** **

**SECURITIES ANDEXCHANGE COMMISSION********Washington, D.C. 20549**

** **

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** **

**FORM 10-Q**

 

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** **

| **ý**                                         |   | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|----------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|                                               |   |                                                                                          |
| **FOR THE QUARTERLY  PERIOD ENDED MARCH 31, 2004** |
|                                               |   |                                                                                          |
| **OR**                                             |
|                                               |   |                                                                                          |
| **o**                                              |   | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**FOR THE TRANSITIONPERIOD FROM         TO         **

** **

**Commission filenumber 000-24643**

** **

**DIGITAL RIVER, INC.**

(Exact name of registrant as specifiedin its charter)

 

| **DELAWARE**                                                    |   | **41-1901640**                           |
|-----------------------------------------------------------------|--------|------------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification Number) |

 

**9625 WEST 76THSTREET, SUITE 150EDEN PRAIRIE, MINNESOTA 55344**(Address of principal executive offices)

** **

**(952) 253-1234**(Registrant’s telephone number, including area code)

 

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Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes ý No o

 

Indicate by check mark whether theregistrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes ý No o

 

Indicate the number of shares outstanding of each of theissuer’s classes of common stock, as of the latest practical date.

 

| **COMMON STOCK, $0.01  PAR VALUE** |   | **31,871,036 SHARES**            |
|------------------------------------|--------|----------------------------------|
| (Class)                            |   | Outstanding as of April 30, 2004 |

 

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DIGITAL RIVER, INC.

 Form 10-Q

Index

 
| PART I.       |   | FINANCIAL INFORMATION                                                                                |   |
|---------------|--------|------------------------------------------------------------------------------------------------------|--------|
|          |   |                                                                                                 |   |
| Item 1.       |   | Financial Statements                                                                                 |   |
|          |   |                                                                                                 |   |
|          |   | Condensed  Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003                    |   |
|          |   |                                                                                                 |   |
|          |   | Condensed  Consolidated Statements of Operations for the three months ended March 31,  2004 and 2003 |   |
|          |   |                                                                                                 |   |
|          |   | Condensed  Consolidated Statements of Cash Flows for the three months ended March 31,  2004 and 2003 |   |
|          |   |                                                                                                 |   |
|          |   | Notes  to Condensed Consolidated Financial Statements                                                |   |
|          |   |                                                                                                 |   |
| Item 2.       |   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations          |   |
|          |   |                                                                                                 |   |
| Item 3.       |   | Qualitative and Quantitative Disclosure about  Market Risk                                           |   |
|          |   |                                                                                                 |   |
| Item 4.       |   | Controls and Procedures                                                                              |   |
|          |   |                                                                                                 |   |
| PART II.      |   | OTHER INFORMATION                                                                                    |   |
|          |   |                                                                                                 |   |
| Item 1.       |   | Legal Proceedings                                                                                    |   |
|          |   |                                                                                                 |   |
| Item  2.      |   | Changes  in Securities, Use of Proceeds and Issuer Purchases of Equity Securities                    |   |
|          |   |                                                                                                 |   |
| Item  5.      |   | Other Information                                                                                    |   |
|          |   |                                                                                                 |   |
| Item 6.       |   | Exhibits and Reports on Form 8-K                                                                     |   |
|          |   |                                                                                                 |   |
| SIGNATURES    |   |                                                                                                 |   |
|          |   |                                                                                                 |   |
| EXHIBIT INDEX |   |

 

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**PARTI****.  FINANCIALINFORMATION**

 

**Item1****.  FinancialStatements**

**DIGITALRIVER, INC.**

CONDENSEDCONSOLIDATED BALANCE SHEETS

(in thousands,except share data)

 
|                                                                                                                 |   | **March 31,  2004** |    | **December  31,  2003** |   |
|----------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|-------------------------|--------|
|                                                                                                                 |   | **(unaudited)**     |    |                    |   |
| **ASSETS**                                                                                                           |   |                |    |                    |   |
| CURRENT ASSETS:                                                                                                      |   |                |    |                    |   |
| Cash and cash equivalents                                                                                            |   | $                   | 105,503 |                    | $      | 101,878 |   |
| Short-term investments                                                                                               |   | 45,016              |    | 30,044                  |   |
| Accounts receivable, net of allowance of $386 and $319                                                               |   | 9,158               |    | 9,306                   |   |
| Prepaid expenses and other                                                                                           |   | 1,620               |    | 1,589                   |   |
|                                                                                                                 |   |                |    |                    |   |
| Total current assets                                                                                                 |   | 161,297             |    | 142,817                 |   |
|                                                                                                                 |   |                |    |                    |   |
| PROPERTY AND EQUIPMENT:                                                                                              |   |                |    |                    |   |
| Property and equipment                                                                                               |   | 34,558              |    | 32,433                  |   |
| Less accumulated depreciation                                                                                        |   | (19,410             | )       | (17,799                 | )      |
|                                                                                                                 |   |                |    |                    |   |
| Net property and equipment                                                                                           |   | 15,148              |    | 14,634                  |   |
| GOODWILL                                                                                                             |   | 23,921              |    | 23,921                  |   |
| INTANGIBLE ASSETS, net of accumulated amortization of $21,555 and  $19,976                                           |   | 7,493               |    | 8,172                   |   |
| OTHER ASSETS                                                                                                         |   | 113                 |    | 114                     |   |
|                                                                                                                 |   | $                   | 207,972 |                    | $      | 189,658 |   |
|                                                                                                                 |   |                |    |                    |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                       |   |                |    |                    |   |
| CURRENT LIABILITIES:                                                                                                 |   |                |    |                    |   |
| Accounts payable                                                                                                     |   | $                   | 49,717  |                    | $      | 41,814 |   |
| Accrued payroll                                                                                                      |   | 2,218               |    | 2,825                   |   |
| Deferred revenue                                                                                                     |   | 3,581               |    | 3,572                   |   |
| Other accrued liabilities                                                                                            |   | 11,120              |    | 9,595                   |   |
|                                                                                                                 |   |                |    |                    |   |
| Total current liabilities                                                                                            |   | 66,636              |    | 57,806                  |   |
|                                                                                                                 |   |                |    |                    |   |
| STOCKHOLDERS’ EQUITY:                                                                                           |   |                |    |                    |   |
| Preferred Stock, $.01 par value; 5,000,000 shares authorized; no  shares issued or outstanding                       |   | —              |    | —                  |   |
| Common Stock, $.01 par value; 60,000,000 shares authorized;  31,714,597 and 31,497,719 shares issued and outstanding |   | 317                 |    | 315                     |   |
| Additional paid-in capital                                                                                           |   | 219,876             |    | 217,981                 |   |
| Accumulated deficit                                                                                                  |   | (78,873             | )       | (86,488                 | )      |
| Accumulated other comprehensive income                                                                               |   | 16                  |    | 44                      |   |
| Total stockholders’ equity                                                                                      |   | 141,336             |    | 131,852                 |   |
|                                                                                                                 |   |                |    |                    |   |
|                                                                                                                 |   | $                   | 207,972 |                    | $      | 189,658 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**DIGITALRIVER, INC.**

