7.0 million over the next 15 months on capital expenditures based on the Company's current anticipated growth rate. The Company further anticipates that it will expend approximately $14.0 million over the next 15 months on product development based on the Company's current anticipated growth rate in operations. The Company may also use cash to acquire or license technology, products or businesses related to the Company's current business. The Company also anticipates that it will continue to experience significant growth in its operating expenses for the foreseeable future and that its operating expenses will be a material use of the Company's cash resources. The Company believes that existing sources of liquidity will provide adequate cash to fund its operations for at least the next 15 months. YEAR 2000 COMPLIANCE Like many other companies, Year 2000 computer issues create certain risks for the Company. If the Company's internal management information systems and external electronic commerce information systems do not correctly recognize and process date information beyond the Year 1999, there could be an adverse impact on the Company's operations. To address these Year 2000 issues with its internal and external systems, the Company has evaluated such systems. The Company believes it has completed all activities to remediate Year 2000 issues as of September 30, 1999, although it will continue testing throughout the next quarter. These activities are intended to encompass all major categories of systems used by the Company, including electronic commerce, sales processing, sales and financial systems. The 12. costs incurred to date related to these programs have been less than $25,000. The total cost does not include potential costs related to any customer or other claims or the cost of internal software and hardware replaced in the normal course of business. The total cost is subject to change should events arise that indicate a Year 2000 issue. The Company is also working with key suppliers of products and services to determine that their operations and products are Year 2000 Compliant or to monitor their progress toward Year 2000 Compliance, as appropriate. The failure of a major supplier to become Year 2000 Compliant on a timely basis, or a conversion that is incompatible with the Company's systems could have a material adverse effect on the Company's business, financial condition and results of operations. In addition the Company's business, financial condition and results of operations may be materially adversely affected to the extent its end-users are unable to use their credit cards due to the Year 2000 issues that are not rectified by their credit card vendors. In addition, the Company has completed internal discussions concerning contingency planning to address potential problem areas with internal systems and with suppliers and other third parties. It is expected that assessment, remediation and contingency planning activities will be on-going throughout calendar year 1999 with the goal of appropriately resolving all material internal and external systems and third party issues. As used by the Company, "Year 2000 Compliant" shall mean software that can individually, and in combination and in conjunction with all other systems, products or processes with which they are required or designed to interface, continue to be used normally and to operate successfully (both in functionality and performance in all material respects) over the transition into the twenty first century when used in accordance with the documentation relating to such software, including being able to, before, on and after January 1, 2000 substantially conform to the following: (i) use logic pertaining to dates which allow users to identify and/or use the century portion of any date fields without special processing; and (ii) respond to all date elements and date input so as to resolve any ambiguity as to century in a disclosed, defined and pre-determined manner and provide date information in ways which are unambiguous as to century, either by permitting or requiring the century to be specified or where the data element is represented without a century, the correct century is unambiguous for all manipulations involving that element. Based on currently available information, the Company does not believe that the Year 2000 matters discussed above related to internal systems or products sold to customers will have a material adverse impact on the its financial condition or overall trends in results of operations; however, it is still uncertain to what extent the Company may be affected by such matters. In addition, customers may delay purchase decisions because of uncertainty about Year 2000 issues. There also can be no assurance that the failure to ensure Year 2000 Compliance by a supplier or another third party would not have a material adverse effect on the Company. