Digital River 2002 Annual Report Download - page 53

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D IGITA L RIV ER , INC .
N ot es to C onsolidate d F inanc ial Stat em ent s
D ec em ber 31, 2002 and 2001
1. Nat ur e of Ope rations and Sum mary of Signif icant Ac count ing P olicies:
Digital River, Inc., a Delaware corporation, and its wholly owned subsidiaries (collectively, the Company) provide a
suite of electronic commerce services to its clients, including web store development and hosting, transaction
processing, electronic software delivery, fraud screening, customer service and analytical marketing. Through
contractual relationships with software publishers and online retailers, the Company offers software products for sale
via the Internet. Beginning in late 1998, the Company also began to offer electronic commerce services to companies
outside of the software vertical market. The Company was incorporated in 1994 and conducted its first online sale
through a client’ s Web store in August 1996.
The Company has experienced significant losses since inception ($103.6 million through December 31, 2002) and has,
until the later stages of 2001, experienced significant negative cash flows from operations. The Company’ s prospects
must be considered in light of the risks frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets such as electronic commerce. To address these risks, the
Company must, among others things, maintain existing and develop new relationships with independent software
publishers, online retailers and other companies outside of the software market, maintain and increase its client base,
implement and successfully execute its business and marketing strategy, continue to develop and upgrade its
technology and transaction-processing systems, provide superior customer service and order fulfillment, respond to
competitive developments, and attract, retain and motivate qualified personnel. There can be no assurances that the
Company will be successful in addressing such risks, and the failure to do so could have a material adverse effect on
the Company’ s business, financial condition and results of operations.
P rinc iples of Consolidation
The consolidated financial statements include the accounts of Digital River, Inc. and its wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments, primarily high grade commercial paper and money
market accounts, that are readily convertible into known amounts of cash and that have original maturities of three
months or less to be cash equivalents. As of December 31, 2002 and 2001, cash balances of approximately $3.0
million and $1.4 million, respectively were maintained related to potential future credit card fees and chargebacks.
Inv estme nts
Investments held by the Company are classified as available for sale securities and are carried at their market value
with cumulative unrealized gains or losses recorded as a component of accumulated other comprehensive losses within
stockholders’ equity.
The following is a summary of the Company’ s investment securities:
C ost F air V alue
D ec ember 31, 2001
Comme r cial Pa pe r .............................................................. $ 9,978,00
0
$ 9,978,00
0
As of December 31, 2001, all securities were due in less than one year. The Company had proceeds from sales of
investments of $9,978,000, $17,999,000, and $36,416,000 in 2002, 2001 and 2000, respectively. The cost basis of
investments and gains and losses are based on specific identification. Realized gains and/or losses on sales of
investments were not significant in the 2002, 2001 and 2000.