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands,except per share data; unaudited)

 
|                                       |   | **Three  Months Ended  March 31,** |   |
|--------------------------------------------|--------|------------------------------------|--------|
|                                       |   | **2004**                           |   | **2003** |   |
|                                       |   |                               |   |   |   |
| REVENUE                                    |   | $                                  | 31,855 |   | $ | 24,600 |   |
| COST OF REVENUE:                           |   |                               |   |   |   |
| Direct cost of services                    |   | 618                                |   | 942 |   |
| Network and infrastructure                 |   | 3,300                              |   | 2,946 |   |
| GROSS MARGIN                               |   | 27,937                             |   | 20,712 |   |
|                                       |   |                               |   |   |   |
| OPERATING EXPENSES:                        |   |                               |   |   |   |
| Sales and Marketing                        |   | 11,468                             |   | 9,272 |   |
| Product Research and Development           |   | 2,924                              |   | 2,388 |   |
| General and administrative                 |   | 2,837                              |   | 2,291 |   |
| Depreciation and amortization              |   | 1,611                              |   | 1,588 |   |
| Amortization of acquisition related costs  |   | 1,579                              |   | 1,221 |   |
|                                       |   |                               |   |   |   |
| Total operating expenses                   |   | 20,419                             |   | 16,760 |   |
|                                       |   |                               |   |   |   |
| INCOME FROM OPERATIONS                     |   | 7,518                              |   | 3,952 |   |
| INTEREST INCOME                            |   | 97                                 |   | 70 |   |
|                                       |   |                               |   |   |   |
| NET INCOME                                 |   | $                                  | 7,615  |   | $ | 4,022 |   |
|                                       |   |                               |   |   |   |
| NET INCOME PER SHARE                       |   |                               |   |   |   |
| BASIC                                      |   | $                                  | 0.24   |   | $ | 0.15 |   |
| DILUTED                                    |   | $                                  | 0.22   |   | $ | 0.13 |   |
|                                       |   |                               |   |   |   |
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING |   |                               |   |   |   |
| BASIC                                      |   | 31,620                             |   | 27,609 |   |
| DILUTED                                    |   | 35,059                             |   | 30,410 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**DIGITALRIVER, INC.**

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands;unaudited)

 
|                                                                               |   | **Three  Months Ended  March 31,** |    |
|------------------------------------------------------------------------------------|--------|------------------------------------|---------|
|                                                                               |   | **2004**                           |    | **2003** |   |
| OPERATING ACTIVITES:                                                               |   |                               |    |   |   |
| Net income                                                                         |   | $                                  | 7,615   |   | $ | 4,022 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |   |                               |    |   |   |
| Other intangibles amortization and earn-out charges                                |   | 1,579                              |    | 1,221 |   |
| Depreciation and amortization                                                      |   | 1,611                              |    | 1,588 |   |
| Change in operating assets and liabilities:                                        |   |                               |    |   |   |
| Accounts receivable                                                                |   | 147                                |    | (291 | ) |
| Prepaid and other assets                                                           |   | (931                               | )       | 101 |   |
| Accounts payable                                                                   |   | 7,904                              |    | 4,040 |   |
| Deferred revenue                                                                   |   | 8                                  |    | (473 | ) |
| Accrued payroll and other accrued liabilities                                      |   | 1,213                              |    | 797 |   |
| Net cash provided by operating activities                                          |   | 19,146                             |    | 11,005 |   |
|                                                                               |   |                               |    |   |   |
| INVESTING ACTIVITIES:                                                              |   |                               |    |   |   |
| Purchases of investments                                                           |   | (15,000                            | )       | — |   |
| Cash paid for acquisitions, net of cash received                                   |   | (294                               | )       | (2,267 | ) |
| Purchases of equipment                                                             |   | (2,124                             | )       | (1,103 | ) |
| Net cash used in investing activities                                              |   | (17,418                            | )       | (3,370 | ) |
|                                                                               |   |                               |    |   |   |
| FINANCING ACTIVITIES:                                                              |   |                               |    |   |   |
| Exercise of stock options and warrants                                             |   | 1,470                              |    | 359 |   |
| Sales of common stock under employee stock purchase plan                           |   | 427                                |    | 394 |   |
| Net cash provided by financing activities                                          |   | 1,897                              |    | 753 |   |
|                                                                               |   |                               |    |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                          |   | 3,625                              |    | 8,388 |   |
| CASH AND CASH EQUIVALENTS, beginning of period                                     |   | 101,878                            |    | 40,801 |   |
|                                                                               |   |                               |    |   |   |
| CASH AND CASH EQUIVALENTS, end of period                                           |   | $                                  | 105,503 |   | $ | 49,189 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**DIGITALRIVER, INC.**

# **NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

(Amounts in thousands, except pershare data)

 

**1.BASIS OF PRESENTATION**

 

The unaudited condensed consolidatedfinancial statements included herein reflect all adjustments,  including normal recurring adjustments,which in our opinion are necessary to fairly state our consolidated financialposition, results of operations and cash flows for the periods presented. These condensed consolidated financial statements should be read in conjunctionwith our audited consolidated financial statements included in our Form 10-Kfor the year ended December 31, 2003 as filed with the Securities and ExchangeCommission. The results ofoperations for the three months ended March 31, 2004 are not necessarilyindicative of the results to be expected for any subsequent quarter or for theentire fiscal year ending December 31, 2004.  The December 31, 2003balance sheet was derived from audited financial statements, but does notinclude all disclosures required by accounting principles generally accepted inthe United States.

 

**2. PRINCIPLES OFCONSOLIDATION**

 

The condensed consolidated financialstatements include the accounts of Digital River, Inc. and our whollyowned subsidiaries. All intercompany balances and transactions have beeneliminated in consolidation.