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK The Company does not enter into financial instruments for trading or speculative purposes and does not currently utilize derivative financial instruments. The operations of the Company are conducted primarily in the United States and as such are not subject to material foreign currency exchange rate risk. The Company has no long-term debt. 13. PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. (c) In the quarter ended September 30, 1999, Messrs. Maaghul and Kentjana of Maagnum collectively received earn-out payments of 48,095 shares of unregistered Common Stock valued at $1,046,000. The issuance and sale of the Common Stock was intended to be exempt from registration and prospectus delivery requirements under the Securities Act of 1933, as amended (the "Securities Act"), by virtue of Section 4(2) thereof due to, among other things, (i) the limited number of persons to whom the Common Stock was issued, (ii) the distribution of disclosure documents to the investor, (iii) the fact that such person represented and warranted to the Company, among other things, that such person was acquiring the Common Stock for investment only and not with a view to the resale or distribution thereof, and (iv) the fact that a certificate representing the Common Stock was issued with a legend to the effect that such Common Stock had not been registered under the Securities Act or any state securities laws and could not be sold or transferred in the absence of such registration or an exemption therefrom. (d) The effective date of the Company's registration statement, filed on Form S-1 under the Securities Act (File No. 333-56787), was August 11, 1998 (the "Registration Statement"). The class of securities registered was Common Stock and all securities registered were sold in this initial public offering (the "IPO"). The managing underwriters for the offering were BT Alex. Brown, BancAmerica Robertson Stephens and Bear, Stearns & Co. Inc. Pursuant to the Registration Statement, the Company sold 3,000,000 shares of its Common Stock for an aggregate gross offering price of $25.5 million. In connection with the IPO, the Company incurred expenses of approximately $2.8 million, of which approximately $1.8 million represented underwriting discounts and commissions and approximately $1 million represented other expenses related to the offering. All such expenses were direct or indirect payments to others. The net offering proceeds to the Company were $22.7 million. Through September 30, 1999, the Company has used $4.3 million of the net proceeds from the IPO to purchase equipment and software, $3.3 million related to acquisitions and $15.1 million of the net proceeds for working capital and general corporate purposes. The use of the proceeds from the offering does not represent a material change in the use of the proceeds described in the Registration Statement. 14. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENTS 2.5 (1) Acquisition Agreement, dated as of July 11, 1999, by and among the Registrant and Tech Squared Inc. 3.1 (2) Amended and Restated Certificate of Incorporation 3.2 (2) Bylaws of the Registrant 4.1 (2) Specimen Common Stock Certificate 10.17 1999 Non-Officer Stock Option Plan 10.18 Form of Non-Qualified Stock Option Agreement under the 1999 Non-Officer Stock Option Plan 11.1 (3) Statement of Computation of Per Share Earnings 27.1 Financial Data Schedule
(1) Filed as an exhibit to the Company's current report on Form 8-K filed by the Company on July 16, 1999, incorporated herein by reference. (2) Filed as an exhibit to the Company's Registration Statement on Form S-1, File No. 333-56787, declared effective on August 11, 1998, incorporated herein by reference. (3) See Note 3 to Condensed Consolidated Financial Statements. (b) REPORTS ON FORM 8-K The Company filed one current report on Form 8-K during the quarter ended September 30, 1999. The report was filed on July 16, 1999 and reported the purchase by the Company of substantially all of the assets of Tech Squared Inc. 15. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 9, 1999 DIGITAL RIVER, INC. By: /S/ ROBERT E. STRAWMAN ------------------------- Robert E. Strawman Chief Financial Officer (Principal Financial and Accounting Officer) 16. EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENTS 2.5 (1) Acquisition Agreement, dated as of July 11, 1999, by and among the Registrant and Tech Squared Inc. 3.1 (2) Amended and Restated Certificate of Incorporation 3.2 (2) Bylaws of the Registrant 4.1 (2) Specimen Common Stock Certificate 10.17 1999 Non-Officer Stock Option Plan 10.18 Form of Non-Qualified Stock Option Agreement under the 1999 Non-Officer Stock Option Plan 11.1 (3) Statement of Computation of Per Share Earnings 27.1 Financial Data Schedule
