<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): August 24, 2000
DIGITAL RIVER, INC.
(Exact name of Registrant as specified in its charter)
Delaware 000-24643 41-1901640
(State or other jurisdiction (Commission File No.) (I.R.S. Employer
of incorporation or organization) Identification No.)
9625 W. 76th Street, Suite 150
Eden Prairie, Minnesota 55344
(Address of principal executive offices) (Zip code)
(612) 253-1234
(Registrant's telephone number, including area code)
<PAGE>
ITEM 2. OTHER EVENTS
On August 24, 2000, pursuant to an Asset Purchase Agreement
dated as of August 24, 2000 (the "Purchase Agreement") by and between the
Registrant and NetSales, Inc. ("NetSales"), in exchange for 1,000,000 shares
of common stock, the Registrant purchased those assets and assumed those
liabilities of NetSales related to NetSales' software services business. The
Purchase Agreement includes a contingent earnout whereby NetSales can receive
up to an additional 350,000 shares of common stock based on performance over
the 180 day period following August 24, 2000. Of the 1,000,000 shares of
common stock issued at closing, 100,000 shares were placed in escrow to
secure certain indemnification obligations contained in the Purchase
Agreement. Subject to outstanding claims, the escrow will terminate 9 months
following the closing.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
Audited financial statements of NetSales as of December 31, 1999.
(b) PRO FORMA FINANCIAL INFORMATION
Unaudited pro forma condensed consolidated financial statements
as of June 30, 2000 give effect to Digital River's acquisition of
certain assets and liabilities of NetSales.
(c) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
2.1* Asset Purchase Agreement, dated August 24, 2000, by
and between Registrant and NetSales, Inc.
20.1* Press release of the Registrant dated August 25, 2000.
*Previously filed with Form 8-K on September 8, 2000
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DIGITAL RIVER, INC
(Registrant)
Date: November 7, 2000 By: /S/ Robert E. Strawman
-------------------------------------------
Robert E. Strawman
Chief Financial Officer
(Principal Financial and Accounting Officer)
2.
<PAGE>
Index to Financial Statements
NetSales
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors...........................................................................F-1
Consolidated Balance Sheet as of December 31,1999........................................................F-2 to F-3
Consolidated Statement of Operations for the year ended December 31,1999.................................F-4
Consolidated Statement of Stockholders' Deficit for the year ended December 31,1999......................F-5
Consolidated Statement of Cash Flows for the year ended December 31,1999.................................F-6 to F-7
Notes to Consolidated Financial Statements for the year ended December 31, 1999..........................F-8 to F-20
Unaudited Condensed Consolidated Balance Sheets for the six-month periods as of June 30, 2000
and 1999................................................................................................F-21 to F-22
Unaudited Condensed Consolidated Statements of Operations for the six-month periods ended
June 30, 2000 and 1999..................................................................................F-23
Unaudited Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2000
and 1999................................................................................................F-24
Unaudited Notes to Condensed Consolidated Financial Statements for the six-month periods ended
June 30, 2000 and 1999..................................................................................F-25 to F-26
Digital River, Inc.
Pro Forma Unaudited Condensed Consolidated Balance Sheet as of June 30, 2000.............................F-27 to F-28
Pro Forma Unaudited Condensed Consolidated Statement of Operations for the six-month period ended
June 30, 2000...........................................................................................F-29
Pro Forma Unaudited Condensed Consolidated Statement of Operations for the year ended December 31, 1999..F-30
Notes to Pro Forma Unaudited Condensed Consolidated Financial Statements.................................F-31
</TABLE>
3.
<PAGE>
F-1
Report of Independent Auditors
The Board of Directors and Stockholders
NetSales, Inc.
We have audited the accompanying consolidated balance sheet of NetSales, Inc.
(the Company) as of December 31, 1999, and the related consolidated statement of
operations, stockholders' deficit and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of NetSales, Inc. at
December 31, 1999, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Kansas City, Missouri
February 22, 2000
<PAGE>
F-2
NetSales, Inc.
Consolidated Balance Sheet
as of December 31, 1999
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash $1,417,598
Trade accounts receivable 332,728
Prepaid expenses 207,778
Other current assets 30,853
-------------------
Total current assets 1,988,957
Property and equipment:
Computer equipment 1,353,723
Office furniture and equipment 1,035,594
Leasehold improvements 77,958
-------------------
2,467,275
Less accumulated depreciation 436,969
-------------------
Net property and equipment 2,030,306
Restricted cash (NOTE 2) 176,357
Other assets, net 265,477
-------------------
Total assets $4,461,097
===================
</TABLE>
<PAGE>
F-3
NetSales
<TABLE>
<CAPTION>
<S> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,388,906
Accrued payroll and related expenses 292,475
Accrued expenses 534,134
Deferred revenue 114,500
Current portion of long-term debt (NOTE 2) 281,449
-------------------
Total current liabilities 2,611,464
Long-term debt, less current portion (NOTE 2) 1,792,248
Redeemable preferred stock - $.01 par value, 14,615,853 shares authorized (NOTES
5 AND 7):
Series A convertible:
Authorized shares - 1,436,084
Issued and outstanding shares - 1,436,084
Aggregate liquidation preference - $1,737,662 1,693,001
Series B convertible:
Authorized shares - 3,179,769
Issued and outstanding shares - 3,179,769
Aggregate liquidation preference - $6,677,515 6,613,004
Stockholders' deficit (NOTES 5 AND 6):
Common stock - $.01 par value:
Authorized shares - 50,000,000
Issued shares - 12,313,155 123,131
Additional paid-in capital 2,635,208
Less 149,812 shares of treasury stock, at cost (25,355)
Notes receivable from stockholders (40,500)
Deferred compensation (889,562)
Accumulated deficit (10,051,542)
-------------------
Total stockholders' deficit (8,248,620)
-------------------
Total liabilities and stockholders' deficit $ 4,461,097
===================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
F-4
<TABLE>
<CAPTION>
NetSales, Inc.