 

**3. NET INCOME PERSHARE**

 

The table below sets forth the computation of basic anddiluted net income per share:

 
|                                               |   | **Three  Months Ended  March 31,** |   |
|----------------------------------------------------|--------|------------------------------------|--------|
|                                               |   | **2004**                           |   | **2003** |   |
| Numerator:                                         |   |                               |   |   |   |
| Net income                                         |   | $                                  | 7,615  |   | $ | 4,022 |   |
|                                               |   |                               |   |   |   |
| Denominator:                                       |   |                               |   |   |   |
| Basic — weighted average shares outstanding   |   | 31,620                             |   | 27,609 |   |
| Effect of dilutive securities:                     |   |                               |   |   |   |
| Employee stock options and warrants                |   | 3,439                              |   | 2,801 |   |
| Diluted — weighted average shares outstanding |   | 35,059                             |   | 30,410 |   |
|                                               |   |                               |   |   |   |
| Basic — net income per share                  |   | $                                  | 0.24   |   | $ | 0.15 |   |
|                                               |   |                               |   |   |   |
| Diluted — net income per share                |   | $                                  | 0.22   |   | $ | 0.13 |   |

 

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**4.GOODWILL AND INTANGIBLE ASSETS**

 

We account for our goodwill in accordancewith SFAS No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 142 precludes the amortization ofgoodwill and intangible assets with indefinite lives, but these assets arereviewed annually (or more frequently if impairment indicators arise) forimpairment.

 

We complete our annual impairment test, inthe fourth quarter of each fiscal year, using a two-step approach and reassessany intangible assets, including goodwill, recorded in connection with earlieracquisitions.

 

Information regarding our otherintangible assets is as follows:

 
|                   |   | **As of  March 31, 2004**   |   |
|------------------------|--------|-----------------------------|--------|
|                   |   | **Carrying  amount  Gross** |   | **Accumulated  amortization** |   | **Net** |   |
|                   |   |                        |   |   |   |   |   |
| Customer relationships |   | $                           | 17,388 |   | $ | 12,353 |   | $ | 5,035 |   |
| Non-compete agreements |   | 3,850                       |   | 3,167 |   | 683 |   |
| Technology/tradename   |   | 7,810                       |   | 6,035 |   | 1,775 |   |
| Total                  |   | $                           | 29,048 |   | $ | 21,555 |   | $ | 7,493 |   |

 
|                   |   | **As of  December 31, 2003** |   |
|------------------------|--------|------------------------------|--------|
|                   |   | **Carrying  amount  Gross**  |   | **Accumulated  amortization** |   | **Net** |   |
|                   |   |                         |   |   |   |   |   |
| Customer relationships |   | $                            | 16,488 |   | $ | 11,405 |   | $ | 5,083 |   |
| Non-compete agreements |   | 3,850                        |   | 2,992 |   | 858 |   |
| Technology/tradename   |   | 7,810                        |   | 5,579 |   | 2,231 |   |
| Total                  |   | $                            | 28,148 |   | $ | 19,976 |   | $ | 8,172 |   |

 

Amortization expense for the threemonths ended March 31, 2004 and 2003 was $1,579 and $1,221, respectively. Estimated amortization expense for the remaining life of the intangible assets,based on intangible assets as of March 31, 2004, is as follows:

 

| **Year** |   |   |   |   |
|----------|--------|--------|--------|--------|
| 2004     |   | $      | 3,572  |   |
| 2005     |   | 2,464  |   |
| 2006     |   | 1,382  |   |
| 2007     |   | 75     |   |
| Total    |   | $      | 7,493  |   |

 

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**5.  STOCK BASED COMPENSATION**

 

At March 31,2004, we had two stock-based employee compensation plans, which are describedmore fully in our 2003 Annual Report Note 7. We account for these plans under the recognition and measurementprinciples of Accounting Principles Board (APB) Opinion No. 25, “Accounting forStock Issued to Employees,” and related Interpretations.  No stock-based employee compensation cost isreflected in net income, as all options granted under these plans had anexercise price equal to the market value of the underlying common stock on thedate of the grant.

 

We have elected to apply the disclosure-onlyprovisions of SFAS No. 123, “Accounting for Stock-Based Compensation” asamended by SFAS No. 148. Accordingly, we account for stock-based compensationusing the intrinsic value method prescribed in APB Opinion No. 25,“Accounting for Stock Issued to Employees,” and related interpretations.Compensation cost for stock options is measured as the excess, if any, of thefair value of our common stock at the date of grant over the stock optionexercise price. 

 

The following table illustrates the effect onnet income and net income per share if we had applied the fair valuerecognition provision of Financial Accounting Standards Board Statement No.123, “Accounting for Stock-Based Compensation,” to stock-based employeecompensation.

 
|                                                                                            |   | **Three  Months Ended March 31,** |   |
|-------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                            |   | **2004**                          |   | **2003** |   |
| Net income, as reported                                                                         |   | $                                 | 7,615  |   | $ | 4,022 |   |
| Add: Stock-based compensation, as reported                                                      |   | —                            |   | — |   |
| Deduct: Total stock-based compensation determined under fair value  based method for all awards |   | (5,974                            | )      | (2,762 | ) |
|                                                                                            |   |                              |   |   |   |
| Adjusted net income, fair value method for all stock-based awards                               |   | $                                 | 1,641  |   | $ | 1,260 |   |
|                                                                                            |   |                              |   |   |   |
| Basic income per share — as reported                                                       |   | $                                 | 0.24   |   | $ | 0.15 |   |
| Diluted income per share — as reported                                                     |   | $                                 | 0.22   |   | $ | 0.13 |   |
| Basic income per share – SFAS No. 123 adjusted                                             |   | $                                 | 0.05   |   | $ | 0.05 |   |
| Diluted income per share - SFAS No. 123 adjusted                                                |   | $                                 | 0.05   |   | $ | 0.04 |   |

 

The fair value of each option grant isestimated on the date of grant using the Black-Scholes option pricing modelusing the following weighted average assumptions:

** **
|                    |   | **Three  Months Ended March 31,** |   |
|-------------------------|--------|-----------------------------------|--------|
|                    |   | **2004**                          |   | **2003** |   |
| Risk-free interest rate |   | 4%                                |   | 3% |   |
| Expected life (years)   |   | 1-3                               |   | 5 |   |
| Volatility factor       |   | 1.3                               |   | 1.4 |   |
| Expected dividends      |   | —                            |   | — |   |

 

8

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** **

**6.ACQUISITIONS AND EARN-OUT ARRANGEMENTS**

 

During the three months ended March31, 2003, we acquired certain assets and liabilities of Metatec International,Inc. and Hartsell Holdings, Inc., d/b/a/ Infocon America Corporation.