(1) Filed as an exhibit to the Company's current report on Form 8-K filed by the Company on July 16, 1999, incorporated herein by reference. (2) Filed as an exhibit to the Company's Registration Statement on Form S-1, File No. 333-56787, declared effective on August 11, 1998, incorporated herein by reference. (3) See Note 3 to Condensed Consolidated Financial Statements. 17. EX-10.17 2 EX-10.17 DIGITAL RIVER, INC. 1999 NON-OFFICER STOCK OPTION PLAN ADOPTED AUGUST 10, 1999 1. PURPOSES. The principal purposes of the Digital River, Inc. (the "Corporation") 1999 Non-Officer Stock Option Plan (the "Plan") Plan are: (a) to improve individual performance by providing long-term incentives and rewards to Employees and Consultants who are not Officers or members of the Board of Directors of the Corporation; (b) to assist the Corporation in attracting, retaining and motivating Employees and Consultants with experience and ability; and (c) to associate the interests of such persons with those of the Corporation's stockholders. Options granted under this Plan may be Non-Qualified Options. 2. DEFINITIONS. For purposes of this Plan, the following terms shall have the meanings indicated below: (a) "AFFILIATE" shall mean any parent corporation or subsidiary corporation of the Corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (b) "BOARD" shall mean the Board of Directors of the Corporation. (c) "CAPITAL STOCK" shall mean any of the Corporation's authorized but unissued shares of voting common stock, par value of One Cent ($.01) per share. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. (e) "COMMITTEE" shall mean a committee comprised of one or more members of the Board appointed by the Board in accordance with Section 4 of the Plan. (f) "CONSULTANT" shall mean any person, including an advisor or other form of independent contractor, engaged by the Corporation or an Affiliate to render consulting services and who is compensated for such services (provided that such services are not in connection with the offer or sale of securities in a capital-raising transaction, and do not directly or indirectly promote or maintain a market for the Corporation's securities), provided that the term "Consultant" shall not include Employees, Officers, Directors, or stockholders beneficially owning ten percent (10%) or more of the Corporation's Capital Stock. (g) "CONTINUOUS SERVICE" shall mean the Optionee's service with the Corporation or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. The Optionee's Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionee renders service to the Corporation or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Optionee renders such service, provided that there is no interruption or termination of the Optionee's Continuous Service. For example, a change in status from an Employee of the Corporation to a Consultant 1. of an Affiliate or a Director of the Corporation will not constitute an interruption of Continuous Service. The Board or the chief executive officer of the Corporation, in that party's sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave. (h) "CORPORATION" shall mean Digital River, Inc., a Delaware corporation and any of its Affiliates. (i) "DIRECTOR" shall mean a member of the Board. (j) "EMPLOYEE" shall mean any person employed by the Corporation or by any Affiliate, excluding Officers and Directors of the Corporation (and of any Affiliate which controls the Corporation) and excluding stockholders beneficially owning ten percent (10%) or more of the Corporation's Capital Stock. (k) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. (l) "FAIR MARKET VALUE" shall mean the price per share determined as follows: (a) if the security is listed for trading on one or more national securities exchanges (including the NASDAQ National Market System), the reported last sales price on such principal exchange on the date in question, or if such security shall not have been traded on such principal exchange on such date, the reported last sales price on such principal exchange on the first day prior thereto on which such security was so traded; or (b) if the security is not listed for trading on a national securities exchange (including the NASDAQ National Market System) but is traded in the over-the-counter market, the mean of the highest and lowest bid prices for such security on the date in question, or if there are no such bid prices for such security on such date, the mean of the highest and lowest bid prices on the first day prior thereto on which such prices existed; or (c) if neither (a) nor (b) is applicable, by any means deemed fair and reasonable by the Committee (as defined below) which determination shall be final and binding on all parties. (m) "NON-QUALIFIED STOCK OPTION" shall mean an Option, not intended to qualify as an incentive stock option as defined in Section 422 of the Code, to purchase Capital Stock of the Corporation. (n) "OFFICER" shall mean a person who is an officer of the Corporation, including any corporate officer with the title of vice president and above and any other Employee of the Corporation whom the Board or the Committee classifies as an "Officer". (o) "OPTION" shall mean a Non-Qualified Stock Option granted pursuant to the Plan. (p) "OPTION AGREEMENT" shall mean a written agreement pursuant to which the Corporation grants an option to an Optionee and sets the terms and conditions of the Option. (q) "OPTION DATE" shall mean the date upon which an option Agreement for an Option granted pursuant to the Plan is duly executed by or on behalf of the Corporation. 