Digital River 2002 Annual Report Download - page 36

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Sales And Marketing. Sales and marketing expense consists primarily of personnel and related expenses, advertising and promotional expenses,
credit card chargebacks and bad debt expense, and credit card transaction fees. Sales and marketing expense increased to $32.4 million in 2002,
from $27.5 million and $25.7 million in 2001and 2000, respectively, resulting primarily from increased credit card transaction fees and bad debt
expense due to increased revenue as well as additional sales and marketing personnel and related expenses. The increase in 2002 from 2001
resulted primarily from increases in credit card transaction fees of $4.2 million, bad debt expense of $0.9 million, personnel related expenses of
$1.3 million offset by a decrease in advertising expense of $1.7 million. The increase in 2001 from 2000 resulted from an increase in credit card
transaction fees of $3.3 million. As a percentage of revenue, sales and marketing expense decreased to 41.7% in 2002 from 47.5% in 2001 and
82.4% in 2000, primarily reflecting the Company’ s increased revenue. In 2002, the sales and marketing expense related to the Software and
Digital Commerce Services Division was $22.7 million, up from $17.5 million in 2001 and $14.7 million in 2000. The sales and marketing
expense related to the E-Business Services Division was $9.7 million in 2002, down from $10.0 million in 2001and $11.0 million in 2000. 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 develops marketing programs, and as volume-driven credit card expenses increase. As a percentage of revenue,
these expenses are expected to continue to decrease as revenue increases.
Product Research And Development. Product research and development expense consists primarily of personnel and related expenses and
consulting costs associated with developing and enhancing the Company’ s CNS platform and related internal systems. Product research and
development expense was $11.5 million in 2002, compared to $11.2 million and $13.1 million in 2001 and 2000, respectively. The increase in
2002 from 2001 resulted from an increase in personnel related expenses. The decrease in 2001 from 2000 resulted from a decrease in consulting
costs of $5.0 million, partially offset by an increase in wages and benefit costs of $2.6 million. As a percentage of revenue, product research and
development expense decreased to 14.7% in 2002 from 19.4% in 2001 and 41.9% in 2000, primarily reflecting the Company’ s increased
revenue. In 2002, the product research and development expense related to the Software and Digital Commerce Services Division was $4.8
million, the same as in 2001 and down from $5.8 million in 2000. Product research and development expense related to the E-Business Services
Division was $6.7 million in 2002, up from $6.4 million in 2001 and down from $7.3 million in 2000. The Company expects that product
research and development expenses will continue to decrease as a percentage of revenue as revenue increases.
General And Administrative. General and administrative expense consists principally of executive, accounting and administrative personnel and
related expenses, including deferred compensation expense, professional fees and investor relations’ expenses. General and administrative
expense increased to $6.8 million in 2002, from $4.7 million and $4.6 million in 2001 and 2000, respectively. The increase in 2002 from 2001
resulted primarily from an increase in various legal and professional fees of approximately $800,000, personnel related expenses of
approximately $600,000 and insurance charges of approximately $300,000. The increase in 2001 from 2000 resulted from an increase in
professional fees of $108,000. As a percentage of revenue, general and administrative expense increased to 8.8% in 2002 from 8.1% in 2001 and
14.9% in 2000, primarily reflecting the Company’ s increased revenue and the growth in the expense base in 2002. General and administrative
expense related to the Software and Digital Commerce Services Division was $4.5 million in 2002 up from $3.2 million in both 2001 and 2000.
In 2002, general and administrative expense for the E-Business Services Division was $2.3 million, up from $1.5 million in 2001 and $1.4
million in 2000. 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 its growth. As a percentage of revenue, these expenses are expected to decrease as revenue
increases.
Amortization Of Goodwill And Other Intangibles And Acquisition Related Costs. Amortization of goodwill and other intangibles and
acquisition related costs consists of the amortization of goodwill and other intangible assets recorded from the Company’ s eleven acquisitions in
the past three years, as well as other acquisition related costs such as earn-out payments. Amortization of goodwill and other intangibles and
acquisition related costs decreased to $5.7 million in 2002 from $17.0 million in 2001 and $15.4 million in 2000. The decrease in 2002 from
2001 related to the implementation of SFAS No. 142, “Goodwill and Other Intangible Assets”. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment.
Upon adoption of SFAS No. 142, the Company discontinued the amortization of goodwill. The Company has assessed goodwill impairment in
2002 using a two-step approach based on reportable segments and reassessed any intangible assets, including goodwill, recorded in connection
with earlier acquisitions. The Company’ s assessment has indicated that there is no impairment of goodwill or other intangibles for the year
ended December 31, 2002 and thus the Company did not record any expense related to goodwill in 2002. The increase in 2001 from 2000
related to the amortization of goodwill and other intangibles from the four acquisitions consummated during 2001.