 

The following unaudited pro formacondensed results of operations for the three months ended March 31, 2004 and2003 have been prepared as if each of the acquisitions from the three monthsended March 31, 2003 had occurred on January 1, 2003.

 
|                         |   | **Three  Months Ended  March 31,** |   |
|------------------------------|--------|------------------------------------|--------|
|                         |   | **2004**                           |   | **2003** |   |
|                         |   |                               |   |   |   |
| Revenue                      |   | $                                  | 31,855 |   | $ | 24,736 |   |
| Income from operations       |   | 7,518                              |   | 3,867 |   |
| Net income                   |   | 7,615                              |   | 3,937 |   |
|                         |   |                               |   |   |   |
| Basic net income per share   |   | $                                  | 0.24   |   | $ | 0.14 |   |
| Diluted net income per share |   | $                                  | 0.22   |   | $ | 0.13 |   |

 

This financial information does notpurport to represent results that would actually have been obtained if thetransactions had been completed on January 1, 2003 or any future results thatmay be realized.

 

**7.   SUBSEQUENT EVENTS**

 

On April 19, 2004, we announced thatwe signed a definitive agreement to acquire element 5 AG, a privately heldcompany based in Germany.  Under theterms of the agreement, we paid $120 million in cash to acquire all of theoutstanding shares of capital stock of element 5.  We also may pay up to an additional $2.5 million in cash based onelement 5’s operating performance over the first twenty-four months subsequentto the acquisition.   In connection with the acquisition ofelement 5, we established a $45 million secured revolving credit facilitywith Harris Trust and Savings Bank.  We may terminate the facility at anytime prior to the scheduled maturity date of July 15, 2005 withoutpenalty.  We may borrow at various rates, including prime or LIBORplus 2.5%.  The facility includes various covenants, including limits onour ability to incur debt and grant liens on our assets, and financial covenantsregarding EBITDA, leverage ratios and capital expenditures.  Amountsoutstanding under the facility in excess of $30 million must be cashcollateralized.  The facility is also secured by a pledge of certaininvestment accounts, receivables and other assets.  As of May 4, 2004, the principal amount of outstanding loansunder the facility was approximately $5 million.

 

9

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**Item2****.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

*We note that, exceptfor the historical information contained herein, the matters discussed belowcontain forward-looking statements that involve known and unknown risks,uncertainties and other factors that may cause our actual results, performanceor achievements, or industry results, to be materially different from anyfuture results, performance or achievements expressed or implied by suchforward-looking statements.  We expressly disclaim any obligation toupdate this information or publicly release any revision or reflect events orcircumstances after the date of this report.  Such factors include, amongothers: our limited operating history and variability of operatingresults, possibility of future losses, risks associated with electronic softwaredelivery, dependence on the Internet and growth in electronic commerce andInternet infrastructure development, dependence on software publishers,dependence on online retailers, system development and electronic commercesecurity risks, rapid technological changes, competition in the electroniccommerce industry, the importance of attracting and retaining personnel,management of our growth, integration of acquired companies, dependence on keyemployees and other risk factors referenced in our Form 10-K for the year endedDecember 31, 2003.*

 

**Overview**

 

We are a provider of comprehensiveelectronic commerce outsourcing solutions. We were incorporated inFebruary 1994 and commenced offering products for sale through ourclients’ Web stores in August 1996. From inception throughAugust 1996, we had no sales, and our activities related primarily to thedevelopment of our proprietary technology platform, known as CNS. In 1996, webegan to focus our business development efforts on the software industry,building our inventory of software products through contracts with softwarepublishers. In 1997, we began to develop software distribution relationshipsthrough contracts with online retailers. As of March 31**,**2004, we had more than 23,000 softwarepublisher clients and online channel partners. In late 1998, we began to offerour comprehensive electronic commerce outsourcing services in the form of atransaction fee-based e-commerce service to clients outside of the softwareindustry. As of March 31, 2004, we were providing electronic commerce servicessuch as Web commerce development and hosting, transaction processing, fraudscreening, digital delivery, integration to physical fulfillment, merchandisingservices, analytical marketing and customer service to over 140 physical goodsclients, as well as operating nearly 12,000 small business physical goodssites.

 

Prior to January 1, 2004, we managedour physical goods clients through a division (formerly our E-Business ServicesDivision) that was separate from our Software and Digital Commerce ServicesDivision.  Beginning January 1, 2004,this divisional structure was consolidated, and we announced that we will nolonger report our activities as separate business segments.  Nonetheless, we remain committed to servingexisting and new clients in the important vertical market of physical goods.

 

We have approximately seven years ofoperating history upon which investors may evaluate our business and prospects.Until 2003, we incurred significant operating losses, and as of March 31, 2004,we had an accumulated deficit of $78.9 million. We intend to expendfinancial and management resources on the development of additional services,sales and marketing, technology and operations to support larger-scaleoperations and greater service offerings. Although we expect to generatepositive cash flow from operations in 2004, there can be no assurance that ourrevenue will increase or even continue at its current level or that we willmaintain profitability or generate cash from operations in future periods.

 

Our prospects must be considered inlight of the risks, expenses and difficulties frequently encountered bycompanies in new and rapidly evolving markets such as electronic commerce. Toaddress these risks, we must, among other things, attract and retain softwarepublishers and online retailers as clients, attract and retain physical goodsclients, introduce new Web sites, Web stores or services, continue to upgradeand develop our systems and infrastructure to meet emerging market needs andremain competitive in our service offerings, and retain and attract personnelcommensurate with our business needs. There can be no assurance that we will besuccessful in addressing these risks, and any failure to do so could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

Our current and future expense levelsare based largely on our planned operations and estimates of future revenue.Revenue and operating results generally depend on the volume and timing oforders received, which are difficult to forecast. We may be unable to adjustspending in a timely manner to compensate for any unexpected revenue shortfall.Accordingly, any significant shortfall in revenue could have an immediateadverse effect on our business, financial condition and results of operations.We are also likely to continue to see revenue fluctuate on a seasonal basis,which is typical for the software publishing market in general and for ourexisting physical goods clients. We believe that our first and fourth quarterstend to be seasonally stronger than our second and third quarters due to the

 

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timing of demand for tax preparationsoftware and the holiday season selling period. In addition, we believe thatsoftware publishers avoid new product releases in the summer months. In view ofthe rapidly evolving nature of our business, we are unable to accuratelyforecast our revenue and believe that period-to-period comparisons of our operatingresults are not necessarily meaningful and should not be relied upon as anindication of future performance.