2. (r) "OPTION STOCK" shall mean the voting common stock of the Corporation, par value of One Cent ($.01) per share (subject to adjustment as described in Section 7) reserved for Options pursuant to this Plan, or any other class of stock of the Corporation which may be substituted therefor by exchange, stock split or otherwise. (s) "OPTIONEE" shall mean an Employee or Consultant of the Corporation or one of its Affiliates to whom an Option has been granted under the Plan. (t) "PLAN" shall mean this 1999 Non-Officer Stock Option Plan, as amended hereafter from time to time. (u) "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. 3. OPTIONS AVAILABLE UNDER PLAN. The Corporation's authorized Capital Stock in an amount equal to One Million Three Hundred Thousand (1,300,000) shares is hereby made available, and shall be reserved for issuance under this Plan. The aggregate number of shares available under this Plan shall be subject to adjustment on the occurrence of any of the events and in the manner set forth in Section 7. Except as provided in Section 7, in no event shall the number of shares reserved be reduced below the number of shares issuable upon exercise of outstanding Options. If an option shall expire or terminate for any reason without having been exercised in full, the unpurchased shares, shall (unless the Plan shall have been terminated) become available for other Options under the Plan. 4. ADMINISTRATION. The Plan shall be administered by the Committee. The Corporation shall grant Options pursuant to the Plan upon determinations of the Committee as to which of the eligible persons shall be granted Options, the number of shares to be optioned and the term during which any such Options may be exercised. The Committee may from time to time adopt rules and regulations for carrying out the Plan and shall have authority and discretion to interpret and construe any provision of the Plan. Each determination, interpretation or other action made or taken by the Committee pursuant to the provisions of the Plan shall be final and conclusive. No member of the Committee will be liable for any action or determination made in good faith with respect to the Plan or any Option granted under the Plan. 5. ELIGIBILITY FOR NON-QUALIFIED OPTIONS. Non-Qualified Options may be granted only to an Employee or Consultant of the Corporation or an Affiliate. Notwithstanding the foregoing, no Employee who is an Officer of the Corporation (or of any Affiliate which controls the Corporation) or who is a Director shall be eligible to receive the grant of an Option under the Plan. No further restrictions are placed on the Committee in determining eligibility for granting Non-Qualified Options. 6. TERMS AND CONDITIONS OF OPTIONS. Whenever the Committee shall designate an Optionee, it shall communicate to the Secretary of the Corporation the name of the Optionee, the number of shares to be optioned and such other terms and conditions as it shall determine, not inconsistent with the provisions of this Plan. The chief executive officer or other officer of the Corporation shall then enter into an Option Agreement with the Optionee, complying with and subject to the following terms and conditions and setting forth such other terms and conditions of the Option as determined by the Committee: 3. (a) NUMBER OF SHARES AND OPTION PRICE. The Option Agreement shall state the total number of shares to which it pertains. The price of Option Stock for a Non-Qualified Stock Option shall be determined by the Committee and may be less than the Fair Market Value at the Option Date. The Option price shall be subject to adjustment as provided in Section 7 hereof. (b) TIME AND MANNER OF EXERCISE OF OPTION. Options granted hereunder shall be exercisable as determined by the Committee at the time of the grant of such Options. Notwithstanding the foregoing, no Option may be exercised after ten (10) years from the date on which the option was granted. (c) TERMINATION OF CONTINUOUS SERVICE, EXCEPT DEATH OR DISABILITY. In the event that the continuous service of an Optionee shall cease for any reason other than his or her death, disability or "for cause," any vested outstanding Options