** **

**SECURITIES AND EXCHANGE COMMISSIONWashington, 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  SEPTEMBER 30, 2001**                                        |
|       |   |                                                                                          |
|       |   | **OR**                                                                                        |
|       |   |                                                                                          |
| **o**      |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|       |   |                                                                                          |
|       |   | FOR THE TRANSITION PERIOD FROM _____ TO _____                                                 |

Commission file number 000-24643

**DIGITALRIVER, INC.**(Exact name of registrant as specified in its charter)

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

 

**9625 WEST 76TH STREET, 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) hasfiled all 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 the number of shares outstanding of each of the issuer'sclasses of common stock, as of the latest practical date.

| COMMON STOCK, $0.01 PAR VALUE |   | 25,563,381 SHARES                  |
|-------------------------------|--------|------------------------------------|
| (Class)                       |   | Outstanding as of November 9, 2001 |

 

 

DIGITAL RIVER,INC.

Form 10-Q

Index

 
| PART I.       | FINANCIAL INFORMATION                                                                                             |   |
|---------------|-------------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                              |   |
| Item 1.       | Financial Statements                                                                                              |   |
|          |                                                                                                              |   |
|          | Condensed  Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000                             |   |
|          |                                                                                                              |   |
|          | Condensed  Consolidated Statements of Operations for the three and nine months ended  September 30, 2001 and 2000 |   |
|          |                                                                                                              |   |
|          | Condensed  Consolidated Statements of Cash Flows for the three and nine months ended  September 30, 2001 and 2000 |   |
|          |                                                                                                              |   |
|          | 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                                                        |   |
|          |                                                                                                              |   |
| PART II.      | OTHER INFORMATION                                                                                                 |   |
|          |                                                                                                              |   |
| Item 1.       | Legal Proceedings                                                                                                 |   |
|          |                                                                                                              |   |
| Item  2.      | Changes  in Securities and Use of Proceeds                                                                        |   |
|          |                                                                                                              |   |
| Item 6.       | Exhibits and  Reports on Form 8-K                                                                                 |   |
|          |                                                                                                              |   |
| SIGNATURES    |                                                                                                              |
|          |                                                                                                              |   |
| EXHIBIT INDEX |                                                                                                              |

 

PART I.  FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

DIGITAL RIVER,INC.

CONDENSED CONSOLIDATEDBALANCE SHEETS

(In Thousands,Except Share Data)

 

 
|                                                                                                                 |   | **September  30,** |       | **December  31,** |       |
|----------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|-------------------|------------|
|                                                                                                                 |   | **2001**           |       | **2000**          |       |
|                                                                                                                 |   | **(unaudited)**    |       |              | ** ** |
| ASSETS                                                                                                               |   |               | ** ** |              | ** ** |
| CURRENT ASSETS:                                                                                                      |   |               |       |              |       |
| Cash and cash equivalents                                                                                            |   | $                  | 17,406     |              | $          | 16,920 |   |
| Short-term investments                                                                                               |   | 7,935              |       | 14,977            |       |
| Accounts receivable, net                                                                                             |   | 9,472              |       | 4,903             |       |
| Prepaid expenses and other                                                                                           |   | 1,434              |       | 1,123             |       |
| Total current assets                                                                                                 |   | 36,247             |       | 37,923            |       |
|                                                                                                                 |   |               |       |              |       |
| PROPERTY AND EQUIPMENT, NET                                                                                          |   | 16,143             |       | 13,570            |       |
| GOODWILL AND OTHER INTANGIBLES, NET AND OTHER ASSETS                                                                 |   | 23,242             |       | 17,910            |       |
|                                                                                                                 |   | $                  | 75,632     |              | $          | 69,403 |   |
|                                                                                                                 |   |               |       |              |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                            |   |               |       |              |       |
| CURRENT LIABILITIES:                                                                                                 |   |               |       |              |       |
| Notes payable                                                                                                        |   | $                  | 2,500      |              | $          | -- |   |
| Accounts payable                                                                                                     |   | 18,322             |       | 14,339            |       |
| Accrued payroll                                                                                                      |   | 2,970              |       | 2,287             |       |
| Deferred revenue                                                                                                     |   | 1,349              |       | 1,833             |       |
| Other current liabilities                                                                                            |   | 3,222              |       | 2,426             |       |
| Total current liabilities                                                                                            |   | 28,363             |       | 20,885            |       |
|                                                                                                                 |   |               |       |              |       |
| STOCKHOLDERS’ EQUITY:                                                                                           |   |               |       |              |       |
| Preferred Stock, $.01 par value; 5,000,000 shares  authorized; no shares issued and outstanding                      |   | --                 |       | --                |       |
| Common Stock, $.01 par value; 60,000,000 shares  authorized; 25,183,617 and 22,275,317 shares issued and outstanding |   | 252                |       | 223               |       |
| Additional paid-in capital                                                                                           |   | 146,673            |       | 132,403           |       |
| Deferred compensation                                                                                                |   | (65                | )          | (194              | )          |
| Accumulated deficit                                                                                                  |   | (99,591            | )          | (83,914           | )          |
| Total stockholders’ equity                                                                                      |   | 47,269             |       | 48,518            |       |
|                                                                                                                 |   | $                  | 75,632     |              | $          | 69,403 |   |