Consolidated Statement of Operations
for the year ended December 31, 1999
<S> <C>
Net revenue $ 1,253,406
Cost of sales 689,914
-------------------
Gross profit 563,492
Operating expenses:
Product development and operations 2,056,525
Sales and marketing 3,298,772
General and administrative 2,865,250
Stock compensation 218,539
-------------------
Operating loss (7,875,594)
Interest expense (56,100)
Interest income 156,965
-------------------
100,865
-------------------
Net loss $(7,774,729)
===================
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
F-5
NetSales, Inc.
Consolidated Statement of Stockholders' Deficit
<TABLE>
<CAPTION>
NOTES
ADDITIONAL RECEIVABLE
COMMON PAID-IN TREASURY FROM DEFERRED ACCUMULATED
STOCK CAPITAL STOCK STOCKHOLDERS COMPENSATION DEFICIT TOTAL
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December
31, 1998 $102,883 $ 994,023 $ -- $ -- $ -- $ (2,276,813) $(1,179,907)
Issuance of 2,024,818
shares of common
stock upon exercise
of stock options 20,248 456,644 -- (54,000) -- -- 422,892
Repurchase non-vested
shares previously
acquired through
option exercises -- -- (25,355) 13,500 -- -- (11,855)
Capital contribution
from officer's
personal issuance of
52,000 shares of
common stock in
payment of consulting
services for Company -- 76,440 -- -- -- -- 76,440
Issuance of compensatory
stock options -- 1,108,101 -- -- (1,108,101) -- --
Amortization of deferred
compensation related
to stock options -- -- -- -- 218,539 -- 218,539
Net loss -- -- -- -- -- (7,774,729) (7,774,729)
---------------------------------------------------------------------------------------------------
Balances at
December 31, 1999 $123,131 $2,635,208 $(25,355) $(40,500) $ (889,562) $(10,051,542) $(8,248,620)
===================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
F-6
NetSales, Inc.
Consolidated Statement of Cash Flows
for the year ended December 31, 1999
<TABLE>
<CAPTION>
OPERATING ACTIVITIES
<S> <C>
Net loss $(7,774,729)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 352,740
Noncash compensation to consultant 76,440
Stock compensation expense 218,539
Changes in operating assets and liabilities:
Trade accounts receivable (189,977)
Prepaid expenses and other current assets (94,021)
Other assets (35,596)
Accounts payable 802,118
Accrued expenses 678,308
Deferred revenue 114,500
-------------------
Net cash used in operating activities (5,851,678)
INVESTING ACTIVITIES
Purchases of property and equipment (2,078,565)
Purchase of certificate of deposit (176,357)
-------------------
Net cash used in investing activities (2,254,922)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 2,102,967
Principal payments on long-term debt (204,015)
Proceeds from issuance of preferred stock, net of
issuance costs 6,613,004
Proceeds from exercise of stock options 422,892
Principal payments on capital lease obligations (104,812)
Acquisition of treasury stock (11,855)
-------------------
Net cash provided by financing activities 8,818,181
-------------------
Net increase in cash 711,581
Cash at beginning of year 706,017
-------------------
Cash at end of year $ 1,417,598
===================
</TABLE>
<PAGE>
F-7
<TABLE>
<CAPTION>
<S> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 63,800
===================
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Notes receivable issued in exchange for common stock $ 54,000
===================
Notes payable retired in exchange for Series A preferred stock $ 134,000
===================
Officer note receivable forgiven in exchange for purchase of treasury
stock $ 13,500
===================
Additions to property and equipment through issuance of capital
lease obligations $ 34,877
===================
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
F-8
NetSales, Inc.
Notes to Consolidated Financial Statements
for the year ended December 31, 1999
1. SUMMARY OF ACCOUNTING POLICIES
BASIS OF PRESENTATION AND NATURE OF BUSINESS
Software Review, L.C. (which subsequently changed its name to NetSales LLC)
originally was formed as a limited liability company (LLC) in August 1995. In
October 1998, NetSales, Inc. (the Company), a Delaware C corporation, was formed
and acquired all of the outstanding interests of the LLC, which remains a
subsidiary of NetSales, Inc. Because the LLC and the C corporation were entities
under common control, this transaction was accounted for in a manner similar to
a pooling of interests with all assets and liabilities transferred at their
historical book values.
Pursuant to the formation of the C corporation in October 1998, the Company is
authorized to issue 50,000,000 shares of $.01 par value common stock and
10,000,000 shares of $.01 par value preferred stock (see NOTE 7). The member
units and related contributions of $1,068,072 were converted into 10,000,000
shares of $.01 common stock.
