<PAGE>
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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 JUNE 30, 2000
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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(952) 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 21,900,379 Shares
----------------------------- -----------------
(Class) Outstanding as of August 7, 2000
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<PAGE>
DIGITAL RIVER, INC.
Form 10-Q
Index
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at June 30, 2000 and December 31, 1999..................................................... 3
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 2000 and 1999.................................. 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2000 and 1999............................................ 5
Notes to Condensed Consolidated Financial Statements....................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................. 9
Item 3. Qualitative and Quantitative Disclosure about Market Risk.................................. 13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders........................................ 13
Item 6. Exhibits and Reports on Form 8-K........................................................... 14
SIGNATURES................................................................................................ 15
Exhibit Index............................................................................................. 16
</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>
June 30, December 31,
2000 1999
------------- ------------
(unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 24,326 $ 15,120
Short-term investments 8,997 24,387
Accounts receivable, net 2,977 2,455
Prepaid expenses and other 1,009 880
--------- ---------
Total current assets 37,309 42,842
PROPERTY AND EQUIPMENT, NET 12,582 7,279
LONG-TERM INVESTMENTS 6,000 14,832
GOODWILL, NET AND OTHER ASSETS 17,563 22,189
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$ 73,454 $ 87,142
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 10,177 $ 11,020
Accrued payroll 4,255 1,909
Deferred revenue 2,154 152
Other current liabilities 1,367 984
--------- ---------
Total current liabilities 17,953 14,065
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding - -
Common Stock, $.01 par value; 60,000,000 shares authorized;
21,128,318 and 20,699,244 shares issued and outstanding 211 207
Additional paid-in capital 126,072 119,445
Deferred compensation (382) (637)
Accumulated deficit (70,400) (45,938)
--------- ---------
Total stockholders' equity 55,501 73,077
--------- ---------
$ 73,454 $ 87,142
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3.
<PAGE>
DIGITAL RIVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data; Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ----------------------
2000 1999 2000 1999
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
SALES $ 31,013 $ 15,814 $ 63,820 $ 27,521
COST OF SALES 24,575 12,832 50,718 22,636
------------ ----------- ---------- ----------
Gross profit 6,438 2,982 13,102 4,885
------------ ----------- ---------- ----------
OPERATING EXPENSES:
Sales and marketing 7,149 4,346 13,768 7,969
Product development and operations 6,852 3,726 12,893 7,290
General and administrative 1,290 1,070 2,576 2,024
Amortization of goodwill and other acquisition related
costs 4,334 1,302 9,728 1,302
------------ ----------- ---------- ----------
Total operating expenses 19,625 10,444 38,965 18,585
------------ ----------- ---------- ----------
LOSS FROM OPERATIONS (13,187) (7,462) (25,863) (13,700)
INTEREST INCOME 554 784 1,239 1,678
------------ ----------- ---------- ----------
Net loss $ (12,633) $ (6,678) $ (24,624) $ (12,022)
------------ ----------- ---------- ----------
------------ ----------- ---------- ----------
Basic and diluted net loss per share $ (0.60) $ (0.33) $ (1.18) $ (0.60)
------------ ----------- ---------- ----------
------------ ----------- ---------- ----------
Basic and diluted weighted average common shares outstanding 21,100 20,169 20,937 19,900
------------ ----------- ---------- ----------
------------ ----------- ---------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4.
<PAGE>
DIGITAL RIVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands; Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
2000 1999
---------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (24,624) $ (12,022)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of goodwill and acquisition related costs 7,695 1,302
Depreciation and amortization 1,343 748
Deferred compensation expense 255 496
Changes in assets and liabilities:
Accounts receivable and prepaid expense (651) 572
Accounts payable (843) 885
Other current liabilities and deferred revenue 4,731 94
---------- -----------
Net cash used in operating activities (12,094) (7,925)
---------- -----------
INVESTING ACTIVITIES:
Purchases of investments (12,065) (59,899)
Proceeds from sales of investments 36,449 40,000
Purchases of equipment (6,601) (1,569)
Acquisitions, net of cash received - (3,320)
Patent acquisition costs (21) (26)
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Net cash provided by (used in) investing activities 17,762 (24,814)
---------- -----------
FINANCING ACTIVITIES:
Sales of Common Stock 3,538 751
---------- -----------
Net cash provided by financing activities 3,538 751
---------- -----------
Net increase (decrease) in cash and cash equivalents 9,206 (31,988)
CASH AND CASH EQUIVALENTS, beginning of period 15,120 63,503
---------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 24,326 $ 31,515
---------- -----------
---------- -----------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Issuance of Common Stock in connection with acquisitions
and related earn-out payments $ 3,093 $ 18,713
---------- -----------
---------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5.