shall terminate at the time specified in the Option Agreement; provided, however, that such vested outstanding Options shall not be exercisable for a period greater than three (3) months after the termination of Continuous Service. Any vested Options not exercised within the period specified in the Option Agreement shall terminate at the expiration of such period. If no such period is specified in the Option Agreement, then any vested outstanding Options shall terminate at the time of the Optionee's termination of continuous service. In the event that Optionee shall be terminated "for cause" including but not limited to: (i) willful breach of any agreement entered into with the Corporation; (ii) misappropriation of the Corporation's property, fraud, embezzlement, breach of fiduciary duty, other acts of dishonesty against the Corporation; or (iii) conviction of any felony or crime involving moral turpitude, the Option shall terminate as of the date of the Optionee's termination of continuous service. (d) DEATH OR DISABILITY OF OPTIONEE. If the Optionee shall die or become disabled within the definition of Section 22(e)(3) of the Code while in the employ of the Corporation or any Affiliate or if the Optionee shall die within the period after the termination of his or her continuous service with the Corporation or any Affiliate as provided in paragraph (c) of this section, and in either case shall not have fully exercised his or her vested Options, any vested Options granted pursuant to the Plan which were exercisable at the date of termination of continuous service shall terminate at the time specified in the option Agreement; provided, however, that such vested Options shall not be exercisable for a period greater than one (1) year following his or her death or date of disability. If no such periods are specified in the Option Agreement, then any vested outstanding Options shall be exercisable only within: (i) six (6) months following the optionee's death and (ii) thirty (30) days following the Optionee's disability. In the case of death, such Option shall be exercised pursuant to paragraph (e) of this Section by the person or persons to whom the optionee's rights under the Option shall pass by the Optionee's will or by the laws of descent and distribution, and only to the extent that such Options were exercisable at the time of death. (e) TRANSFER OF OPTION. Each Option granted hereunder shall, by its terms, not be transferable by the Optionee other than by will or by the laws of descent and distribution, and shall be, during the Optionee's lifetime, exercisable only by the Optionee or Optionee's guardian or legal representative. Except as permitted by the preceding sentence, each Option granted under the Plan and the rights and privileges thereby conferred shall not be transferred, assigned or pledged in any way (whether by operation of law or otherwise) and shall not be subject to 4. execution, attachment or similar process. Upon any attempt to so transfer, assign, pledge, or otherwise dispose of the option, or of any right or privilege conferred thereby, contrary to the provisions of the Option or the Plan, or upon levy of any attachment or similar process upon such rights and privileges, the Option, and such rights and privileges, shall immediately become null and void. (f) MANNER OF EXERCISE OF OPTIONS. An Option may be exercised, in whole or in part, at such time or times and with such rights with respect to such shares which have accrued and are in effect. Such Option shall be exercisable only by: (i) written notice to the Corporation of intent to exercise the Option with respect to a specified number of shares of stock; (ii) tendering the original Option Agreement to the Corporation; and (iii) payment to the Corporation of the amount of the Option purchase price for the number of shares of stock with respect to which the Option is then exercised. Payment of the Option purchase price shall be made in the manner set forth in the Option Agreement, which may be in: (i) cash, check or equivalent form; (ii) by delivery of shares of common stock of the Corporation which have been owned for no less than six (6) months, with a Fair Market Value equal to the Option purchase price; (iii) by a combination of cash and shares of common stock of the Corporation, which valued together shall equal the Option purchase price; provided, however, that there shall be no such exercise at any time as to fewer than one hundred (100) shares or all of the remaining shares then purchasable by the Optionee or person exercising the Option. When all shares of Optioned stock covered by the Option Agreement have been issued to the Optionee, or the Option shall expire, the Option Agreement shall be canceled. (g) OPTION CERTIFICATE. The Board of Directors shall have discretion to issue a certificate representing an Option granted pursuant to