The Company offers full service Internet electronic commerce outsource solutions
and electronic software distribution solutions to a wide range of clients,
including software publishers, software cyberstores, software value-added
resellers and system integrators, through software purchases and downloads from
the Internet.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of NetSales, Inc. and
its wholly-owned subsidiary, NetSales LLC. All significant intercompany accounts
and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
<PAGE>
F-9
1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company derives its revenues primarily from providing outsource electronic
commerce services such as transaction processing, customer service and
integration of legacy systems. The Company's fees for services provided, charged
as a percentage of transaction revenues, as a per transaction fee, as a onetime
implementation fee, or as a combination of more than one of these methods, are
reflected as net revenues in the accompanying consolidated statement of
operations.
For many of the Company's clients, a reseller contractual relationship has been
established whereby a percentage of the gross sales price from a transaction is
paid to the Company as a service fee. Gross revenues from the sale of software
and other products, to which the Company assumes credit risk, net of estimated
returns, are recognized upon either the electronic delivery of the software or
shipment of the physical product to the end user. Product costs, including the
amount payable to the software publisher or online retailer, are recognized
concurrent with the recognition of gross revenues. For sales of consignment
goods, the Company takes title to merchandise, charges the customer's credit
card and arranges for a third party to complete delivery to the customer. The
difference between gross revenues and products costs is reported as net revenues
in the accompanying consolidated statement of operations.
Gross revenues and product costs for the year ended December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
<S> <C>
Gross revenues $14,219,761
Product costs 12,966,355
-------------------
Net revenue $ 1,253,406
===================
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets as
follows:
<TABLE>
<CAPTION>
<S> <C>
Computer equipment 3 years
Office furniture and equipment 5 years
Leasehold improvements Remaining term of
the lease
</TABLE>
<PAGE>
F-10
1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
Advertising costs are charged to expense as incurred and are included in sales
and marketing expenses in the accompanying consolidated statement of operations.
Total advertising expense amounted to $581,891 for the year ended December 31,
1999.
RESEARCH AND DEVELOPMENT
Research and development costs of $573,000 for the year ended December 31, 1999
are expensed as incurred and included in product development and operations
expenses in the accompanying consolidated statement of operations.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion (APB) No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its employee stock options and have adopted the pro forma
disclosure requirements under Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation." As the exercise price of
certain employee stock options granted by the Company in 1999 was less than the
estimated market price of the underlying common stock on the date of grant, the
Company recognized compensation expense of $218,539 during the year ended
December 31, 1999 in accordance with APB No. 25.
INCOME TAXES
Prior to becoming a C corporation in October 1998, the Company had elected to be
taxed as a limited liability company; accordingly, the results of operations
were included in the income tax returns of the Company's members.
Subsequent to becoming a C corporation, the Company accounts for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
the liability method is used in accounting for income taxes, whereby deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
<PAGE>
F-11
1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 2000. The statement
will require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives not considered hedges must be adjusted to fair value
through income. If a derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivative will either be offset against
the change in fair value of the hedged asset, liability or firm commitment
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Company does not
anticipate the adoption of SFAS No. 133 will have a significant effect on its
results of operations or financial position.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation: An Interpretation of APB Opinion No.
25" (the Interpretation). The Interpretation, among other things, requires that
certain modifications to outstanding stock options as to a direct change to the
exercise price (repricings) or the number of shares or an indirect change to the
exercise price or number of shares (sometimes referred to as "synthetic
pricings") must be accounted for using variable-award accounting. The
Interpretation requires compensation accounting for all awards for which share
repricings or synthetic pricings occurred after December 15, 1998. Compensation
expense is to be recognized only to the extent that the market price of the
stock exceeds the stock price on the date of the issuance of the Interpretation
and increases thereafter; consequently, the last measurement of compensation
expense would occur at the date the options are exercised. The Interpretation
will be effective beginning July 1, 2000. The Company does not believe the
impact of this Interpretation will have a material effect on its results of
operations.
2. NOTES PAYABLE AND LONG-TERM DEBT
During 1998, the Company issued notes payable of $134,000 to three stockholders
of the Company. The agreements provided for interest ranging from 10% to 25%.
The notes payable were converted to Series A convertible preferred stock in
January 1999.
<PAGE>
F-12
2. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
In 1998, the Company obtained financing through a U.S. Small Business
Administration (SBA) loan. The agreement provides for interest at prime (8.25%)
plus 2.25%. The loan was paid in full by the Company in March 1999.
During 1999, the Company issued a note payable to a bank of $176,357. The
agreement provides for interest to be paid monthly at a rate of 6.86%. The
principal portion is to be paid in full in February 2002. This note payable is
secured by a certificate of deposit in the amount of $176,357 at December 31,
1999, which is included as restricted cash in the accompanying consolidated
balance sheet.
In November 1999, the Company entered into a financing agreement with Silicon
Valley Bank. The agreement provides a maximum of $1,500,000 in available
borrowings for eligible equipment purchases. Each equipment advance is
considered a promissory note, with a $50,000 minimum amount for each advance and
a the maximum number of advances of seven. Principal and interest payments are
due monthly in advance with interest equal to the basic rate determined by the
bank as of the funding date (9.06% at December 31, 1999). The facility also
calls for a one-time commitment fee payment of $7,500. The Company has granted
Silicon Valley Bank a security interest in all funded equipment advances. As of
December 31, 1999, the total amount outstanding under this facility was
$897,340, which matures on December 1, 2002. In January 2000, the Company
submitted an additional draw in the amount of $320,014, which is anticipated to
be funded on or about February 1, 2000. As part of the financing agreement, the
Company issued to Silicon Valley Bank warrants to purchase 20,000 shares of
Series B preferred stock, which are exercisable at $2.10 per share and expire on
November 16, 2006.