<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, 1999 as
filed with the Securities and Exchange Commission. The results of operations for
the period ended June 30, 2000 are not necessarily indicative of the results to
be expected for any subsequent quarter or for the entire fiscal year ending
December 31, 2000. The December 31, 1999 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 three months ended June 30,
2000 and 1999, 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>
June 30, 2000 June 30, 1999
------------------- -----------------
<S> <C> <C>
Common Stock warrants 356,087 388,513
Common Stock options 3,479,032 2,712,766
</TABLE>
4. ACQUISITIONS AND EARN-OUT ARRANGEMENTS:
Former employees of Maagnum Internet Group, which the Company purchased in
April 1999, received earn-out payments of 124,349 shares of Common Stock valued
at $3,093,000 in March 2000. The Company charged such amount to compensation
expense and this is included as amortization of goodwill and acquisition related
costs in the accompanying Condensed Consolidated Statements of Operations. This
amount would have increased general and administrative expense had it been
reported outside of that caption.
During 1999, the Company acquired four companies that were accounted for
under the purchase method. The following unaudited pro forma condensed results
of operations for the six months ended June 30, 1999 has been prepared as if
each of the acquisitions had occurred on January 1, 1999:
6.
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
1999
--------------------
(In Thousands)
<S> <C>
Sales $ 31,509
Loss from operations (16,103)
Net loss (14,526)
Basic and diluted loss per share $ (0.71)
</TABLE>
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 or any future results that may in fact be realized.
5. SEGMENT INFORMATION:
The Company has two operating segments under the guidelines of SFAS No.
131, Software and Digital Commerce Services and E-Business Services, which have
been identified as components of the Company which are reviewed regularly by
management to determine resource allocation and assess performance. No
disclosure of segments for 1999 has been presented as Software and Digital
Commerce Services represented substantially all operations in 1999. Unallocated
corporate items consist of goodwill amortization, acquisition related costs and
interest income for operational results and consist of certain cash, investments
and goodwill for total assets. Segment information is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED Software and Digital E-Business Unallocated
Commerce Services Services Corporate
JUNE 30, 2000: Division Division Items Consolidated
---------------------- ----------------- ----------------- -----------------
(in thousands)
<S> <C> <C> <C> <C>
Sales $ 29,856 $ 1,157 - $ 31,013
Gross profit 5,479 959 - 6,438
Loss from operations (3,191) (5,662) (4,334) (13,187)
Net loss (3,191) (5,662) (3,780) (12,633)
Total assets 14,109 5,304 54,041 73,454
7.
<PAGE>
<CAPTION>
SIX MONTHS ENDED Software and Digital E-Business Unallocated
Commerce Services Services Corporate
JUNE 30, 2000: Division Division Items Consolidated
---------------------- ----------------- ----------------- -----------------
(in thousands)
<S> <C> <C> <C> <C>
Sales $ 61,910 $ 1,910 - $ 63,820
Gross profit 11,608 1,494 - 13,102
Loss from operations (5,651) (10,484) (9,728) (25,863)
Net loss (5,651) (10,484) (8,489) (24,624)
</TABLE>
6. STOCKHOLDERS' EQUITY:
In June 2000, the Company's Board of Directors approved amending the 1999
Non-Officer Stock Option Plan to increase the number of shares of Common Stock
available for grants was under the plan to 3,950,000 shares from 2,250,000
shares.
7. RECENT ACCOUNTING PRONOUNCEMENTS:
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued Staff Accounting Bulletin No. 101B to defer the
effective date of implementation of SAB 101 until the fourth quarter of 2000. In
July 2000, the Financial Standards Board's Emerging Issues Task Force ("EITF")
reached a consensus on EITF 99-19, "Reporting Revenue Gross as a Principal
versus Net as an Agent." EITF 99-19 follows the effective date of SAB 101B. The
Company is currently analyzing the impact these pronouncements will have on its
revenue presentation.
In March 2000, the EITF also published its consensus on EITF 00-2,
"Accounting for Web Site Development Costs." EITF 00-2 is effective for fiscal
quarters beginning after June 30, 2000. The Company is currently analyzing the
impact this pronouncement will have on its financial statements.
8.
<PAGE>
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,
1999.