this Plan. Such certificate shall be surrendered to the Corporation upon exercise of the Option. (h) DELIVERY OF CERTIFICATE. Except where shares are held for unpaid withholding taxes, between fifteen (15) and thirty (30) days after receipt of the written notice and payment specified above, the Corporation shall deliver to the Optionee certificates for the number of shares with respect to which the Option has been exercised, issued in the Optionee's name; provided, however, that such delivery shall be deemed effected for all purposes when the Corporation, or the stock transfer agent for the Corporation, shall have deposited such certificates in the United States mail, postage prepaid, addressed to the Optionee and the address specified in the written notice of exercise. (i) OTHER PROVISIONS. The Option Agreements under this Section shall contain such other provisions as the Committee shall deem advisable. 7. ADJUSTMENTS. (a) CAPITALIZATION ADJUSTMENTS. If any change is made in the Capital Stock subject to the Plan, or subject to any Option, without the receipt of consideration by the Corporation (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Corporation), the Plan will be appropriately adjusted in the class(es) and 5. maximum number of shares subject to the Plan pursuant to Section 3 and the maximum number of shares subject to award to any person pursuant to Sections 5 and 6, and the outstanding Options will be appropriately adjusted in the class(es) and number of shares and price per share of stock subject to such outstanding Options. Such adjustments shall be made by the Board of Directors of the Corporation, the determination of which shall be final, binding and conclusive. (The conversion of any convertible securities of the Corporation shall not be treated as a transaction "without receipt of consideration" by the Corporation.) (b) CHANGE IN CONTROL--ASSET SALE, MERGER, CONSOLIDATION OR REVERSE MERGER. In the event of (1) a sale of substantially all of the assets of the Corporation, (2) a merger or consolidation in which the Corporation is not the surviving corporation or (3) a reverse merger in which the Corporation is the surviving corporation but the shares of Capital Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then any surviving corporation or acquiring corporation shall assume any Options outstanding under the Plan or shall substitute similar Options (including an award to acquire the same consideration paid to the stockholders in the transaction described in this Section 7, paragraph (b)) for those outstanding under the Plan. In the event any surviving corporation or acquiring corporation refuses to assume such Options or to substitute similar Options for those outstanding under the Plan but subject to the restrictions in this Section 7, paragraph (d), then with respect to Options held by Optionees whose Continuous Service has not terminated, the vesting shall be accelerated in full, and the Options shall terminate if not exercised at or prior to such event. With respect to any other Options outstanding under the Plan, such Options shall terminate if not exercised prior to such event. (c) CHANGE IN CONTROL--SECURITIES ACQUISITION. In the event of an acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable successor provisions (excluding any employee benefit plan, or related trust, sponsored or maintained by the Corporation or an Affiliate) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Corporation representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of directors (other than an acquisition pursuant to Section 7, paragraph (b) above), then with respect to Options held by Optionees whose Continuous Service has not terminated and subject to the restrictions in Section 7, paragraph (d), the vesting of such Options shall be accelerated in full. (d) POOLING OF INTERESTS. If the Corporation and the other party to the transaction constituting a "change in control" as described in this Section 7 agree that such transaction is to be treated as a "pooling of interests" for financial reporting purposes, and if such transaction in fact is so treated, then the accelerated vesting of options described in this Section 7 shall not occur to the extent that the Corporation's independent public accountants and such other party's independent public accountants separately determine in good faith that such acceleration would preclude the use of "pooling of interests" accounting. 8. NO RIGHTS AS STOCKHOLDER. An Optionee shall not, by reason of any option granted hereunder, have any right of a stockholder of the Corporation with respect to the shares covered by his Option until such shares shall have been issued to the Optionee. 6. 9. NO OBLIGATION TO EXERCISE OPTION. The granting of an Option shall impose no obligation upon the Optionee to exercise such option. Neither shall the Plan confer upon the Optionee any rights respecting continued continuous service nor limit the Optionee's rights or the Corporation's rights to terminate such continuous service. 