On December 31, 1999, the Company entered into a $1,000,000 unsecured note
payable agreement with Harbour Vest Partners with interest payable at a rate of
10%. Pursuant to the terms of the note agreement, if at any time prior to
January 31, 2000 the Company issued any class of securities for an aggregate
amount of at least $3 million, this note would be converted into shares of the
new securities. On January 28, 2000, the Company completed an offering of Series
C preferred stock at $5.40 per share aggregating total proceeds of $24 million.
As such, this note and accrued interest related thereto was converted into
186,653 shares of Series C preferred stock at $5.40 per share. Accordingly, the
$1,000,000 unsecured note payable is classified as a long-term liability in the
accompanying consolidated balance sheet. In addition, as a part of the note
payable
<PAGE>
F-13
2. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
agreement, the Company issued to Harbour Vest Partners warrants to purchase
18,519 shares of Series C preferred stock, which are exercisable after January
31, 2000 at $5.40 per share and expire on December 31, 2004.
Principal maturities of the long-term debt, excluding the $1,000,000 converted
to Series C preferred stock in January 2000, for the next three years ended
December 31 are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $281,449
2001 308,033
2002 484,215
</TABLE>
3. LEASES
In December 1997, the Company entered into a sale-leaseback transaction with a
leasing company whereby it sold certain property and equipment for $35,203.
Pursuant to the sale-leaseback transaction, the Company accounted for the lease
of the property and equipment as a capital lease. The Company also leased
certain computer equipment accounted for as a capital lease. The Company
terminated all capital leases, including leases entered into in 1999, in July
1999 by remitting an agreed upon amount.
The Company leases various office space under agreements accounted for as
operating leases. Future minimum lease payments under these noncancelable leases
at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31
-----------
<S> <C>
2000 $ 646,634
2001 666,786
2002 455,737
2003 248,566
---------------
Total minimum lease payments $2,017,723
===============
</TABLE>
Rent expense under all operating leases for the year ended December 31, 1999 was
$281,167.
<PAGE>
F-14
4. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities for the year ended December
31, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Net operating loss carryforward $3,226,876
Stock compensation 87,416
Other 54,851
------------------
Total deferred tax assets 3,369,143
Deferred tax liabilities:
Book basis of tangible assets greater than tax 11,116
------------------
Net deferred tax assets before allowance 3,358,027
Valuation allowance for deferred tax assets (3,358,027)
------------------
Net deferred tax assets $ --
==================
</TABLE>
At December 31, 1999, net operating loss carryforwards of approximately
$8,067,000 are available to reduce future federal income taxes and will begin to
expire in 2018 if unused. Utilization of the net operating loss carryforwards
may be subject to certain limitations as a result of changes in ownership of the
Company.
The reconciliation of income taxes computed at the U.S. statutory tax rate to
income tax expense for the year ended December 31, 1999 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Loss before income taxes $(7,774,729)
U.S. statutory tax rate x34%
-------------------
Federal income tax benefit at U.S. statutory rate (2,643,408)
State income tax benefit, net of federal tax effect (466,484)
Change in valuation allowance 3,099,834
Other, net 10,058
-------------------
Net income tax expense $ --
===================
</TABLE>
<PAGE>
F-15
5. PREFERRED STOCK
In November 1998, the stockholders of the Company approved an amendment and
restatement of the Company's Articles of Incorporation pursuant to the
completion of a stock purchase agreement. Under the revised Articles of
Incorporation, the Company is authorized to issue 1,436,084 shares of $.01 par
value Series A convertible preferred stock and 3,179,769 shares of $.01 par
value Series B convertible preferred stock. In January 2000, the Articles of
Incorporation were amended and restated to provide for the issuance of up to
3,249,769 shares of Series B convertible preferred stock (see NOTE 7).
In November 1998, the Company sold 1,325,034 shares of the Company's Series A
convertible preferred stock to investors at $1.21 per share. Proceeds of the
offering, net of offering costs of $40,999, amounted to $1,559,001. As discussed
in NOTE 2, in January 1999 certain notes payable in the amount of $134,000 were
converted to 111,050 shares of Series A convertible preferred stock.
In February 1999, the Company sold 3,179,769 shares of the Company's Series B
convertible preferred stock to investors at $2.10 per share. Proceeds of the
offering, net of offering costs of $64,511, amounted to $6,613,004.
Series A and B preferred stockholders are entitled to voting rights equivalent
to common stockholders based on the number of shares of common stock into which
the Series A and B preferred shares can be converted, as adjusted from time to
time in accordance with the Company's Articles of Incorporation. As long as 5%
of the Series A and B preferred shares remain outstanding, the Company may not
make any changes regarding amendments to the Articles of Incorporation and
bylaws, authorization, issuance or redemption of additional series of preferred
stock, declaration or payment of dividends on common stock, additional loans or
authorization of a change in control of the Company, among other things, without
the consent of a majority of the then-outstanding Series A and B preferred
stockholders.