 

**Resultsof Operations**

 

The following table sets forth certainitems from our condensed consolidated statements of operations as a percentageof total revenue for the periods indicated.

 
|                                      |   | **Three  Months Ended  March 31,** |   |
|-------------------------------------------|--------|------------------------------------|--------|
|                                      |   | **2004**                           |   | **2003** |   |
| Revenue                                   |   | 100.0                              | %      | 100.0 | % |
| Cost of Revenue:                          |   |                               |   |   |   |
| Direct cost of services                   |   | 1.9                                |   | 3.8 |   |
| Network and infrastructure                |   | 10.4                               |   | 12.0 |   |
| Gross Margin                              |   | 87.7                               |   | 84.2 |   |
| Operating Expenses:                       |   |                               |   |   |   |
| Sales and marketing                       |   | 36.0                               |   | 37.7 |   |
| Product research and development          |   | 9.2                                |   | 9.7 |   |
| General and administrative                |   | 8.9                                |   | 9.3 |   |
| Depreciation and amortization             |   | 5.0                                |   | 6.5 |   |
| Amortization of acquisition-related costs |   | 5.0                                |   | 5.0 |   |
| Total operating expenses                  |   | 64.1                               |   | 68.2 |   |
| Income from operations                    |   | 23.6                               |   | 16.0 |   |
| Interest income                           |   | 0.3                                |   | 0.3 |   |
| Net income                                |   | 23.9                               | %      | 16.3 | % |

 

***REVENUE.*** Revenue increased to $31.9 millionfor the three months ended March 31, 2004 from $24.6 million for the sameperiod in the prior year, an increase of $7.3 million or 29.5%.  Theincrease was primarily attributable to higher virus-related software sales,strong tax-related software sales, growth in the number of software publishersand online retailer clients, and heavier e-marketing activities.

 

International sales represented approximately 27% and 21%of total revenue in the three-month periods ended March 31, 2004 and 2003,respectively.  We expect that as aresult of our acquisition of element 5, this percentage will continue toincrease.

 

***GROSSMARGIN.***Cost of revenue, which consists of direct cost of servicesand network and infrastructure costs (both shown in this paragraph and tableabove exclusive of depreciation and amortization expense), was $3.9 million forthe three months ended March 31, 2004 and March 31, 2003.  The grossprofit margin increased in the three months ended March 31, 2004 to 87.7% from84.2% for the same period in the prior year.  The increase in gross marginwas primarily due to leveraging our infrastructure over significantly morerevenue and clients and a reduction in customization labor costs.  We believe that electronic commerce andrelated services are becoming more competitive.  Accordingly, we may haveto reduce our pricing or alter our pricing structure and policies in the futureand any such change could reduce gross margins.

 

***SALES AND MARKETING.***Sales andmarketing expense consists primarily of personnel and related expenses,advertising and promotional expenses, credit card chargebacks and bad debtexpense, and credit card transaction fees.  Sales and marketing expenseincreased to $11.5 million for the three months ended March 31, 2004 from $9.3million for the same period in the prior year, an increase of $2.2 million or23.7%.  The increase primarily resulted from credit card fees andchargeback costs directly associated with the increase in revenue, additionalsales and marketing personnel and related expenses and marketing andpromotional programs for the recent launch of our SoftwarePassportproduct.  As a percentage of revenue, sales and marketing expense were36.0% in the three months ended March 31, 2004, compared to 37.7% for the sameperiod in the prior year, primarily reflecting our increased revenue.  Asa percentage of revenue, sales and marketing expense is expected to declineover time.

 

11

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***PRODUCT RESEARCH AND DEVELOPMENT.*** Productresearch and development expense consists primarily of personnel and relatedexpenses and consulting costs associated with developing and enhancing our CNSplatform and related internal systems. Product research and development expense increased to $2.9 million forthe three months ended March 31, 2004 from $2.4 million for the same period inthe prior year, an increase of $0.5 million or 22.4%.   The increase was primarily driven by increases inpersonnel-related expenses, partially offset by reductions in outsideconsulting fees, as we continue to build out our international features andfunctionality for several of our top-tier clients.  As a percentage of revenue, product research and developmentexpense was 9.2% in the three months ended March 31, 2004, compared to 9.7% forthe same period in the prior year.  We expect product research and developmentcosts to increase in absolute dollars and range between 9 and 11 percent ofrevenue as we continue to develop the CNS and other related internal systems.

 

***GENERALAND ADMINISTRATIVE.***General and administrative expense consists primarily ofexecutive, accounting and administrative personnel and related expenses,including professional fees and investor relations expenses.  General andadministrative expenses increased to $2.8 million for the three months endedMarch 31, 2004 from $2.3 million for the same period in the prior year, anincrease of $0.5 million or 23.8%.  Theincrease resulted primarily from professional and legal fees and audit and taxservices associated with compliance with the Sarbanes-Oxley Act and relatedrules and regulations, foreign governance compliance, and ongoing litigationexpenses.  As a percentage of revenue, general and administrative expensewas 8.9% for the three-month period ended March 31, 2004, compared to 9.3% forthe same period in the prior year.  We expect general and administrativeexpense will increase in absolute dollars over time as we continue to buildinfrastructure to support our business and comply with new governmentalregulations.  As a percentage of revenue, general and administrative expense is expectedto decline over time.

 

***AMORTIZATIONOF INTANGIBLE ASSETS AND ACQUISITION-RELATED COSTS.***Amortization of intangible assets andacquisition-related costs was $1.6 million for the three months ended March 31,2004 compared to $1.2 million for the same period in the prior year.  The increase was due to additionalamortizable assets acquired throughout 2003.

 

***INTEREST INCOME****.* Interest income consists of earnings on our cash and cash equivalentsand short-term investments.

 

***INCOME TAXES.***** **We paid noincome taxes in any reported period.  Wehad net operating loss carryforwards of approximately $88.4 million as of March31, 2004. Included in this amount is approximately $50.1 million of deductionsresulting from disqualifying dispositions of stock options. When thesedeductions relating to disqualifying dispositions are realized for financialstatement purposes they will not result in a reduction in income tax expense,rather the benefit will be recorded as additional paid-in-capital. These incometax net operating loss carryforwards expire beginning in the year 2009.Deductions from disqualifying dispositions of stock options are included in netoperating loss carryforwards with a corresponding valuation allowance.  Because of the uncertainty of futurerealization, a valuation allowance equal to the deferred tax asset has beenrecorded.  Ownership changes resultingfrom the issuance of additional equity will limit future annual realization ofthe tax net operating loss carryforwards to a specified percentage of our valueunder Section 382 of the Internal Revenue Code.

