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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 MARCH 31, 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)
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(612) 253-1234
(Registrant's telephone number, including area code)
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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 / / No /X/
Common Stock, $0.01 par value 20,151,288 shares
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(Class) Outstanding as of May 3, 1999
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<PAGE>
DIGITAL RIVER, INC.
Form 10-Q
Index
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
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<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at March 31, 1999 and December 31, 1998......................................... 3
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1999 and 1998.............................. 4
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 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................................................................... 7
Item 3. Qualitative and Quantitative Disclosure about Market Risk....................... 12
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds....................................... 13
Item 6. Exhibits and Reports on Form 8-K................................................ 13
SIGNATURES................................................................................ 14
Exhibit Index............................................................................. 15
</TABLE>
2.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGITAL RIVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 50,445 $ 63,503
Short-term investments 19,949 10,894
Accounts receivable, net 743 1,487
Prepaid expenses and other 366 420
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Total current assets 71,503 76,304
PROPERTY AND EQUIPMENT, NET 4,411 3,914
OTHER ASSETS 125 110
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$ 76,039 $ 80,328
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,835 $ 3,880
Accrued payroll 688 807
Other current liabilities 531 1,054
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Total current liabilities 6,054 5,741
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STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding - -
Common Stock, $.01 par value; 45,000,000 shares authorized;
19,730,330 and 19,544,791 shares issued and outstanding 197 195
Additional paid-in capital 94,449 93,883
Deferred compensation (1,194) (1,368)
Accumulated deficit (23,467) (18,123)
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Total stockholders' equity 69,985 74,587
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$ 76,039 $ 80,328
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
DIGITAL RIVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data; Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
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1999 1998
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<S> <C> <C>
SALES $11,707 $ 2,270
COST OF SALES 9,804 1,896
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Gross profit 1,903 374
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OPERATING EXPENSES:
Sales and marketing 3,622 1,060
Product development and operations 3,564 703
General and administrative 955 208
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Total operating expenses 8,141 1,971
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LOSS FROM OPERATIONS (6,238) (1,597)
INTEREST INCOME 894 42
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Net loss $(5,344) $(1,555)
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Basic and diluted net loss per share $ (.27) $ (.16)
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Basic and diluted weighted average common shares outstanding 19,632 9,946
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
DIGITAL RIVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands; Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (5,344) $(1,555)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 344 105
Deferred compensation expense 284 -
Changes in assets and liabilities:
Accounts receivable and prepaid expense 798 (125)
Accounts payable 955 911
Other current liabilities (642) 38
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Net cash used in operating activities (3,605) (626)
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INVESTING ACTIVITIES:
Purchases of short-term investments (17,055) -
Proceeds from sales of investments 8,000 -
Purchases of equipment (811) (599)
Patent acquisition costs (14) (12)
Payment of deferred costs (31) -
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Net cash used in investing activities (9,911) (611)
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FINANCING ACTIVITIES:
Sales of Common Stock 458 9,168
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Net cash provided by financing activities 458 9,168
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Net increase (decrease) in cash and cash equivalents (13,058) 7,931
CASH AND CASH EQUIVALENTS, beginning of period 63,503 2,126
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CASH AND CASH EQUIVALENTS, end of period $ 50,445 $10,057
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The unaudited condensed consolidated financial statements included
herein reflect all adjustments, consisting only of normal recurring
adjustments, which in the opinion of management are necessary to fairly state
the Company's consolidated financial position, results of operations and cash
flows for the periods presented. These condensed consolidated financial
statements should be read in conjunction with the Company's audited
consolidated financial statements included in the Company's Form 10-K for the
year ended December 31, 1998 as filed with the Securities and Exchange
Commission. The results of operations for the period ended March 31, 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:
Net loss per share is computed in accordance with Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" ("FAS 128"). FAS 128
requires the Company to report both basic loss per share, which is based on
the weighted-average number of common shares outstanding excluding
contingently issuable or returnable shares, and diluted loss per share, which
is based on 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 three months ended March 31, 1999 and 1998,
respectively, all potential common shares were anti-dilutive and were
excluded from the diluted net loss per share calculations.
The following table summarizes securities outstanding as of each period
end which were not included in the calculation of diluted net loss per share
since their inclusion would be anti-dilutive:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Common Stock warrants 388,513 634,588
Common Stock options 2,524,607 808,800
</TABLE>
4. SUBSEQUENT EVENTS:
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 (the "Merger Agreement"),
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
<PAGE>
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 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.
Also in April 1999, pursuant to an Asset Purchase Agreement (the
"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 April 1999, the Company's stockholders approved the 1998 Stock Option
Plan, as amended wherein the number of the number of shares of Common Stock
available for grants was increased to 3,283,333 shares from 2,333,333 shares.
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 through
contracts with software publishers and had contracts with a total of 1,479
and 1,677 software publishers as of December 31, 1998 and March 31, 1999,
respectively. In 1997, the Company began to develop distribution
relationships and had contracts with a total of 1,095 and 1,171 online
retailers as of December 31, 1998 and March 31, 1999, respectively.