The holders of Series A and B preferred stock are entitled to received dividends
based on the number of shares of common stock into which the Series A and B
preferred stock can be converted if any such dividends are declared, paid or set
aside for common stockholders.
<PAGE>
F-16
5. PREFERRED STOCK (CONTINUED)
Upon liquidation, Series A and B preferred stockholders are entitled to an
aggregate preference distribution of the original issue price of $1.21 per share
and $2.10 per share, respectively, plus any declared and unpaid dividends.
However, in no event shall the holders of Series A and B preferred stock receive
more than $3.63 per share and $6.30 per share, respectively. Holders of Series A
and B preferred stock have the right, at their option, to convert shares of
Series A and B preferred stock into common stock. The conversion rate per share
shall be the original issue price per share of Series A and B preferred stock
plus all declared and unpaid dividends divided by $1.21 and $2.10, respectively,
subject to adjustment from time to time in accordance with the Company's
Articles of Incorporation. Each share of Series A and B preferred stock shall be
convertible into common stock, at the option of the holder, any time after the
date of issuance under the terms described above. In the event of a qualified
public offering of the Company's common stock, defined in the Series A and B
preferred stock agreements as a public offering which values the Company at no
less than $100 million and the proceeds to the Company from such offering are
not less than $15 million, shares of Series A and B preferred stock
automatically will be converted into common stock under the terms described
above.
By written notice, as defined by the Series A and B certificates of preference,
at any time after the fifth anniversary of the Series A and B preferred stock,
each holder of Series A and B preferred stock can require the Company to redeem
all shares of the Series A and B preferred stock the redeeming holder
designates, payable in cash, based on the greater of the original issue price or
the Company's value, as determined by a qualified appraiser in accordance with
the Series A and B certificates of designation.
6. STOCK OPTIONS
In November 1998, the Company approved a stock option plan and reserved
3,396,754 shares (subsequently increased to 3,896,754 shares) of $.01 par value
common stock for issuance to employees, officers, directors and consultants
under the plan. The term of each stock option is 10 years from the date of the
grant or a shorter term as provided in the Stock Option Agreement (the
Agreement) subject to certain limitations based on stock ownership percentages.
The term of each option that is not an incentive stock option shall
<PAGE>
F-17
6. STOCK OPTIONS (CONTINUED)
be determined by the Board of Directors and set forth in the Agreement. The
options are exercisable immediately; however, the Company has the right to buy
back the related shares at the exercise price. This right generally diminishes
over a four-year period. A summary of stock option activity related to the plan
is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
OPTION AVERAGE
NUMBER OF PRICE PER EXERCISE
SHARES SHARE PRICE EXERCISABLE
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1998 1,102,000 $ .10 $ .10 1,102,000
Granted 2,027,250 .10-3.00 1.34
Exercised (2,024,818) .10-3.00 .24
Canceled/expired (238,183) .10-3.00 .63
================
Outstanding at December 31, 1999 866,249 .25-3.00 2.53 866,249
================
</TABLE>
The following table summarizes outstanding and exercisable options at December
31, 1999:
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS
OUTSTANDING
EXERCISE AND
PRICES EXERCISABLE
------------------------------------------------------
<S> <C>
$ .25 17,500
1.00 54,050
1.75 196,250
3.00 598,449
</TABLE>
<PAGE>
F-18
6. STOCK OPTIONS (CONTINUED)
The weighted-average remaining contractual life at December 31, 1999 is 9.75
years. Using the Minimum Value option pricing model, the weighted-average fair
value of options granted during the year ended December 31, 1999 was $1.31.
The fair values of options granted were estimated at the date of grant using the
Minimum Value option pricing model with the following weighted-average
assumptions for the year ended December 31, 1999: a risk-free interest rate
ranging from 5.7% to 6% and a weighted-average expected life of five years.
Under the Minimum Value option pricing model, the volatility factor is excluded.
The Company assumed a 0% dividend yield over the expected life of the options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period of the common stock underlying
the options. The effects of applying SFAS No. 123, "Accounting for Stock-Based
Compensation," for pro forma disclosures are not likely to be representative of
the effects on reported net income or losses for future years. The Company's pro
forma net loss would be $7,914,083 for the year ended December 31, 1999.
7. SUBSEQUENT EVENT
PREFERRED STOCK - SERIES C
In January 2000, the stockholders of the Company approved an amendment and
restatement of the Company's Articles of Incorporation pursuant to the
completion of a stock purchase agreement. Under the revised Articles of
Incorporation, the Company is authorized to issue 1,436,084 shares of $.01 par
value Series A convertible preferred stock, 3,249,769 shares of $.01 par value
Series B convertible preferred stock, 6,481,482 shares of $.01 par value Series
C convertible preferred stock and 10,000,000 shares of preferred stock with
terms to be determined by the Board of Directors of the Company.
In January 2000, the Company sold 5,868,946 shares of the Company's Series C
convertible preferred stock to investors at $5.40 per share. Proceeds of the
offering, net of offering costs of $91,387, amounted to $31,600,921.