 

**Liquidity and CapitalResources**

 

As of March 31, 2004, we had $105.5 million of cash andcash equivalents, $45.0 million of short-term investments and working capitalof approximately $94.7 million. Our primary source of internal liquidityis our operating activities.  During thethree months ended March 31, 2004, our operations generated $19.1 million ofcash compared to $11.0 million for the same period of the prior year.  Theimprovement was mainly due to an increase in net income, collection of accountsreceivable and an increase in accounts payable.  Net cash used ininvesting activities during the three months ended March 31, 2004 totaled $17.4million.  This was comprised of purchases of investments of $15.0 million,investments in equipment of $2.1 million and net investments in acquisitions of$0.3 million.  Net cash provided by financing activities during the threemonths ended March 31, 2004 totaled $1.9 million, comprised of the sale of stockthrough the exercise of stock options and purchases through the employee stockpurchase plan.

 

On April 19, 2004, we announced thatwe signed a definitive agreement to acquire element 5 AG, a privately heldcompany based in Germany.  Under theterms of the agreement, we paid $120 million in cash to acquire all of theoutstanding shares of capital stock of element 5.  We also may pay up to an additional $2.5 million in cash based onelement 5’s operating performance over the first twenty-four months subsequentto the acquisition.

 

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Our principal commitments consisted of long-termobligations outstanding under operating leases, which in future periods willalso include the obligation under leases we assumed in connection with ourrecent acquisition of element 5. Although we have no material commitments for capital expenditures, weanticipate continued capital expenditures consistent with our anticipatedgrowth in operations, infrastructure, and personnel as well as those which mayarise in connection with our acquisition and integration of element5.    We further anticipate thatour expenditures on product development will be consistent with our anticipatedgrowth in operations as well as any requirements which may arise in connectionwith our acquisition and integration of element 5.  We also anticipatethat we will continue to experience growth in our operating expenses for theforeseeable future and that our operating expenses will be a material use of ourcash resources.

 

We expect to continue toevaluate and consider a wide array of potential strategic transactions,including business combinations and acquisitions of businesses, products,services and other assets as well as licenses of technology related to ourcurrent business.  At any given time, wemay be engaged in discussions or negotiations with respect to one or more suchtransactions.  Any such transactionscould have a material impact on our financial position, results of operations,or cash flows.  There is no assurancethat any such discussions or negotiations will result in the consummation ofany transaction.  The process ofintegrating any acquisition may create unforeseen challenges for ouroperational, financial and management information systems, as well asunforeseen expenditures and other risks, including diversion of management’sattention from other business concerns, the potential loss of key customers,employees and business partners, difficulties in managing facilities and employeesin different geographic areas, and difficulties in entering markets in which wehave no or limited direct prior experience and where competitors in suchmarkets have stronger market positions. In addition, an acquisition may cause us to assume liabilities or becomesubject to litigation.  Further, therecan be no assurance that we will realize a positive return on any acquisitionor that future acquisitions will not be dilutive to our current shareholders’percentage ownership or to earnings.  Wehave allocated significant valuation in the form of goodwill and intangiblesfor the companies we acquired in the past, which is subject to impairmenttesting on a regular basis.  If theindividual businesses do not perform as expected at the acquisition dates, wemay incur impairment charges for goodwill, accelerated amortization ofdefinite-lived intangible assets due to shortened expected lives of thoseassets, immediate write-offs and restructuring or other related expenses.

 

In connection with theacquisition of element 5, we established a $45 million secured revolvingcredit facility with Harris Trust and Savings Bank.  We may terminate thefacility at any time prior to the scheduled maturity date of July 15, 2005without penalty.  We may borrow at various rates, including prime orLIBOR plus 2.5%.  The facility includes various covenants, includinglimits on our ability to incur debt and grant liens on our assets, andfinancial covenants regarding EBITDA, leverage ratios and capital expenditures. Amounts outstanding under the facility in excess of $30 million must be cashcollateralized.  The facility is also secured by a pledge of certaininvestment accounts, receivables and other assets.  As of May 4,2004, the principal amount of outstanding loans under the facility wasapproximately $5 million.

 

We believe that existingsources of liquidity and the results of our operations will provide adequatecash to fund our operations, although we may seek to raise additional capital.In January 2002, we filed a universal shelf registration statement with the SECpursuant to which we could issue up to $100 million in common stock, preferredstock, debt securities and/or warrants.  Of this amount, approximately $45 million was utilized to issue commonstock in our July 2003 public offering leaving approximately $55 millionavailable for future use.   The sale ofadditional equity or convertible debt securities could result in additionaldilution to our stockholders. There can be no assurances that financing will beavailable in amounts or on terms acceptable to us, if at all.

 

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**Item 3****.  Qualitative and Quantitative Disclosure AboutMarket Risk**

 

**Interest Rate Risk**

 

We maintain our portfolio of cashequivalents and short-term investments in a variety of securities, including government obligations and money market funds.In connection with our acquisition ofelement 5, we established a $45 million secured revolving credit facility withHarris Trust and Savings Bank.  A sharprise in interest rates could have a materialadverse impact on interest expense associated with our credit facility withHarris Trust and Savings Bank.  We donot currently hedge our interest rate exposure and do not enter into financialinstruments for trading or speculative purposes or utilize derivative financialinstruments.

 

**Foreign Currency Risk**

 

Our operationshave been conducted primarily in the United States currency and as such havenot been subject to material foreign currency exchange rate risk.   However,the growth in our international operations is increasing our exposure toforeign currency fluctuations as well as other risks typical of internationaloperations, including, but not limited to differing economic conditions,changes in political climate, differing tax structures and other regulationsand restrictions. Accordingly, our future results could be materially adverselyimpacted by changes in these or other factors. For example, approximately one half of our recently acquired element 5’srevenue is in euros and currencies other than U.S. dollars.  As a result, a greater proportion of ourrevenues and earnings will now be subject to currency fluctuations.  We translate income statement amounts thatare denominated in foreign currency into U.S. dollars at the average exchangerates in each applicable period. To the extent the U.S. dollar weakens againstforeign currencies, the translation of these foreign currency denominatedtransactions results in increased net revenues, operating expenses and netincome. Conversely, our net revenues, operating expenses and net income willdecrease when the U.S. dollar strengthens against foreign currencies. We do notcurrently have a currency hedging program to mitigate the effect offluctuations of currency prices on our financial results.