10. WITHHOLDING TAXES. Whenever under the Plan shares of Option Stock are to be issued upon exercise of the Options granted hereunder, and prior to the delivery of any certificate or certificates for said shares by the Corporation, the Corporation shall have the right to require the Optionee to remit to the Corporation an amount sufficient to satisfy any federal and state withholding or other employment taxes resulting from such exercise. In the event that withholding taxes are not paid within five days after the date of exercise, to the extent permitted by law the Corporation shall have the right, but not the obligation, to cause such withholding taxes to be satisfied by reducing the number of shares of stock deliverable or by offsetting such withholding taxes against amounts otherwise due from the Corporation to the Optionee; provided, however, that no shares are withheld with a value exceeding the minimum amount of tax required to be withheld by law. If withholding taxes are paid by reduction of the number of shares deliverable to Optionee, such shares shall be valued at the Fair Market Value as of the fifth business day following the date of exercise. 11. MODIFICATION OF OUTSTANDING OPTIONS. The Committee may accelerate the exercisability of an outstanding Option and may authorize modification of any outstanding Option with the consent of the participant when and subject to such conditions as are deemed to be in the best interests of the Corporation and in accordance with the purposes of the Plan. 12. FOREIGN EMPLOYEES. Without amending the Plan, the Committee may grant Options to eligible employees who are foreign nationals on such terms and conditions different from those specified in this Plan as may in the judgment of the Committee be necessary or desirable to foster and promote achievement of the purposes of the Plan, and, in furtherance of such purposes the Committee may make such modification, amendments, procedures, subplans and the like as may be necessary or advisable to comply with provisions of laws in other countries in which the Corporation operates or has employees. 13. LIQUIDATION. Upon the complete liquidation of the Corporation, any unexercised Options theretofore granted under this Plan shall be deemed canceled, except as otherwise provided in Section 7 in connection with a merger, consolidation or reorganization of the Corporation. CONDITIONS UPON ISSUANCE OF SHARES. The Corporation may require the Optionee (or any person to whom an Option is transferred under Section 6 paragraph (e)) to execute such documents and to provide such representations, written assurances or information which the Corporation shall determine is necessary, desirable or appropriate to comply with applicable securities and other laws as a condition of granting an Option to such Optionee or permitting the Optionee (or any person to whom an Option is transferred under Section 6 paragraph (e)) to exercise such Option. The Corporation may, upon advice of counsel to the Corporation, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities and other laws, including, but not limited to, legends restricting the transfer of the Option Stock. 7. 14. TERMINATION AND AMENDMENT OF THE PLAN. This Plan shall terminate when all reserved Option Stock has been issued and cannot return to the reserve or at such earlier time as the Board of Directors shall determine. Any termination shall not affect any Options then outstanding under the Plan. The Board or the Committee at any time, and from time to time, may amend the Plan. 15. INDEMNIFICATION. In addition to such other rights of indemnification as they may have and subject to limitations of applicable law, the members of the Committee shall be indemnified by the Corporation against all costs and expenses reasonably incurred by them in connection with any action, suit or proceeding to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any rights granted thereunder and against all amounts paid to them in settlement thereof or paid by them in satisfaction of a judgment of any such action, suit or proceeding. The Committee member or members shall notify the Corporation in writing, giving the Corporation an opportunity at its own cost to defend the same before such Committee member or members undertake to defend the same on their own behalf. 16. GENERAL PROVISIONS. If any day on or before which action under the Plan must be taken falls on a Saturday, Sunday, or legal holiday, such action may be taken on the next succeeding day not a Saturday, Sunday or legal holiday. To the extent that federal laws do not otherwise control, the Plan and all determinations made and actions taken pursuant hereto shall be governed by and construed under the laws of the State of Delaware. 