Digital River 2006 Annual Report Download - page 83

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associated with stock option grants since January 2003, with the exception of three dates, each of which
apparently resulted from errors in internal processes rather than any intentional backdating.
During the relevant period, we granted 1,306 employees, consultants, officers and directors options to
acquire approximately 16.8 million shares of our common stock. These option grants, awarded on 69 distinct
grant dates, consisted of one or more of the following types of grants: (i) grants to directors; (ii) grants to
Section 16 officers; (iii) follow-on grants to employees; (iv) grants to new hires; (v) grants to employees
receiving promotions; and (vi) grants to consultants.
Grants to Directors.
During the relevant period, we appropriately awarded grants to directors during Board of Directors or
Compensation Committee meetings. The Special Committee discovered no problems associated with director
grants, with the exception of one grant to one director on February 13, 2003. Due to a clerical error, the
original paperwork for the February 13, 2003 Board of Director grants was misdated, which was corrected in
2003 with the exception of one former director who had already exercised his option. We subsequently
corrected this error for all but one director. We should have recorded a charge related to the grant price and
recorded an additional charge for a subsequent vesting acceleration. These charges make up less than $10,000
of the total $9.4 million after-tax restatement.
Grants to Section 16 Officers.
During the relevant period, the Stock Option Committee awarded 540,000 stock options to nine Section 16
officers on four different specified grant dates. After a review of the corporate record, the Special Committee
determined that the Stock Option Committee was not vested with the authority to award stock options to
Section 16 officers. Outside counsel conducted interviews with the Stock Option Committee members and
certain Compensation Committee members and determined that the committee members believed the Stock
Option Committee possessed the authority to make the grants. This is corroborated by subsequent Board
ratification of the grants. However, because the requisite authority did not exist, the measurement dates for
these grants have been adjusted to the Board ratification date, and the charges under APB 25 make up
$1.0 million of the total $9.4 million after-tax restatement.
Grants to Employees and Consultants (inclusive of follow-on, new hire, and promotion grants).
During the relevant period, stock option grants to non-Section 16 employees and consultants were
generally awarded by the Stock Option Committee. Stock Option Committee documentation with respect to
such grants is in many instances inadequate, particularly from 1998 through 2002. Based on interviews and a
review of all available documentation, including relevant email archives, the Special Committee determined
that employee and consultant grants on sixteen grant dates may not have been measured on the correct date.
Consistent with accounting literature and recent guidance from the Securities and Exchange Commission
(“SEC”), we employed one of three methods to assign the correct measurement date: (i) the date of a relevant
email, if the content of the email indicates action by the Stock Option Committee; (ii) beginning in 2003, the
last trading day of the month of the grant in accordance with our policy adopted in early 2003; or (iii) the date
a grant was ratified by the Board of Directors if no other relevant documentation existed.
Based on the findings of the Special Committee, after accounting for forfeitures, we calculated stock-
based compensation expense (under APB 25 for 1998 through 2005 and under SFAS 123(R) for 2006) of
approximately $11.9 million over the respective awards’ vesting terms for the periods from 1998 through
2006. We recorded $85,000, after-tax, of stock-based compensation on its 2006 financial statements in the
fourth quarter related to the foregoing options. In addition, the Company included unrecorded charges related
to option grants to consultants not expensed in the relevant periods under EITF 96-18 ($427,862) and charges
of ($70,008) related to option grants to employees prior to their dates of hire.
79
DIGITAL RIVER, INC.
Notes to Consolidated Financial Statements — (Continued)