 

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**Item4****.  Controls andProcedures**

 

(a)           Based on their evaluation of ourdisclosure controls and procedures conducted as of March 31, 2004, our ChiefExecutive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-15(e)promulgated under the Securities Exchange Act of 1934) are effective.

 

(b)           This evaluation did not identify anychange in our internal controls over financial reporting that occurred duringthe quarter ended March 31, 2004 that has materially affected, or is reasonablylikely to materially affect, our internal controls over financial reporting.

 

**Limitationson the Effectiveness of Controls**

 

Our management, including the ChiefExecutive Officer and Chief Financial Officer, does not expect that ourdisclosure controls and procedures or our internal controls will prevent allerror and fraud. A control system, no matter how well conceived and operated,can provide only reasonable, not absolute, assurance that the objectives of thecontrol system are met. Further, the design of a control system must reflectthe fact that there are resource constraints, and the benefits of controls mustbe considered relative to their costs. Because of the inherent limitations inall control systems, no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within our company havebeen detected. These inherent limitations include the realities that judgmentsin decision-making can be faulty, and that breakdowns can occur because ofsimple error or mistake. Additionally, controls can be circumvented by theindividual acts of some persons, by collusion of two or more people, or bymanagement override of the control. The design of any system of controls alsois based in part upon certain assumptions about the likelihood of futureevents, and there can be no assurance that any design will succeed in achievingits stated goals under all potential future conditions; over time, control maybecome inadequate because of changes in conditions, or the degree of compliancewith the policies or procedures may deteriorate.  Because of the inherentlimitations in a cost-effective control system, misstatements due to error orfraud may occur and not be detected.

 

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**PARTII****.  OTHERINFORMATION**

 

**Item1.****  LegalProceedings**

 

Beginning in August 2001, we andcertain of our officers and directors were named as defendants in severalclass action shareholder complaints filed in the United States District Courtfor the Southern District of New York, now consolidated as *In re Digital River, Inc. InitialPublic Offering Securities Litigation,* Case No. 01-CV-7355.  Similar complaints, referred to here as theIPO Lawsuits, were filed in the same court against hundreds of other publiccompanies, referred to here as the Issuers. In the consolidated amended complaint against us, the plaintiffs allegethat we, certain of our officers and directors and the underwriters of ourinitial public offering, or IPO, violated Section 11 of the Securities Act of1933 based on allegations that our IPO registration statement and prospectusfailed to disclose material facts regarding the compensation to be received by,and the stock allocation practices of, the IPO underwriters.  The complaint also contains a claim forviolation of Section 10(b) of the Securities Exchange Act of 1934 based on allegationsthat this omission constituted a deceit on investors.  The plaintiffs seek unspecified monetary damages and otherrelief.

 

In July 2002, we joined in a global motion to dismiss theIPO Lawsuits filed by all of the Issuers (among others).  In October2002, the parties agreed to toll the statute of limitations with respect tocertain of the named officers and directors until September 30, 2003 and on thebasis of this agreement, our officers and directors were dismissed fromthe lawsuit without prejudice.  In February 2003, the court issued adecision denying the motion to dismiss the Section 11 claims against us andalmost all of the other Issuers and denying the motion to dismiss the Section10(b) claims against us and many of the Issuers.

 

During the summer of 2003, we, along with asubstantial majority of Issuers, indirectly participated in discussions withthe plaintiffs and the Issuers’ respective insurers regarding a tentativesettlement of the IPO Lawsuits. The terms of the tentative settlement wouldprovide for, among other things, a release of the Issuers and their officersand directors from all further liability resulting from plaintiffs’ claims, andthe assignment to plaintiffs of certain potential claims that the Issuers mayhave against their IPO underwriters. The tentative settlement also providesthat, in the event that plaintiffs ultimately recover less than a guaranteedsum of $1 billion from the IPO underwriters, plaintiffs would be entitledto payment by each participating Issuer’s insurer of a pro rata share of anyshortfall in the plaintiffs’ guaranteed recovery.  In June 2003, pursuantto the authorization of a special litigation committee of our board ofdirectors, we entered into a non-binding memorandum of understandingreflecting the settlement terms described above. In September 2003, inconnection with the possible settlement, our officers and directors whohad entered tolling agreements with plaintiffs (described above) agreed toextend those agreements so that they would not expire prior to any settlementbeing finalized. Although we have approved this settlement proposal inprinciple, it remains subject to a number of procedural conditions, as well asformal approval by the Court. Pending definitive settlement, we continueto believe that the claims against us, our officers and directors are withoutmerit and intend to defend against them vigorously.

 

In August 2001, an action was broughtagainst us and other defendants in the U.S. District Court in the District ofColumbia alleging infringement of United States Patent No. 6,014,651 owned byChristopher M. Crawford of Washington, D.C. Crawford alleges that we directly infringe the patent by the provisionof online software purchase and delivery services, that we actively induceinfringement of the patent by supporting and otherwise promoting our electronicsoftware delivery services to others and that we contributorily infringed thepatent by making, using, selling and offering to sell components of ourelectronic software delivery services.  No substantive actions have takenplace in this case.  The court hasdelayed substantive discovery in this case, pending a preliminary determinationof the legal scope of Crawford’s claim. Discovery reopened in February 2004, and is ongoing.  We have been in the process of preparingmaterials regarding claim interpretation to present to the court, and we expectto do so at an appropriate point in the case. Although a number of co-defendants have settled with plaintiff Crawford,at this time, Crawford has declined to make a definitive demand for theresolution of this case.  We believe that this lawsuit iswithout merit and intend to defend against it vigorously.

 

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**ITEM 2. Changes in Securities, Use of Proceeds and IssuerPurchases of Equity Securities**

 

In April 2001, the Board of Directors authorized a sharerepurchase program of up to $5.0 million of our outstanding shares of commonstock. Repurchases are at our discretion based on ongoing assessments of thecapital needs of the business and the market price of our shares. No time limitwas set for the completion of the repurchase program.  In 2001, weexpended $267,000 to repurchase our shares. During the year ended December 31,2003 and the quarter ended March 31, 2004, no shares were repurchased under therepurchase program.

