Digital River 2002 Annual Report Download - page 29

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Volatility in our stock price may induce securities class-action litigation against us, and the expense of defense could harm our results of
operations.
Beginning in August 2001, we and certain of our officers and directors were named as defendants in several class action shareholder complaints
filed in the United States District Court for the Southern District of New York, now consolidated as In re Digital River, Inc. Initial Public
Offering Securities Litigation, Case No. 01-CV-7355. In the consolidated amended complaint, the plaintiffs allege that we, certain of our
officers and directors and the underwriters of our initial public offering, or IPO, violated Section 11 of the Securities Act of 1933 based on
allegations that our IPO registration statement and prospectus failed to disclose material facts regarding the compensation to be received by, and
the stock allocation practices of, the IPO underwriters. The complaint also contains a claim for violation of Section 10(b) of the Securities
Exchange Act of 1934 based on allegations that this omission constituted a deceit on investors. The plaintiffs seek unspecified monetary
damages and other relief. Similar complaints, referred to here as the IPO Lawsuits, were filed in the same court against hundreds of other public
companies.
On August 8, 2001, the IPO Lawsuits were consolidated for pretrial purposes before United States Judge Shira Scheindlin of the Southern
District of New York. Judge Scheindlin held an initial case management conference on September 7, 2001, at which time she ordered, among
other things, that the time for all defendants in the IPO Lawsuits to respond to any complaint be postponed until further order of the court. Thus,
we have not been required to answer any of the complaints, and no discovery has been served on us.
On July 15, 2002, we joined in a global motion to dismiss the IPO Lawsuits filed by all of the issuers (among others). On October 9, 2002, the
court entered an order dismissing our named officers and directors from the IPO Lawsuits without prejudice, pursuant to an agreement tolling
the statute of limitations with respect to these officers and directors until September 30, 2003. On February 19, 2003, the court issued a decision
denying the motion to dismiss the Section 11 claims against us and almost all of the other issuers and denying the motion to dismiss the Section
10(b) claims against us and many of the other issuers. We believe that this lawsuit is without merit and intend to defend against it vigorously.
However, this litigation, as well as any other securities class-action litigation that might be initiated against us, could result in substantial costs
and a diversion of management's attention and resources.
We may need to raise additional capital to achieve our business objectives, which could result in dilution to existing investors.
We require substantial working capital to fund our business. If capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated. If additional funds are raised through the issuance of equity securities, the percentage
ownership of our stockholders will be reduced, stockholders may experience additional dilution or these equity securities may have rights,
preferences or privileges senior to those of our Common Stock. Our capital requirements depend on several factors, including the rate of market
acceptance of our products, the ability to expand our client base and the growth of sales and marketing. We have had significant operating losses
and negative cash flow from operations since inception. Additional financing may not be available when needed, on terms favorable to us or at
all. If adequate funds are not available or are not available on acceptable terms, we may be unable to develop or enhance our services, take
advantage of future opportunities or respond to competitive pressures, which would harm our operating results and adversely affect our ability to
achieve profitability.
Provisions of our charter documents, other agreements and Delaware law may inhibit potential acquisition bids for us.
Certain provisions of our Amended and Restated Certificate of Incorporation, Bylaws, other agreements and Delaware law could make it more
difficult for a third-party to acquire us, even if a change in control would be beneficial to our stockholders.