8. DIGITAL RIVER, INC. NOTICE OF EXERCISE Digital River, Inc. Re: Exercise of Stock Options 1999 Non-Officer Stock Option Plan Ladies and Gentlemen: Pursuant to the terms of that certain Stock Option Agreement under the Digital River, Inc. 1999 Non-Officer Stock Option Plan, this Letter is to notify you that I hereby exercise my outstanding stock options to purchase_______________ shares of common stock (the "Shares") of Digital River, Inc. Attached is (indicate by placing an "X" in the appropriate box): (i) a check in the amount of $__________ made payable to Digital River, Inc.; (ii) another form of consideration acceptable to Digital River, Inc. (explain below): _____________________________________________________________ in payment of the exercise price of $_________ per share. I acknowledge prior receipt of a copy of the Digital River, Inc. 1999 Non-Officer Stock Option Plan. I understand that I may suffer adverse tax consequences as the result of my purchase of Shares. I represent that I have consulted with any tax consultants I deem advisable in connection with the purchase or disposition of the Shares and that I am not relying on Digital River, Inc. for any tax advice. Very Truly Yours, ------------------------------------- Signature ------------------------------------- Print Name Date: ------------------------------- EX-10.18 3 EX-10.18 Exhibit 10.18 DIGITAL RIVER, INC. NON-QUALIFIED STOCK OPTION AGREEMENT UNDER THE 1999 NON-OFFICER STOCK OPTION PLAN THIS AGREEMENT is made as of _________________, between DIGITAL RIVER, INC., a Delaware corporation (the "Company"), and ___________________________ (the "Optionee"). THE PARTIES AGREE AS FOLLOWS: 1. OPTION GRANT. The Company hereby grants to the Optionee an option (the "Option") to purchase the number of shares of the Company's voting common stock (the "Shares"), for an exercise price per share (the "Option Price") and based upon a Grant Date, all as set forth below: Shares Under Option: ____________ Option Price Per Share: ____________ Grant Date: ____________ Vesting Commencement Date: ____________ Vesting Schedule (Cumulative): ____________ The Option will be subject to all of the terms and conditions set forth herein and in the Company's 1999 Non-Officer Stock Option Plan (the "Non-Officer Plan"), a copy of which is attached hereto and incorporated herein by reference. The Option granted hereunder will be a Non-Qualified Stock Option, NOT intended to qualify as an incentive stock option as defined in Section 422 of the Internal Revenue Code of 1986, as amended. 2. STOCKHOLDER RIGHTS. No rights or privileges of a stockholder in the Company are conferred by reason of the granting of the Option. Optionee will not become a stockholder in the Company with respect to the Shares unless and until the Option has been properly exercised and the Option Price fully paid as to the portion of the Option exercised. 3. TERMINATION. Subject to earlier termination as provided in the Non-Officer Plan, this Option will expire, unless previously exercised in full, on the date ten (10) years from the Grant Date. 4. TERMS OF THE NON-OFFICER PLAN. The Optionee understands that the Non-Officer Plan includes important terms and conditions that apply to this Option. Those terms include (without limitation): important conditions on the right of the Optionee to exercise the Option; important restrictions on the ability of the Optionee to transfer the Option or to transfer Shares received upon exercise of the Option; and early termination of the Option following the occurrence of certain events, including the Optionee no longer being an employee, director or consultant to or of the Company or its subsidiaries. The Optionee acknowledges that he or she has read the Non-Officer Plan, agrees to be bound by its terms, and makes each of the representations required to be made by the Optionee under it. 1. 5. MISCELLANEOUS. This Agreement (together with the Non-Officer Plan) sets forth the complete agreement of the parties concerning the subject matter hereof; superseding all prior agreements, negotiations and understandings. This Agreement will be governed by the laws of the State of Minnesota irrespective of such state's choice of law provisions, and may be executed in counterparts. The parties hereby have entered into this Agreement as of the date set forth above. DIGITAL RIVER, INC. By: ------------------------------------- Title: President "OPTIONEE" ----------------------------------------- Attachments: (1) 1999 Non-Officer Stock Option Plan (2) Notice of Exercise 2. EX-27.1 4 EXHIBIT 27.1
5 1,000 9-MOS DEC-31-1999 SEP-30-1999 10,730 47,537 2,402 311 105 60,995 7,111 1,773 87,085 11,641 0 0 0 207 75,237 87,085 47,589 47,589 38,889 38,889 30,932 909 0 (20,711) 0 (20,711) 0 0 0 (20,711) (1.03) (1.03)
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