Digital River 2002 Annual Report Download - page 37

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Loss From Operations. The Company’ s loss from operations decreased to $916,000 in 2002 from $20.1 million in 2001 and $40.1 million in
2000, resulting primarily from increased revenue without corresponding increases in operating expenses. In 2002, the Software and Digital
Commerce Services Division generated income from operations of $21.4 million compared to income of $10.7 million in 2001 and a loss of
$5.6 million in 2000. In 2002, the loss from operations related to the E-Business Services Division was $8.1 million compared to a loss of
$9.1 million in 2001 and $15.9 million in 2000. In calculating segment losses, the Company does not include depreciation and amortization of
property and equipment or amortization of goodwill and other intangibles and acquisition related costs.
Interest Income. Interest income consists of earnings on the Company’ s cash and cash equivalents and short-term investments. Interest income
decreased to $406,000 in 2002 from $881,000 in 2001 and $2.0 million in 2000, resulting from net effects in changes in average cash and cash
equivalent balances and decreases in interest rates.
Income taxes. The Company had net operating loss carryforwards of approximately $81,700,000 as of December 31, 2002. Included in this
amount is approximately $16,700,000 of deductions resulting from disqualifying dispositions of stock options. When these deductions are
realized for financial statement purposes they will not result in a reduction in income tax expense, rather the benefit will be recorded as
additional paid-in-capital. These income tax net operating loss carryforwards expire beginning in the year 2009. Deductions from disqualifying
dispositions of stock options are included in net operating loss carryforwards with a corresponding valuation allowance. Because of the
uncertainty of future realization, a valuation allowance equal to the deferred tax asset has been recorded. Ownership changes resulting from the
issuance of additional equity will limit future annual realization of the tax net operating loss carryforwards to a specified percentage of the value
of the Company under Section 382 of the Internal Revenue Code.
Liquidit y and C apital R esour ce s
Net cash provided by operating activities in 2002 and 2001 was $17.6 million and $0.5 million, respectively. Net cash used in operations was
$17.0 million in 2000. The net cash provided by operating activities in 2002 and 2001 and used in operating activities in 2000 was primarily the
result of declining net losses, offset by goodwill and other intangibles amortization and earn-out charges, increases in accounts payable and
increases in depreciation and amortization.
Net cash used in investing activities was $0.6 million in 2002 and was the result of purchases of equipment of $5.2 million and net cash paid for
acquisitions of $5.4 million offset by $10.0 million in investment sales. Net cash used in investing activities was $2.4 million in 2001 and was
the result of purchases of equipment of $5.9 million and net cash paid for acquisitions of $1.5 million, offset in part by net sales of investments
of $5.0 million. Net cash provided by investing activities was $14.9 million in 2000 and was the result of net sales of investments of
$24.4 million partially offset by purchases of equipment of $9.4 million.
Net cash provided by financing activities in 2002, 2001 and 2000 was $2.2 million, $6.6 million, and $3.9 million, respectively. The cash
provided by financing activities in each year was mainly the result of proceeds from the exercise of stock options and warrants. However, in
2002 the Company repaid the $2.5 million in notes payable related to its August 2001 acquisition of RegSoft which caused a decrease in cash
provided by financing activities. Additionally, in April 2001, the Company initiated a share repurchase program of up to $5.0 million of its
outstanding shares of Common Stock. Repurchases will be at the Company’ s discretion based on ongoing assessments of the capital needs of the
business and the market price of its shares. No time limit was set for the completion of the repurchase program. During 2002, no shares were
repurchased under the repurchase program. In 2001, the Company expended $267,000 to repurchase its shares.
As of December 31, 2002, the Company had approximately $40.8 million of cash and cash equivalents and working capital of approximately
$14.5 million. Significant components of the Company’ s working capital are cash and cash equivalents and short term receivables net of client
and merchant payables. The Company’ s principal commitments consisted of long term 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 over the next 24 months it will expend
approximately $17.0 million on capital expenditures and approximately $20.0 million on product research and 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.