 

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**Item 5. OtherInformation**

 

On April 19, 2004, we announced thatwe signed a definitive agreement to acquire element 5 AG, a privately heldcompany based in Germany.  Under theterms of the agreement, we paid $120 million in cash to acquire all of theoutstanding shares of capital stock of element 5.  We also may pay up to an additional $2.5 million in cash based onelement 5’s operating performance over the first twenty-four months subsequentto the acquisition.   In connection with the acquisition ofelement 5, we established a $45 million secured revolving credit facilitywith Harris Trust and Savings Bank.  We may terminate the facility at anytime prior to the scheduled maturity date of July 15, 2005 withoutpenalty.  We may borrow at various rates, including prime or LIBORplus 2.5%.  The facility includes various covenants, including limits on ourability to incur debt and grant liens on our assets, and financial covenantsregarding EBITDA, leverage ratios and capital expenditures.  Amountsoutstanding under the facility in excess of $30 million must be cashcollateralized.  The facility is also secured by a pledge of certaininvestment accounts, receivables and other assets.  As of May 4, 2004, the principal amount of outstanding loansunder the facility was approximately $5 million.

 

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**Item6****.  Exhibits andReports on Form 8-K**

 

(A) Exhibits

 
| **EXHIBIT  NUMBER** |   | **DESCRIPTION OF  DOCUMENTS** |
|---------------------|--------|-------------------------------|
|                |   |                          |   |   |
| 2.1                 |   | (4)                           |   | Stock Purchase  Agreement, dated as of April 17, 2004 by and among Digital River, Inc., Blitz  F03-1424 GmbH, a company organized under the laws of Germany and a wholly owned  subsidiary of Digital River, and the selling shareholders of element 5  Informationstechnologien und –dienstleistungen Aktiengesellschaft, a company  organized under the laws of Germany. |
| 3.1                 |   | (1)                           |   | Amended and  Restated Certificate of Incorporation, as amended, as currently in effect. |
| 3.2                 |   | (2)                           |   | Amended and  Restated Bylaws, as currently in effect. |
| 4.1                 |   | (3)                           |   | Specimen of  Common Stock Certificate. |
| 10.15               |   | (4)                           |   | Line of Credit  Agreement, dated April 16, 2004, between Digital River, Inc. and Harris Trust  and Savings Bank. |
| 10.16               |   | (4)                           |   | Security  Agreement Re: Receivables, dated April 16, 2004, between Digital River, Inc.  and Harris Trust and Savings Bank. |
| 10.17               |   | (4)                           |   | First Amendment  to Line of Credit Agreement and Promissory Note, dated April 30, 2004,  between Digital River, Inc. and Harris Trust and Savings Bank. |
| 10.18               |   | (4)                           |   | First Amendment  to Security Agreement Re: Receivables, dated April 30, 2004, between Digital  River, Inc. and Harris Trust and Savings Bank. |
| 31.1                |   |                          |   | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2                |   |                          |   | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1                |   |                          |   | Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2                |   |                          |   | Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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| (1) |   | Filed as  Exhibits 3.1 and 3.3 to our Registration Statement on Form S-3, File No.  333-81626, filed on January 29, 2002, declared effective on February 12,  2002, and incorporated herein by reference. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Filed as an exhibit  to our Annual Report on Form 10-K for the year ended December 31, 2000, filed  on March 27, 2001, and incorporated herein by reference.                                              |
| (3) |   | Filed as an  exhibit to our Registration Statement on Form S-1, File No. 333-56787,  declared effective on August 11, 1998, and incorporated herein by reference.                                         |
| (4) |   | Filed as an  exhibit to our Current Report on Form 8-K, filed on May 4, 2004, and  incorporated herein by reference.                                                                                      |

 

(B) Reports on Form 8-K.

 

 On January 28, 2004, we furnished a current report on Form 8-Kannouncing under Item 12 the financial results for the quarter and year endedDecember 31, 2003.

 

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SIGNATURES

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
| Date:  | May 7, 2004 | DIGITAL RIVER,  INC.                            |
|--------|-------------|-------------------------------------------------|
|   |        |                                            |
|   |        |                                            |
|   |        | By:                                             | /s/ CARTER D. HICKS |
|   |        |                                            |
|   |        | Carter D. Hicks                                 |
|   |        | *Chief Financial  Officer*                      |
|   |        | *(Principal  Financial and Accounting Officer)* |
|        |             |                                                 |  |

 

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EXHIBIT INDEX

 
| **EXHIBIT  NUMBER** |   | **DESCRIPTION OF  DOCUMENTS** |
|---------------------|--------|-------------------------------|
|                |   |                          |   |   |
| 2.1                 |   | (4)                           |   | Stock Purchase  Agreement, dated as of April 17, 2004 by and among Digital River, Inc., Blitz  F03-1424 GmbH, a company organized under the laws of Germany and a wholly  owned subsidiary of Digital River, and the selling shareholders of element 5  Informationstechnologien und —dienstleistungen Aktiengesellschaft, a company  organized under the laws of Germany. |
| 3.1                 |   | (1)                           |   | Amended and  Restated Certificate of Incorporation, as amended, as currently in effect. |
| 3.2                 |   | (2)                           |   | Amended and  Restated Bylaws, as currently in effect. |
| 4.1                 |   | (3)                           |   | Specimen of  Common Stock Certificate. |
| 10.15               |   | (4)                           |   | Line of Credit  Agreement, dated April 16, 2004, between Digital River, Inc. and Harris Trust  and Savings Bank. |
| 10.16               |   | (4)                           |   | Security  Agreement Re: Receivables, dated April 16, 2004, between Digital River, Inc.  and Harris Trust and Savings Bank. |
| 10.17               |   | (4)                           |   | First Amendment  to Line of Credit Agreement and Promissory Note, dated April 30, 2004,  between Digital River, Inc. and Harris Trust and Savings Bank. |
| 10.18               |   | (4)                           |   | First Amendment  to Security Agreement Re: Receivables, dated April 30, 2004, between Digital  River, Inc. and Harris Trust and Savings Bank. |
| 31.1                |   |                          |   | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2                |   |                          |   | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1                |   |                          |   | Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2                |   |                          |   | Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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| (1) |   | Filed as  Exhibits 3.1 and 3.3 to our Registration Statement on Form S-3, File No.  333-81626, filed on January 29, 2002, declared effective on February 12,  2002, and incorporated herein by reference. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Filed as an  exhibit to our Annual Report on Form 10-K for the year ended December 31,  2000, filed on March 27, 2001, and incorporated herein by reference.                                              |
| (3) |   | Filed as an  exhibit to our Registration Statement on Form S-1, File No. 333-56787,  declared effective on August 11, 1998, and incorporated herein by reference.                                         |
| (4) |   | Filed as an  exhibit to our Current Report on Form 8-K, filed on May 4, 2004, and  incorporated herein by reference.                                                                                      |

 

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