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
<PAGE>
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 late 1998, the Company began development of a
transaction fee based e-commerce service for products other than third-party
software and began offering this service in early 1999. 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 March 31, 1999, had an accumulated
deficit of approximately $23.5 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.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
consolidated condensed statements of operations as a percentage of total
revenues for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
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<S> <C> <C>
Sales 100.0% 100.0%
Cost of sales 83.7 83.5
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Gross profit 16.3 16.5
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Operating expenses:
Sales and marketing 30.9 46.7
Product development and operations 30.4 31.0
General and administrative 8.2 9.2
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
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Total operating expenses (1) 69.5 86.9
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Loss from operations (53.2) (70.4)
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Interest income 7.6 1.9
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Net loss (45.6)% (68.5)%
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</TABLE>
(1) Operating expenses include non-cash employee stock compensation
charges of $284,000 (2.4% of sales) for the three months ended
March 31, 1999.
SALES
Sales increased to $11.7 million for the quarter ended March 31, 1999,
up from $2.3 million for the quarter ended March 31, 1998. The increase was
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 24% and 32%
of sales for the three months ended March 31, 1999 and 1998, respectively.
GROSS PROFIT
Cost of sales increased to $9.8 million in the quarter ended March 31,
1999 from $1.9 million in the quarter ended March 31, 1998. This increase
reflects the Company's growth in sales. The Company's gross profit margin
decreased slightly in the quarter ended March 31, 1999 due mainly to the
higher cost impact of increased physical shipments in 1999. The Company
believes that Internet commerce and related services will 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 $3.6 million in the quarter
ended March 31, 1999 from $1.1 million in the quarter ended March 31, 1998.
This increase 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 this increase for
the comparable quarters ended March 31 were an increase in advertising and
marketing expenditures of $747,000, an increase in wages and benefits of
$718,000 and an increase in credit card fees and chargeback costs of
$475,000. As a percentage of sales, sales and marketing expense decreased to
30.9% in the quarter ended March 31, 1999 from 46.7% in the quarter ended
March 31, 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 $3.6 million in
the quarter ended March 31, 1999 from $703,000 in the quarter ended March
31,1998. The increase was 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 this increase for the comparable quarters
ended March 31, were an increase in wages and benefits of $465,000 and an
increase in consulting costs of $1.6 million. As a percentage of sales,
product
<PAGE>
development and operations expense decreased to 30.4% in the quarter ended
March 31, 1999 from 31.0% in the quarter ended March 31, 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 $955,000 in the quarter
ended March 31, 1999 from $208,000 in the quarter ended March 31, 1998. The
increase was primarily due to increased personnel and related expenses. The
primary components of this increase for the comparable quarters ended March
31 were an increase in deferred compensation expense of $284,000 and an
increase in wages and benefits of $275,000. As a percentage of sales, general
and administrative expense decreased to 8.2% in the quarter ended March 31,
1999 from 9.2% in the quarter ended March 31, 1998, primarily reflecting the
Company's growth in sales. The Company expects general and administrative
expense, excluding the impact of deferred compensation 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 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 March 31, 1999,
the Company had approximately $24.0 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 three months of 1999, the Company used $3.6 million of cash
to fund operations and made additions of equipment and software totaling
$811,000. The Company also purchased $17.1 million in short-term investments
which were partially offset by $8.0 million in sales of investments.
As of March 31, 1999 the Company had approximately $50.4 million of cash
and cash equivalents and $19.9 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 $8.0 million over the next 21 months on capital expenditures
based on the Company's current anticipated growth rate. The Company further
anticipates that it will
<PAGE>
expend approximately $17.0 million over the next 21 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 21 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 March 31, 1999, although it will continue testing
throughout the year. 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 costs incurred to date
related to these programs have not been material. The cost which will be
incurred by the Company prospectively is not expected to exceed $10,000. The
total cost estimate 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 estimate is based on the current
assessment of the projects and is subject to change as the project progresses.
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 begun 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
<PAGE>
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.
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(d) The effective date of the Company's registration statement, filed on
Form S-1 under the Securities Act of 1933 (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 March 31, 1999, the Company has used $2.5 million of the net
proceeds from the IPO to purchase equipment and software and $7.9 million of
the net proceeds for working capital and general corporate purposes. The
Company has invested the net proceeds in short-term, investment-grade,
interest bearing financial instruments. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
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<S> <C>
3.1(1) Amended and Restated Certificate of Incorporation
3.2(1) Bylaws of the Registrant
4.1(1) Specimen Common Stock Certificate
11.1(2) Statement of Computation of Per Share Earnings
27.1 Financial Data Schedule
</TABLE>
(1) 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.
(2) See Note 3 to Condensed Consolidated Financial Statements.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 1999 DIGITAL RIVER, INC.
By: /s/ Robert E. Strawman
----------------------
Robert E. Strawman
Chief Financial Officer
(Principal Financial and Accounting
Officer)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
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<S> <C>
3.1(1) Amended and Restated Certificate of Incorporation
3.2(1) Bylaws of the Registrant
4.1(1) Specimen Common Stock Certificate
11.1(2) Statement of Computation of Per Share Earnings
27.1 Financial Data Schedule
</TABLE>
(1) 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.
(2) See Note 3 to Condensed Consolidated Financial Statements.
15
<TABLE> <S> <C>
<PAGE>
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<S> <C>
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<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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0
0
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<EPS-PRIMARY> (0.27)
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