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Digital R iver 2001 Annual Report
October 20,1879
wasa great day to be a candlemaker.

Table of contents

  • Page 1
    October 20,1879 was a great day to be a candlemaker. Digital R iver 2001 Annual Report

  • Page 2
    ...built AR PANET know that their invention would become the Internet and bring traditional commerce and business operations to an entirely new level? They may not have, but insightful, forwardthinking people made all these advances possible.We at Digital R iver share this insight. The rest is history!

  • Page 3
    1 Staying Focused for the Future

  • Page 4
    ... 30,000 25,000 20,000 15,000 10,000 5,000 $44,915 $21,837 $9,272 $1,472 (In Thousands) 1998 1999 2000 2001 (In Thousands) 1998 1999 2000 2001 (D ollars) Revenue 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% (D ollars) Gross Profit 500% 450% 400% 350% 300% 250% 200% 150% 100...

  • Page 5
    ... e-commerce strategy, site development and hosting, order and transaction management, system integration, product fulfillment and returns, e-marketing and customer service.With over 450 employees, Digital R iver is headquartered near Minneapolis and has offices in Chicago, R aleigh, Seattle and...

  • Page 6
    ...true value that our e-commerce outsourcing model offers to their various businesses. Digital R iver's mission is to be the leading global e-commerce and operations for our clients, but we are also committed to and highly focused on growing their sales. We help companies quickly and profitably manage...

  • Page 7
    achieved a key financial milestone " We by meeting our profitability targets for 2001.We will continue to stay the course, focus on our business' growth drivers and capitalize on future trends and opportunities. " Joel A. Ronning Chief Executive O fficer 5 Joel A. Ronning - Chief Executive O ...

  • Page 8
    ... flat, on an absolute basis, and improved margins. 1. Manage increases in our top line relative to growth in For the year ended December 31, 2001, Digital R iver's revenues our employee base. R evenue growth outpaced the growth in employees at Digital R iver by four-fold last year. last year. For...

  • Page 9
    ...an absolute basis. Technology Platform One of our top priorities at Digital R iver last year was to commence development of our next generation e-commerce platform named Digital R iver X-Streamâ„¢.These efforts focus on two key initiatives.The first is to build a new e-commerce system based on J2EE...

  • Page 10
    ... new clients. Digital R iver has already established its leadership position in the first vertical market that we served, software and digital commerce, and will continue to build market share among a broader base of manufacturers, distributors and retailers. • T he organic growth of the Internet...

  • Page 11
    ... Internet as a direct sales channel that offers closer customer relationships and increased efficiencies and revenues. Despite all the events that happened in the past year, we emerged a strong company in an enviable market position. We have a world-class infrastructure and a strong management team...

  • Page 12
    ... achieved exceptional revenue growth while controlling expenses, managing cash flow and increasing our operational efficiencies. Digital R iver's growth has been driven by four key strategies: taking advantage of the organic growth of the Internet; winning new clients; executing revenue-generating...

  • Page 13
    11

  • Page 14
    ...offer creative ways to entice users to shop online, such as permission-based e-mail marketing.When customers are online, we employ purchasing techniques such as site merchandising to make it easy for them to shop and buy, and 24x7 on- and off-line customer service to answer customers' questions. 12

  • Page 15
    13 Samuel Morse's Telegraph was first used on May 24, 1844.

  • Page 16
    ... largest industry, software and digital product manufacturers, we've created a number of tools and services to help clients leverage our vast client network through joint sales and marketing efforts. We also expanded our international capabilities to handle money orders, wire transfers and AccepGiro...

  • Page 17
    15 The first call on Alexander Graham Bell's Telephone was made June 3, 1875.

  • Page 18
    ... sizes and close sales ratios. Another key player in this team is the Digital R iver Account Development Manager (ADM). The ADM is the primary resource our clients go to for everything they do or need at Digital River, including all e-marketing and merchandising activities. As ADMs help clients use...

  • Page 19
    17 Nikola Tesla's experiments with high frequency electric currents in 1893 are the first demonstration of wireless communication.

  • Page 20
    ... also bring to Digital R iver new service capabilities and give us the ability to offer lower-cost and self-directed services to the SME market.As a result, we meet a broad range of e-business and commerce needs ranging from enterprise-wide solutions for Fortune 1000 corporations to solutions for...

  • Page 21
    19 Early computer users c. 1946.

  • Page 22
    ..., product searching, contract pricing, quoting, payment processing, customer service and payment settlement. By adding a packaged solution to our core offering, we can now offer any company the option to buy our solution and manage it in-house by themselves or outsource their entire e-commerce...