OVERVIEW
The Company is a leading provider of comprehensive electronic commerce
outsourcing solutions. 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 the software industry, building its
inventory of software products through contracts with software publishers. In
1997, the Company began to develop software distribution relationships through
contracts with online retailers. As of June 30, 2000, the Company had
approximately 7,500 software publisher clients and online retailer clients that
are served by the Software and Digital Commerce Services Division. In late 1998,
the Company began to offer its comprehensive electronic commerce outsourcing
services in the form of a transaction fee-based e-commerce service to clients
outside of the software industry. As of June 30, 2000, the Company had 43 client
contracts under its E-Business Services Division.
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. For e-commerce services offered under the E-Business Services
division, the Company derives its revenue from licensing, development fees,
transaction processing and hosting fees as well as service fees. E-Business
Services revenue is recognized as services are performed, except for licensing
and certain integration fees which are recognized evenly over the term of the
contract. The Company generated less than 4% and 15% of its revenue and gross
profit, respectively, for the quarter ended June 30, 2000 from E-Business
Services. There can be no assurance that the Company will derive any significant
revenue from E-Business Services in the future.
9.
<PAGE>
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 June 30, 2000, had an accumulated deficit of
approximately $70.4 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, particularly with regards to the E-Business Services
division. As a result, the Company expects to incur additional losses and
continued negative cash flow from operations for the foreseeable future. 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, online retailers and
E-Business Services clients, 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 Six Months Ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 79.2 81.1 79.5 82.2
---------- ----------- ------------ ---------
Gross profit 20.8 18.9 20.5 17.8
---------- ----------- ------------ ---------
Operating expenses:
Sales and marketing 23.0 27.5 21.6 29.0
Product development and operations 22.1 23.6 20.2 26.5
General and administrative 4.2 6.8 4.0 7.4
Amortization of goodwill and other acquisition related
costs 14.0 8.2 15.2 4.7
---------- ----------- ------------ ---------
Total operating expenses 63.3 66.1 61.0 67.6
---------- ----------- ------------ ---------
Loss from operations (42.5) (47.2) (40.5) (49.8)
---------- ----------- ------------ ---------
10.
<PAGE>
Interest income, net 1.8 5.0 1.9 6.1
---------- ----------- ------------ ---------
Net loss (40.7)% (42.2)% (38.6)% (43.7)%
---------- ----------- ------------ ---------
---------- ----------- ------------ ---------
</TABLE>
SALES
Sales increased to $31.0 million for the quarter ended June 30, 2000 from
$15.8 million for the quarter ended June 30, 1999 and increased to $63.8 million
for the six months ended June 30, 2000, up from $27.5 million for the same
period of 1999. Sales for the Software and Digital Commerce Services segment
increased to $29.9 million for the quarter ended June 30, 2000 from $15.8
million for the quarter ended June 30, 1999 and increased to $61.9 million for
the six months ended June 30, 2000, up from $27.5 million for the same period of
1999. 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. Sales for the E-Business Services segment
were $1.2 million for the quarter ended June 30, 2000 and were $1.9 million for
the six months ended June 30, 2000. These sales were the results of new clients
contracted. International sales represented approximately 24% and 25% of sales
for the six months ended June 30, 2000 and 1999, respectively.
GROSS PROFIT
Cost of sales increased to $24.6 million in the quarter ended June 30, 2000
from $12.8 million in the quarter ended June 30, 1999 and increased to $50.7
million for the six months ended June 30, 2000 from $22.6 million for the same
period of 1999. The Company's gross profit margin increased to 20.8% in the
quarter ended June 30, 2000 versus 18.9% in the quarter ended June 30, 1999. The
gross profit margin for the Software and Digital Commerce Services segment
decreased to 18.3% in the quarter ended June 30, 2000 versus 18.9% in the
quarter ended June 30, 1999. This decrease was due mainly to a change in the
client mix to certain lower margin clients. The gross profit margin for the
E-Business Services segment was 82.9% in the quarter ended June 30, 2000 and is
a function of margins earned on licensing, transaction fees and other services.
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 $7.1 million in the quarter ended
June 30, 2000 from $4.3 million in the quarter ended June 30, 1999 and increased
to $13.8 million for the six months ended June 30, 1999 from $8.0 million for
the same period of 1999. The increases resulted from expanding the E-Business
sales, client services and marketing infrastructure and variable expenses which
increase in relation to sales. The primary components of the increase for the
comparable quarters ended June 30 were an increase in wages and benefits of $1.1
million and an increase in credit card fees and chargeback costs of $798,000. As
a percentage of sales, sales and marketing expense decreased to 23.0% in the
quarter ended June 30, 2000 from 27.5% in the quarter ended June 30, 1999,
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.
11.