 

See accompanying notes to condensed consolidated financial statements.

DIGITAL RIVER,INC.

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

(In Thousands,Except Per Share Data; Unaudited)

 
|                                                                                             |   | **Three  Months Ended** |         | **Nine  Months Ended** |       |
|--------------------------------------------------------------------------------------------------|--------|-------------------------|--------------|------------------------|------------|
|                                                                                             |   | **September  30,**      |         | **September  30,**     |       |
|                                                                                             |   | **2001**                |         | **2000**               |       | **2001** |   | **2000** |   |
|                                                                                             |   |                    | ** **   |                   | ** ** |   | ** ** |   | ** ** |
| REVENUE                                                                                          |   | $                       | 13,991       |                   | $          | 7,607 |   | $ | 40,092 |   | $ | 21,125 |   |
|                                                                                             |   |                    |         |                   |       |   |   |   |   |
| COSTS AND EXPENSES (exclusive of depreciation and  amortization expense shown separately below): |   |                    |         |                   |       |   |   |   |   |
| Direct cost of services                                                                          |   | 778                     |         | 421                    |       | 1,990 |   | 991 |   |
| Network and infrastructure                                                                       |   | 2,144                   |         | 1,888                  |       | 7,602 |   | 5,636 |   |
| Sales and marketing                                                                              |   | 6,599                   |         | 6,247                  |       | 19,863 |   | 19,690 |   |
| Product research and development                                                                 |   | 2,764                   |         | 2,857                  |       | 7,962 |   | 10,949 |   |
| General and administrative                                                                       |   | 1,116                   |         | 1,151                  |       | 3,218 |   | 3,608 |   |
| Depreciation and amortization                                                                    |   | 1,226                   |         | 896                    |       | 3,522 |   | 2,239 |   |
| Amortization of goodwill and other intangibles and  acquisition related costs                    |   | 3,912                   |         | 2,603                  |       | 12,396 |   | 12,331 |   |
| Total costs and expenses                                                                         |   | 18,539                  |         | 16,063                 |       | 56,553 |   | 55,444 |   |
| LOSS FROM OPERATIONS                                                                             |   | (4,548                  | )            | (8,456                 | )          | (16,461 | ) | (34,319 | ) |
| INTEREST INCOME                                                                                  |   | 174                     |         | 382                    |       | 784 |   | 1,621 |   |
| Net loss                                                                                         |   | $                       |  (4,374 | )                      | $          |  (8,074 | ) | $ |  (15,677 | ) | $ |  (32,698 | ) |
| Basic and diluted net loss per share                                                             |   | $                       |  (0.18  | )                      | $          |  (0.37 | ) | $ |  (0.66 | ) | $ |  (1.55 | ) |
| Basic and diluted weighted average common shares  outstanding                                    |   | 24,585                  |         | 21,598                 |       | 23,832 |   | 21,164 |   |

 

See accompanying notes to condensed consolidated financial statements.