  • Page 23
    21 In 1926, Clarence W. Hansell experimented with the use of quartz fibers to transmit light. His experiments are the basis for modern fiber optics.

  • Page 24
    22

  • Page 25
    Financial Section Digital R iver 2001 Annual Report 23

  • Page 26
    ...expense shown separately below): Direct cost of services Network and infrastructure Sales and marketing Product research and development General and administrative Depreciation and amortization Amortization of goodwill and other intangibles and acquisition related costs Total costs and expenses Loss...

  • Page 27
    ... of goodwill and other intangibles and acquisition related costs of $5,394, $4,334, 2,603 and $3,056 in the quarters ended March 31, June 30, September 30 and December 31, 2000, respectively. (c) Net loss per share is the same for both basic and diluted. 25 Digital River 2001 Annual Report

  • Page 28
    ... 2001, the Company had approximately 10,000 software publisher clients and online retailer clients served by the Software and Digital Commerce Services Division. In late 1998, the Company began to offer its comprehensive electronic commerce outsourcing services in the form of a transaction fee-based...

  • Page 29
    ...develop new relationships with software publishers, online retailers and E-Business Services clients, 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...

  • Page 30
    ... include Web commerce hosting, transaction processing, digital and physical fulfillment services, fraud screening, customer service and merchandising and analytical marketing services.The Company reports its revenue on a net basis and therefore records only the net transaction fees and service fees...

  • Page 31
    ... items from the Company's consolidated statements of operations as a percentage of total revenue for the years indicated. 2001 R evenue Costs and expenses: Direct cost of services Network and infrastructure Sales and marketing Product research and development General and administrative Depreciation...

  • Page 32
    ...62.4% in 2000.The Company believes that Internet commerce and related services may become more competitive in the future. Accordingly, the Company may reduce or alter its pricing structure and policies in the future and any such change could reduce gross margins. 30 Digital River 2001 Annual Report

  • Page 33
    ...card transaction fees of $2.7 million. As a percentage of revenue, sales and marketing expense decreased to 47.5% in 2001 from 82.4% in 2000 and 119.8% in 1999, primarily reflecting the Company's increased revenue. In 2001, the sales and marketing expense related to the Software and Digital Commerce...

  • Page 34
    ... in 1999, primarily reflecting the Company's increased revenue. In 2001 and 2000, general and administrative expense related to the Software and Digital Commerce Services Division was $3.2 million. In 2001, general and administrative expense for the E-Business Services Division was $1.5 million, up...

  • Page 35
    ... 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. In 2001, the Company expended $267,000 to repurchase its shares. 33 Digital River 2001 Annual Report

  • Page 36
    ...; goodwill and intangible assets with indefinite lives are not amortized but tested for impairment annually, except in certain circumstances, and whenever there is an impairment indicator; all acquired goodwill must be assigned to reporting units for purposes of 34 Digital River 2001 Annual Report

  • Page 37
    ... after December 15, 2001.The provisions of this statement provide a single accounting model for impairment of long-lived assets.The Company anticipates that this new standard will not have a material impact on its financial position or results of operations. 35 Digital River 2001 Annual Report

  • Page 38
    ... Accounts payable Accrued payroll Deferred revenue O ther accrued liabilities Total current liabilities CO MMITMENTS AND CO NTINGENCIES (Notes 2 and 4) STO CKHO LDER S' EQUITY: Preferred Stock, $.01 par value; 5,000,000 shares authorized; no shares issued or outstanding Common Stock, $.01 par value...

  • Page 39
    ... shown separately below): Direct cost of services Network and infrastructure Sales and marketing Product research and development General and administrative Depreciation and amortization Amortization of goodwill and other intangibles acquisition related costs (Note 2) Total costs and expenses LO...

  • Page 40
    ...Shares BALANCE, D ecember 31, 1998 Common Stock issued for acquisitions and earn-out arrangements Net Common Stock exchanged in Tech Squared transaction Exercise of stock options and warrants Deferred compensation related to stock options granted for services.... 38 Digital River 2001 Annual Report

  • Page 41
    ... for the Years Ended December 31 Accumulated Other Comprehensive Loss D eferred Compensation Accumulated D eficit Total Stockholders' Equity Comprehensive Loss $(1,368) (110) 841 (637) 443 (194) 157 $...$ 140 (38,116) $ (37,976) $ (162) (27,653) $ (27,815) 39 Digital River 2001 Annual Report

  • Page 42
    ... Accounts payable 2,916 Accrued payroll and other accrued liabilities (1,884) Net cash provided by (used in)operating activities INVESTING ACTIVITIES: Purchases of investments Sales / maturities of investments Cash paid for acquisitions, net of cash received Purchases of equipment Patent acquisition...

