Digital River 2002 Annual Report Download - page 13

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With our E-Business services, we provide a wide range of electronic commerce services to clients outside of the software industry, primarily
manufacturers, distributors and physical goods retailers. These services allow the client to perform electronic commerce on a business-to-
business or business-to-consumer basis. In a typical E-Business Services contract, we are responsible for: (i) Web commerce system design,
hosting and integration into the client’ s management system; (ii) the processing of payments made by end-users; (iii) the communication of
orders to the client or the client’ s third-party fulfillment agency for delivery of the product to end-users; (iv) the fraud screening and processing
of the applicable credit card transaction to the client’ s credit card processor; (v) customer service; and (vi) the distribution of a report to the
client detailing related sales activity that we have processed. As of March 1, 2003, we were providing services to over 100 client sites, excluding
approximately 20,000 small business sites serviced as a result of the purchase of certain assets of Network Commerce, Inc. and Orbit
Commerce, Inc. during 2001 and CCNow, Inc. in 2002. The table below sets forth certain of our software publisher, online retailer and E-
Business Service clients:
Software Publishers Online Retailers E-Business Services
H&R Block, Inc. MicroWarehouse, Inc. Cisco, Inc.
McAfee.com Corporation Software Oasis, Inc. Johnson & Johnson
ScanSoft, Inc. Visioneer, Inc. Major League Baseball
Symantec Corporation USA.net
Acquisitions
In March 2002, pursuant to an Asset Purchase Agreement between us and Innuity Acquisition Corp. ("IAC"), we purchased certain assets for
approximately $2,400,000 in cash and assumed approximately $3,600,000 in merchant liabilities. The agreement includes an opportunity for a
cash earn-out based on revenue generated from the IAC assets during the 12-month period following the close of the transaction.
In March 2002, pursuant to an Amended and Restated Asset Purchase Agreement (the "Agreement") between us and Beyond.com Corporation
("Beyond.com"), in exchange for 179,096 shares of our Common Stock, we purchased those assets and assumed those liabilities of Beyond.com
related to its eStores business, which manages online stores for clients. The purchase was approved by the U.S. Bankruptcy Court following
Beyond.com's filing for Chapter 11 bankruptcy protection. Immediately following the closing of the Agreement, we entered into a Post-Closing
Amendment to the Agreement with Beyond.com (the "Post-Closing Amendment"), pursuant to which, among other things, we agreed to
increase the number of shares to be delivered to Beyond.com under the Agreement to 222,842, in exchange for a release of certain potential
claims by Beyond.com against us. The Post-Closing Amendment is subject to approval by the U.S. Bankruptcy Court. The Official Committee
of Unsecured Creditors ("Committee") of Beyond.com's bankruptcy estate has objected to the Post-Closing Amendment, asserting that the
increase in shares to be delivered to Beyond.com under the Post-Closing Amendment is inadequate. The hearing on Beyond.com's motion to
approve the Post-Closing Amendment was originally set for June 7, 2002. The parties, with the approval of the U.S. Bankruptcy Court, have
agreed to continue the hearing on several occasions. The U.S. Bankruptcy Court is currently scheduled to consider the Post-Closing
Amendment on May 23, 2003. Beyond.com is also asserting that it is entitled to additional shares with a value of $650,000 under the
Agreement pursuant to provisions of the Agreement under which Beyond.com could earn additional consideration post-closing if certain clients
of Beyond.com immediately prior to the closing maintain or establish client relationships with us following the closing. We disagree that any of
such shares are due to Beyond.com under the Agreement. Of the shares issued at closing, 70,000 shares were placed in escrow to secure certain
indemnification obligations contained in the Agreement. The parties agreed to the return of 8,277 shares to us to satisfy outstanding claims
under the escrow. An additional 14,482 of these shares are subject to additional outstanding claims and will remain in escrow pending
resolution of such claims; the remaining 47,241 shares have been released to Beyond.com.
Sales And Marketing
We market our services directly to clients and prospective clients. We focus our efforts on generating awareness for our brand, establishing our
position as a global leader of electronic commerce outsourcing, generating leads in our target markets and providing sales tools for our direct
sales force. We conduct a variety of highly integrated marketing programs to achieve these goals in an effective and efficient manner. We
currently market our services to clients via direct marketing, print and electronic advertising, trade shows and events, public relations and media
events and speaking engagements. We plan to increase our overall marketing expenditures on a dollar basis, but maintain the current level on a
percentage basis.
Primarily, we sell our electronic commerce outsourcing services through a global, direct sales force that is engaged in selling our services, which
includes pre-sales, sales, sales support, and staff located in an office in the United Kingdom. Our sales organization sells to top executives and
vice-presidents within software and digital content publishers and online retailers, manufacturers, distributors and traditional retailers looking to
create or expand their electronic commerce business. During the sales process, our sales staff delivers demonstrations, presentations, collateral,
ROI analyses, proposals, and contracts. We offer contract incentives on a case-by-case basis.
We also design and implement e-marketing and merchandising programs to help our clients to help drive traffic to their online stores as well as
increase close ratios, average order values and repeat purchases. Our e-marketing team utilizes a range of programs and tools such as search
engine optimization, email marketing and store merchandising including specials, cross-sells and up-sells. This team uses our extensive data
warehouse tools to create targeted programs to drive increased sales.
As of March 1, 2003 we had 130 employees engaged in sales and marketing including personnel in a sales office in the United Kingdom.