<PAGE>
F-19
7. SUBSEQUENT EVENT (CONTINUED)
Series C preferred stockholders are entitled to voting rights equivalent to
common stockholders based on the number of shares of common stock into which the
Series C preferred shares can be converted. Certain actions shall require the
affirmative vote of the holders of 70% of the shares of Series A, Series B and
Series C preferred stock (all on an as-converted basis), voting together as a
single class, including: authorization or issuance of additional Series C
preferred shares, or any shares of stock having priority over or ranking on a
parity with the Series C preferred shares on liquidation or dissolution;
amendment of the Articles of Incorporation of the Company so as to alter any
existing provision relating to the Series C preferred shares or the holders
thereof or waive any of the rights granted to such holders as long as 5% of the
Series A preferred shares remain outstanding; the Company may not make any
changes regarding amendments to the Articles of Incorporation and bylaws,
authorization, issuance or redemption of additional series of preferred stock,
declaration or payment of dividends on common stock, additional loans or
authorization of a change in control of the Company, among other things, without
the consent of a majority of the then-outstanding Series A preferred
stockholders.
In the event any dividend or distribution is declared or made on the Company's
Series A and Series B preferred stock and common stock, a comparable dividend or
distribution must be simultaneously made on the Series C preferred shares, on
the basis of the number of shares of common stock into which the Series C
preferred shares are then convertible.
Upon liquidation, Series C preferred stockholders are entitled to an aggregate
preference distribution of the original issue price of $5.40 per share plus any
declared and unpaid dividends. However, in no event shall the holders of Series
A preferred stock receive more than $10.80 per share. Holders of Series C
preferred stock have the right, at their option, to convert shares of Series C
preferred stock into common stock at an initial conversion rate of one share of
common stock for each Series C preferred share (each preferred share being taken
initially at $5.40 for the purpose of such conversion). The conversion price and
rate shall be subject to certain so-called "weighted average" anti-dilution
provisions.
<PAGE>
F-20
7. SUBSEQUENT EVENT (CONTINUED)
Series C preferred shares shall be automatically converted into common stock at
the current conversion price upon either (1) the closing of an underwritten
public offering of common stock of at least $25 million at a per share price to
the public of at least $10.80 per share or (2) the affirmative vote of the
holders of at least 70% of the outstanding shares of all classes of preferred
stock of the Company, voting together.
From and after the seventh anniversary of the closing of the investor's initial
purchase of Series C preferred shares, the investor shall have the right to put
any or all of the Series C preferred shares then owned to the Company for
purchase at a price per share to be determined by appraisal. Redemption's at the
option of the Company shall not be permitted.
<PAGE>
F-21
NetSales, Inc.
Condensed Consolidated Balance Sheets
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30
2000 1999
----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $20,671,895 $5,033,090
Trade accounts receivable 341,863 107,289
Prepaid expenses 839,970 288,279
Other current assets 209,389 16,352
----------------------------
Total current assets 22,063,117 5,445,010
Net property and equipment 5,413,959 1,022,032
Restricted cash 187,303 176,357
Prepaid license fee 1,000,000 --
Other assets, net 323,303 264,234
----------------------------
Total assets $28,987,682 $6,907,633
============================
</TABLE>
<PAGE>
F-22
<TABLE>
<CAPTION>
JUNE 30
2000 1999
---------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 2,670,779 $1,061,475
Accrued payroll and related expenses 789,925 317,365
Accrued expenses 1,671,656 77,347
Current portion of capital lease obligations 848 36,484
Current portion of long-term debt 472,296 --
---------------------------------
Total current liabilities 5,605,504 1,492,671
Capital lease obligations, less current portion 1,962 49,896
Long-term debt, less current portion 819,613 176,357
Redeemable preferred stock--$.01 par value, 14,615,853 shares
authorized:
Series A convertible:
Authorized, issued and outstanding shares--1,436,084
Aggregate liquidation preference--$1,737,662 at June 30, 2000 1,693,001 1,693,001
Series B convertible:
Authorized, issued and outstanding shares--3,179,769 in
1999 and 3,249,769 in 2000
Aggregate liquidation preference--$6,824,515 at June 30, 2000 6,613,004 6,613,004
Series C convertible:
Authorized--6,481,482, issued and outstanding shares--5,868,946
in 2000
Aggregate liquidation preference - $31,692,308 at June 30, 2000 31,595,493 --
Stockholders' deficit:
Common stock--$.01 par value:
Authorized shares--50,000,000 123,416 122,295
Issued and outstanding shares--12,346,655 in 2000 and
12,229,500 in 1999
Additional paid-in capital 2,732,335 2,504,467
Less 181,734 shares of treasury stock, at cost (32,437) --
Notes receivable from stockholders (40,500) (54,000)
Deferred compensation (751,049) (1,051,580)
Accumulated deficit (19,372,660) (4,638,478)
---------------------------------
Total stockholders' deficit (17,340,895) (3,117,296)
---------------------------------
Total liabilities and stockholders' deficit $28,987,682 $6,907,633
=================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
F-23
NetSales, Inc.
Condensed Consolidated Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
2000 1999
-----------------------------------------
<S> <C> <C>
Net revenue 1,325,117 637,630
Operating expenses:
Selling, general and administrative 11,047,193 3,020,711
Stock compensation 138,513 56,523
-----------------------------------------
Operating loss (9,860,589) (2,439,604)
Interest expense (65,333) (23,066)
Interest income 604,804 101,005
-----------------------------------------
539,471 77,939
-----------------------------------------
Net loss $ (9,321,118) $(2,361,665)
=========================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
F-24
NetSales, Inc.