  • Page 43
    ... Accounting Policies: Digital R iver, 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...

  • Page 44
    ... the straight-line method of amortization once the patent application is filed. Patents are included in other assets on the accompanying consolidated balance sheets, net of accumulated amortization of $400,000 and $352,000 42 as of December 31, 2001 and 2000. Digital River 2001 Annual Report

  • Page 45
    ...with the e-commerce services provided to its clients.These services include Web commerce hosting, transaction processing, digital and physical fulfillment services, fraud screening, customer service and merchandising and analytical marketing services.The Company acts as the merchant of record on the...

  • Page 46
    ... there is an impairment indicator; all acquired goodwill must be assigned to reporting units for purposes of impairment testing; and effective January 1, 2002, goodwill from acquisitions initiated prior to July 1, 2001 is no longer subject to amortization. 44 Digital River 2001 Annual Report

  • Page 47
    ...for 727,939 shares of Common Stock valued at $4,301,000 plus $964,000 in cash.The value of the Common Stock was based on the closing market price on the date the transaction was consummated.The Company will amortize intangible assets acquired, consisting of customer base, non-compete agreements, and...

  • Page 48
    ... will be recorded as additional goodwill. In March 2001, the Company purchased the Market Maker assets of Calico Commerce, Inc. ("Calico") in exchange for 1,630,368 shares of Common Stock valued at $7,846,000 plus direct expenses.The value of the Common Stock was based on the closing market price on...

  • Page 49
    ... presentation purposes, the impact of this transaction was to reduce Common Stock outstanding by 350,000 shares and is presented on the accompanying Consolidated Statement of Stockholders' Equity net of expenses incurred in conjunction with the transaction. 47 Digital River 2001 Annual Report

  • Page 50
    ... the Internal R evenue Code. 4. Commitments and Contingencies: Leases The Company has six facility leases in addition to leasing certain computer equipment.Total rent expense, including common area maintenance charges, recognized under all leases was $1,367,000, Digital River 2001 Annual Report 48

  • Page 51
    ... New York.These actions include (1) Whalen v. Digital R iver, Inc., et al., Case No. 01-CV7355; and (2) Nicolois v. Digital R iver, Inc., et al., Case No. 01-CV-7992. Similar complaints were filed in the same Court against hundreds of other public companies that conducted IPO s of their common stock...

  • Page 52
    ... Company granted options to purchase 605,882 shares of Common Stock at an exercise price of $8.50 per share to certain members of management outside of both plans during 1998. At December 31, 2001, options outstanding outside of both plans totaled 13,529 shares. 50 Digital River 2001 Annual Report

  • Page 53
    ...deemed fair value of the Company's Common Stock on options to purchase 454,468 shares at exercise prices of $3.00 to $7.50 issued during May and June 1998. During 1999, the Company recognized $110,000 in expense related to options granted for consulting services. 51 Digital River 2001 Annual Report

  • Page 54
    ... under the plan.Total shares purchased by employees under the plan were 182,000 and 113,000 in the years ended December 31, 2001 and 2000, respectively. 7. Segment Information: The Company has two operating segments, Software and Digital Commerce Services and E-Business Services, which have been...

  • Page 55
    ... arbitration alleges breach of contract and tortious interference claims against the Company.The prayer for relief requests R M 28,809,137.09 (R ingit Malaysia or approximately US $7,581,150) plus pre-judgment interest, punitive damages, all legal costs and other 53 Digital River 2001 Annual Report

  • Page 56
    ... valued as described above). Of the shares issued at closing, 70,000 shares were placed in an escrow to secure certain indemnification obligations contained in the Agreement. Subject to outstanding claims, the escrow will terminate 90 days following the closing. 54 Digital River 2001 Annual Report

  • Page 57
    ...the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Minneapolis, Minnesota, January 28, 2002 55 Digital River 2001 Annual Report

  • Page 58
    ... The company's Annual Meeting of stockholders will be held at 3:30pm on Monday, May 20, 2002, at the R adisson Plaza Hotel 35 South 7th Street Minneapolis, MN. Corporate Headquarters 9625 West 76th Street Suite 150 Eden Prairie, MN 55344 Joel A. Ronning (3) Chief Executive O fficer Digital R iver...

  • Page 59
    Digital R iver Inc. Staying Focused for the Future Digital River 2001 Annual Report

  • Page 60
    D igital River, Inc. Corporate Headquarters 9625 West 76th Street, Suite 150 Eden Prairie, Minnesota 55344 952.253.1234 International Office 9 The Pavilions R uscombe Business Park Twyford, Berkshire R G10 9NN United Kingdom + 44(0)118.934.6100 www.digitalriver.com