DIGITAL RIVER,INC.

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(In Thousands;Unaudited)

 

 
|                                                                                   |   | **Nine  Months Ended** |       |
|----------------------------------------------------------------------------------------|--------|------------------------|------------|
|                                                                                   |   | **September  30,**     |       |
|                                                                                   |   | **2001**               | ** ** | **2000** | ** ** |
|                                                                                   |   |                   | ** ** |   | ** ** |
| OPERATING ACTIVITIES:                                                                  |   |                   |       |   |   |
| Net loss                                                                               |   | $                      | (15,677    | ) | $ | (32,698 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:           |   |                   |       |   |   |
| Goodwill and other intangibles amortization and  acquisition related costs             |   | 12,396                 |       | 10,301 |   |
| Depreciation and amortization                                                          |   | 3,522                  |       | 2,239 |   |
| Deferred compensation expense                                                          |   | 129                    |       | 342 |   |
| Changes in assets and liabilities:                                                     |   |                   |       |   |   |
| Accounts receivable and prepaid expense                                                |   | (3,728                 | )          | (2,025 | ) |
| Accounts payable                                                                       |   | 2,298                  |       | 1,429 |   |
| Other current liabilities and deferred revenue                                         |   | 224                    |       | 3,281 |   |
| Net cash used in operating activities                                                  |   | (836                   | )          | (17,131 | ) |
|                                                                                   |   |                   |       |   |   |
| INVESTING ACTIVITIES:                                                                  |   |                   |       |   |   |
| Proceeds from sales of investments, net                                                |   | 7,042                  |       | 22,395 |   |
| Purchases of equipment                                                                 |   | (4,833                 | )          | (8,335 | ) |
| Acquisitions, net of cash received                                                     |   | (1,119                 | )          | (50 | ) |
| Patent acquisition costs                                                               |   | (8                     | )          | (27 | ) |
| Net cash provided by investing activities                                              |   | 1,082                  |       | 13,983 |   |
|                                                                                   |   |                   |       |   |   |
| FINANCING ACTIVITIES:                                                                  |   |                   |       |   |   |
| Sales of Common Stock                                                                  |   | 507                    |       | 3,582 |   |
| Repurchase of Common Stock                                                             |   | (267                   | )          | -- |   |
| Net cash provided by financing activities                                              |   | 240                    |       | 3,582 |   |
| Net increase in cash and cash equivalents                                              |   | 486                    |       | 434 |   |
|                                                                                   |   |                   |       |   |   |
| CASH AND CASH EQUIVALENTS, beginning of period                                         |   | 16,920                 |       | 15,120 |   |
| CASH AND CASH EQUIVALENTS, end of period                                               |   | $                      | 17,406     |   | $ | 15,554 |   |
|                                                                                   |   |                   |       |   |   |
| SUPPLEMENTAL CASH FLOW DISCLOSURE:                                                     |   |                   |       |   |   |
| Issuance of Common Stock in connection with  acquisitions and related earnout payments |   | $                      | 14,066     |   | $ | 9,093 |   |

 

See accompanying notes to condensed consolidated financial statements.

DIGITAL RIVER,INC.

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

1.             BASISOF PRESENTATION:

The unaudited condensed consolidated financial statements includedherein reflect all adjustments, consisting only of normal recurringadjustments, which in the opinion of management are necessary to fairly statethe Company’s consolidated financial position, results of operations and cashflows for the periods presented.  Thesecondensed consolidated financial statements should be read in conjunction withthe Company’s audited consolidated financial statements included in theCompany’s Form 10-K for the year ended December 31, 2000 as filed with theSecurities and Exchange Commission.  Theresults of operations for the three and nine months ended September 30, 2001are not necessarily indicative of the results to be expected for any subsequentquarter or for the entire fiscal year ending December 31, 2001.  The December 31, 2000 balance sheet wasderived from audited financial statements, but does not include all disclosuresrequired by generally accepted accounting principles.