Condensed Consolidated Statements of Cash Flows
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
2000 1999
------------------------------------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $ (7,817,358) $(1,554,147)
INVESTING ACTIVITIES
Purchases of property and equipment (3,832,380) (833,120)
Purchase of certificate of deposit -- (176,357)
------------------------------------
Net cash used in investing activities (3,832,380) (1,009,477)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 573,480 176,357
Principal payments on long-term debt and capital lease
obligations (355,268) (189,977)
Proceeds from issuance of preferred stock, net of issuance
costs 30,595,493 6,613,004
Proceeds from exercise of stock options 97,412 291,313
Acquisition of treasury stock (7,082) --
------------------------------------
Net cash provided by financing activities 30,904,035 6,890,697
------------------------------------
Net increase in cash 19,254,297 4,327,073
Cash at beginning of period 1,417,598 706,017
------------------------------------
Cash at end of period $20,671,895 $ 5,033,090
====================================
SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Notes payable converted to Series C preferred stock $ 1,000,000 $ --
====================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
F-25
NetSales, Inc.
Notes to Unaudited Condensed
Consolidated Financial Statements
June 30, 2000
1. SUMMARY OF ACCOUNTING POLICIES
BASIS OF PRESENTATION AND NATURE OF BUSINESS
Software Review, L.C. (which subsequently changed its name to NetSales L.L.C.)
originally was formed as a limited liability company (LLC) in August 1995. In
October 1998, NetSales, Inc. (the Company), a Delaware C corporation, was formed
and acquired all of the outstanding interests of the LLC, which remains a
subsidiary of NetSales, Inc. Because the LLC and the C corporation were entities
under common control, this transaction was accounted for in a manner similar to
a pooling of interests with all assets and liabilities transferred at their
historical book values.
Pursuant to the formation of the C corporation in October 1998, the Company is
authorized to issue 50,000,000 shares of $.01 par value common stock and
10,000,000 shares of $.01 par value preferred stock. The member units and
related contributions of $1,068,072 were converted into 10,000,000 shares of
$.01 common stock.
The Company offers full service Internet electronic commerce outsource solutions
and electronic software distribution solutions to a wide range of clients,
including software publishers, software cyberstores, software value-added
resellers and system integrators, through software purchases and downloads from
the Internet.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information per Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
six-month period ended June 30, 2000 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000. These
financial statements should be read in conjunction with the consolidated
financial statements and footnotes for the year ended December 31, 1999.
<PAGE>
F-26
2. STOCK OPTIONS
A summary of stock option activity during the six-month periods ended June 30,
2000 is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
OPTION AVERAGE
NUMBER OF PRICE PER EXERCISE
SHARES SHARE PRICE EXERCISABLE
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1999 866,249 $ .25-3.00 $2.53 866,249
Granted 831,550 3.25-4.25 4.02
Exercised (28,500) .25-4.25 2.95
Canceled/expired (178,250) .10-4.25 2.88
----------------
Outstanding at June 30, 2000 1,491,049 1.00-4.25 3.31 1,491,049
================
</TABLE>
The following table summarizes outstanding and exercisable options at June 30,
2000:
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS
OUTSTANDING
EXERCISE AND
PRICES EXERCISABLE
------------------------------------------------------
<S> <C>
$1.00 53,349
1.75 195,500
3.00 442,900
3.25 107,000
4.00 303,300
4.25 389,000
</TABLE>
<PAGE>
F-27
Digital River, Inc.
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma unaudited condensed consolidated financial statements
include the historical financial statements of Digital River, Inc. and give
effect to the transaction and events described in the notes accompanying the
pro forma unaudited condensed consolidated financial statements as if the
transaction and events referred to therein were initiated at the beginning of
the periods presented.
On August 24,2000, Digital River, Inc. purchased certain assets and assumed
certain liabilities of NetSales related to NetSales' software services
business. The acquisition was accomplished pursuant to an Asset Purchase
Agreement dated as of August 24, 2000 by and between Digital River and
NetSales, Inc. Pursuant to the Asset Purchase Agreement, Digital River paid
total consideration of 1,000,000 shares of Digital River's common stock,
valued at $6.00 per share. The assets acquired consist primarily of client
contracts. The transaction will be accounted for using the purchase method of
accounting.
The pro forma adjustments are based on available information and certain
estimates and assumptions. Therefore, it is likely that the actual
adjustments will differ from the pro forma adjustments. Digital River
believes that such estimates and assumptions provide a reasonable basis for
presenting all of the significant effects of the transaction and events and
that the pro forma adjustments give appropriate effect to those estimates and
assumptions and are properly applied in the pro forma unaudited condensed
consolidated financial statements.
The pro forma unaudited condensed consolidated financial statements should be
read in conjunction with the historical financial statements and related
notes included in the Registrant's Form 10-K. Pursuant to the Current Report
on Form 8-K filed October 20, 2000, as of September 30, 2000, the Registrant
commenced reporting its company wide revenue on a net basis. Previously,
substantially all revenue generated through Digital River software services
division was recognized on a gross basis. The pro forma unaudited
condensed consolidated financial statements are provided for informational
purposes only and should not be construed to be indicative of Digital River's
results of operations or its financial position had the transactions and
events described above been consummated on the dates assumed and do not
project Digital River's financial position or results of operations for any
future date or period.