<PAGE>
PRODUCT DEVELOPMENT AND OPERATIONS
Product development and operations expense increased to $6.9 million in the
quarter ended June 30, 2000 from $3.7 million in the quarter ended June 30, 1999
and increased to $12.9 million for the six months ended June 30, 2000 from $7.3
million for the same period of 1999. 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 June 30, were an increase in consulting costs of $1.4
million and an increase in wages and benefits of $1.1 million. As a percentage
of sales, product development and operations expense decreased to 22.1% in the
quarter ended June 30, 2000 from 23.6% in the quarter ended June 30, 1999. 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 $1.3 million in the quarter
ended June 30, 2000 from $1.1 million in the quarter ended June 30, 1999 and
increased to $2.6 million for the six months ended June 30, 2000 from $2.0
million for the same period of 1999. 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 4.2% in the quarter ended June 30, 2000 from 6.8% in the quarter ended June
30, 1999, 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 investments. The decrease from the prior period was attributable
to lower cash and investment balances in 2000. 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 June 30, 2000, the
Company had approximately $74 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 six months of 2000, the Company used $12.1 million of cash
to fund operations and made additions of equipment and software totaling $6.6
million. The Company sold $36.4 million in investments which were partially
offset by $12.1 million in purchases of investments. In addition, the
12.
<PAGE>
Company received $3.5 million from stock sales, all of which were through stock
option and warrant exercises. In the same period for 1999, the Company used $7.9
million of cash to fund operations, $3.3 for acquisitions, $1.6 million for
addition of equipment and software and $60.0 million to purchase short-term
investments which was partially offset by $40.0 million in sales of investments
As of June 30, 2000 the Company had $24.3 million of cash and cash
equivalents, $9.0 million of short-term investments and $6.0 million in
long-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 $17.0 million over the next 18 months on capital
expenditures based on the Company's current anticipated growth rate. The Company
further anticipates that it will expend approximately $21.0 million over the
next 18 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 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 18 months.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued Staff Accounting Bulletin No. 101B to defer the
effective date of implementation of SAB 101 until the fourth quarter of 2000. In
July 2000, the Financial Standards Board's Emerging Issues Task Force ("EITF")
reached a consensus on EITF 99-19, "Reporting Revenue Gross as a Principal
versus Net as an Agent." EITF 99-19 follows the effective date of SAB 101B. The
Company is currently analyzing the impact these pronouncements will have on its
revenue presentation.
In March 2000, the EITF also published its consensus on EITF 00-2,
"Accounting for Web Site Development Costs." EITF 00-2 is effective for fiscal
quarters beginning after June 30, 2000. The Company is currently analyzing the
impact this pronouncement will have on its financial statements.
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.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's annual meeting of stockholders was held on May 3, 2000 (the
"Annual Meeting").
The following matters were considered and voted upon at the Annual Meeting:
13.
<PAGE>
The first matter related to the election of three director nominees,
Timothy C. Choate, William J. Lansing and Christopher J. Sharples as directors
to serve until the 2003 annual meeting of stockholders. The votes cast for and
against such nominees were as follows:
<TABLE>
<CAPTION>
NAME FOR WITHHELD
------------------------------------------------------- ------------------- ----------------------
<S> <C> <C>
Timothy C. Choate 16,803,793 192,672
William J. Lansing 16,341,628 654,837
Christopher J. Sharples 16,805,353 191,112
</TABLE>
The second matter related to the approval of the Company's 2000 Employee
Stock Purchase Plan and to authorize reserving 200,000 shares under such plan.
16,770,880 votes were cast for approval and 205,731 votes were cast against
approval. There were 19,854 abstentions and no broker non-votes.
The third matter related to the approval of an amendment to the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock from 45,000,000 shares to 60,000,000 shares. 16,137,359 votes were
cast for approval and 841,889 votes were cast against approval. There were
17,217 abstentions and no broker non-votes.
The fourth matter related to the ratification of the appointment of Arthur
Andersen LLP as independent auditors of the Company for its fiscal year ending
December 31, 2000. 16,918,467 votes were cast for ratification and 65,166 votes
were cast against ratification. There were 12,832 abstentions and no broker
non-votes.
Based on these voting results, each of the directors nominated was elected
and the second, third and fourth matters were approved.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
------ ------------------------
<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.
14.
<PAGE>
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
2000.
15.
<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: August 14, 2000 DIGITAL RIVER, INC.
By: /s/ Robert E. Strawman
----------------------
Robert E. Strawman
Chief Financial Officer
(Principal Financial and Accounting Officer)
16.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
------ ------------------------
<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.
17.
