Digital River 2002 Annual Report Download - page 59

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As of December 31, 2002, the Company had net operating loss carryforwards of approximately $81,700,000. 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.
The components of deferred income taxes are as follows:
2002 2001
N et oper ating loss c ar ryf or wa r ds......................... $ 32,490,00
0
$ 32,136,000
N onde duc tible r e se rve s and a cc r ua ls................... 1,972,00
0
369,00
0
D epre c ia tion and a mor tiza tion ............................. 4,503,00
0
4,656,00
0
V alua tion a llow a nc e............................................... ( 38,965,000) ( 37,161,000)
$
—
$—
O wner ship c ha nge s re sulting fr om the issuance of a dditiona l e quity w ill limit futur e a nnua l r ea liz ation of the ta x net
ope ra ting loss c ar ryf or wa r ds to a spec if ied pe rc entage of the value of the Compa ny under Se ction 382 of the Inter na l
Revenue Code.
5. Com mitm e nt s and C ont ingencie s:
Leases
T he Company c ur r ently has four fa cility lea se s in a ddition to lea sing c er ta in compute r e quipment unde r non-c anc elable
ope ra ting lea se s. Total r e nt e xpe nse , inc luding common a re a mainte na nc e c ha r ge s, re cognize d unde r all lea ses w a s
$1,652,000, $1,367,000, a nd $839,000 f or the yea rs ende d D ec e mber 31, 2002, 2001 and 2000, re spe ctive ly. T he
minimum annua l r ents unde r long-ter m lea ses a t D ec e mber 31, 2002 w er e a s follows:
Y ear e nding D ec e mber 31,....
2003............................................. $ 1,103,00
0
2004............................................. 745,00
0
2005............................................. 468,00
0
$ 2,316,00
0
Lit igation
On February 27, 2002, ePedas initiated arbitration before the American Arbitration Association against the Company.
The demand for arbitration alleged breach of contract and tortious interference claims against the Company. The case
was transferred to the International Section of the American Arbitration Association. The matter was settled by way of
a settlement agreement executed on October 22, 2002, and the arbitration was dismissed on November 12, 2002.
In April 2002, we, along with RegSoft.com, Inc., a subsidiary of the Company, and Register Now!, a division of the
Company, and other various defendants, became party to patent litigation, regarding United States Patent No.
4,500,919 assigned to the Massachusetts Institute of Technology (hereinafter “MIT”) by the inventor William F.
Schreiber of Cambridge, Massachusetts. MIT licensed the patent to Electronics for Imaging, Inc. and the parties jointly
filed a lawsuit in the U.S. District Court in the Eastern District of Texas. The suit is still pending. Upon the
determination of the claims’ scope, the Company may file for a dismissal of the case if the court construes the patent
claims consistently with our position. The Company believes these lawsuits are without merit and intend to defend
against them vigorously.
In August 2001, the Company and certain of its 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. These actions
include (1) Whalen v. Digital River, Inc., et al., Case No. 01-CV-7355; and (2) Nicolois v. Digital River, Inc., et al.,
Case No. 01-CV-7992. Similar complaints were filed in the same Court against hundreds of other public companies
that conducted IPOs of their common stock in the late 1990s. In each of these complaints, the plaintiffs allege that the
Company, certain of its officers and directors and its IPO underwriters violated the federal securities laws because the
Company’ s IPO registration statement and prospectus contained untrue statements of material fact or omitted material
facts regarding the compensation to be received by, and the stock allocation practices of, the IPO underwriters. The
plaintiffs seek unspecified monetary damages and other relief. The Company believes these lawsuits are without merit
and intend to defend against them vigorously.