<PAGE>
F-28
Digital River, Inc.
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2000
(in thousands)
<TABLE>
<CAPTION>
ACQUISITION
DIGITAL RIVER OF NETSALES DIGITAL RIVER
HISTORICAL ASSETS (1) PRO FORMA
------------------ ------------------ ------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $24,326 $-- $24,326
Short-term investments 8,997 -- 8,997
Accounts receivable, net 2,977 -- 2,977
Other current assets 1,009 10 1,019
------------------ ------------------ ------------------
37,309 10 37,319
Fixed assets, net 12,582 -- 12,582
Long-term investments 6,000 -- 6,000
Goodwill, net and other assets 17,563 6,049 23,612
------------------ ------------------ ------------------
$73,454 $6,059 $79,513
================== ================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $10,177 $-- $10,177
Accrued payroll liabilities 4,255 -- 4,255
Other current liabilities 3,521 10 3,531
------------------ ------------------ ------------------
17,953 10 17,963
Shareholders' equity:
Common stock 211 10 221
Additional paid-in capital 126,072 6,039 132,111
Deferred compensation (382) -- (382)
Accumulated deficit (70,400) -- (70,400)
------------------ ------------------ ------------------
55,501 6,049 61,550
------------------ ------------------ ------------------
$73,454 $6,059 $79,513
================== ================== ==================
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
balance sheet.
<PAGE>
F-29
Digital River, Inc.
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2000
(in thousands, except net loss per share)
<TABLE>
<CAPTION>
DIGITAL RIVER NETSALES PRO FORMA DIGITAL RIVER
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
------------------ ------------------ ------------------ ----------------
<S> <C> <C> <C> <C>
Revenue $13,518 $1,325 $-- $14,843
Cost and expenses:
Direct cost of services 570 -- -- 570
Network and infrastructure 3,748 -- 1,987 (2) 5,735
Selling, general and administrative -- 11,186 (11,186)(2) 0
Sales and marketing 13,443 -- 2,592 (2) 16,035
Product research and development 8,092 -- 1,099 (2) 9,191
General and administrative 2,457 -- 1,705 (2) 4,162
Depreciation and amortization 1,343 -- 360 (2) 1,703
Amortization of goodwill and
acquisition related costs 9,728 -- 1,512 (3) 11,240
------------------ ------------------ ------------------ ----------------
Total costs and expenses 39,381 11,186 (1,931) 48,636
------------------ ------------------ ------------------ ----------------
Loss from operations (25,863) (9,861) 1,931 (33,793)
Interest income 1,239 540 (540)(4) 1,239
------------------ ------------------ ------------------ ----------------
Net loss $(24,624) $(9,321) $1,391 (5) $(32,554)
================== ================== ================== ================
Net loss per share $(1.18) $(1.48)
================== ================
Weighted average shares outstanding 20,937 1,000 21,937
================== ================== ================
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
statement of operations.
<PAGE>
F-30
Digital River, Inc.
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(in thousands, except net loss per share)
<TABLE>
<CAPTION>
DIGITAL RIVER NETSALES PRO FORMA DIGITAL RIVER
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
------------------ ------------------ ------------------ ----------------
<S> <C> <C> <C> <C>
Revenue $14,507 $1,253 $-- $15,760
Cost and expenses:
Direct cost of services 801 -- -- 801
Network and infrastructure 4,434 690 -- 5,124
Sales and marketing 17,383 3,299 -- 20,682
Product research and development 10,251 2,056 -- 12,307
General and administrative 4,001 3,084 -- 7,085
Depreciation and amortization 1,552 -- -- 1,552
Amortization of goodwill and
acquisition related costs 6,886 -- 3,025 (3) 9,911
------------------ ------------------ ------------------ ----------------
Total costs and expenses 45,308 9,129 3,025 57,462
------------------ ------------------ ------------------ ----------------
Loss from operations (30,801) (7,876) (3,025) (41,702)
Interest income 3,148 101 (101)(4) 3,148
------------------ ------------------ ------------------ ----------------
Net loss $(27,653) $(7,775) $(3,126) $(38,554)
================== ================== ================== ================
Net loss per share $(1.36) $(1.81)
================== ================
Weighted average shares outstanding 20,312 1,000 (5) 21,312
================== ================== ================
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
statement of operations.
<PAGE>
F-31
Digital River, Inc.
NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2000
The following pro forma adjustments have been made to the pro forma condensed
consolidated financial statements.
1. Purchase Accounting
Reflects the allocation of the purchase price of $6.0 million, plus
transaction expenses as of June 30, 2000. The purchase price was allocated
to goodwill and other intangibles.
2. Cost and Expenses
Reflects the elimination of certain NetSales expenses (3.4 million for the
six months ended June 30, 2000) not related to the servicing of contracts
acquired by Digital River. This adjustment also classifies expenses in
Digital River's format.
3. Goodwill Amortization
Represents an increase in goodwill amortization expense based on a two year
amortization period.
4. Interest Income
Represents the elimination of interest income earned by NetSales on cash
balances not acquired by Digital River.
5. Loss per Share
Represents the addition of 1 million shares outstanding that were issued in
conjunction with the transaction.