2.             PRINCIPLESOF CONSOLIDATION:

The condensed consolidated financial statements include the accounts ofDigital River, Inc. and its wholly owned subsidiaries.  All intercompany balances and transactionshave been eliminated.

3.             RECENTACCOUNTING PRONOUNCEMENTS:

On June 29, 2001, the Financial Accounting Standards Board approved forissuance Statement of Financial Accounting Standards (SFAS) 141, Business Combinations,and SFAS 142, Goodwill and Intangible Assets. Major provisions of theseStatements are as follows: all business combinations initiated after June 30,2001 must use the purchase method of accounting; the pooling of interest methodof accounting is prohibited except for transactions initiated before July 1,2001; intangible assets acquired in a business combination must be recordedseparately from goodwill if they arise from contractual or other legal rightsor are separable from the acquired entity and can be sold, transferred,licensed, rented or exchanged, either individually or as part of a relatedcontract, asset or liability; goodwill and intangible assets with indefinitelives are not amortized but tested for impairment annually, except in certaincircumstances, and whenever there is an impairment indicator; all acquiredgoodwill must be assigned to reporting units for purposes of impairment testingand segment reporting; effective January 1, 2002, goodwill from acquisitionsinitiated prior to July 1, 2001 will no longer be subject to amortization.  These new rules were applicable to ouracquisitions of RegSoft.com and Orbit Commerce, Inc.  Accordingly, goodwill totaling $3,375,000 resulting from theseacquisitions is not being amortized. Management is currently reviewing theprovisions of these Statements on our previous acquisitions and their impact onthe Company's results of operations.

4.             NETLOSS PER SHARE:

Basic loss per share is computed using the weighted-average number ofcommon shares outstanding excluding contingently issuable or returnable shares,and diluted loss per share is computed using the weighted-average number ofcommon shares outstanding and dilutive potential common sharesoutstanding.  As a result of the lossesincurred by the Company for the three and nine months ended September 30, 2001and 2000, all potential common shares were anti-dilutive and were excluded fromthe diluted net loss per share calculations.

The following table summarizes securities outstanding as of each periodend which were not included in the calculation of diluted net loss per sharesince their inclusion would be anti-dilutive:
|                  |   | **September  30,** |   | **September  30,** |
|-----------------------|--------|--------------------|--------|--------------------|
|                  |   | **2001**           |   | **2000**           |
| Common Stock warrants |   | 356,087            |   | 356,087            |
| Common Stock options  |   | 6,307,338          |   | 5,212,357          |

** **

5.             ACQUISITIONSAND EARN-OUT ARRANGEMENTS:

In September 2001, the Company acquired substantially all of the assetsand related liabilities of Orbit Commerce, Inc. (Orbit) in exchange for 727,939shares of Common Stock valued at $4,300,000 plus $964,000.  The value of the Common Stock was based onthe closing market price on the date the transaction was consummated.  The excess of the purchase price over thefair value of the tangible assets acquired was assigned to customer base,non-compete agreements and technology/tradename, with the excess of $2,823,000recorded as goodwill.  The Company willamortize intangible assets over a three-year period.  Goodwill is not amortized but is subject to annual impairmenttesting.  Under the agreement, Orbit hasan opportunity to earn additional shares of Common Stock based on revenuecontribution over the succeeding 15-month period.

In August 2001, the Company acquired all of the outstanding stock ofRegSoft.com (RegSoft) in exchange for $750,000 and a $2,500,000 note, payablein full on February 2, 2002.  The excessof the purchase price over the fair value of the tangible assets acquired wasassigned to customer base, non-compete agreements and technology/tradename, withthe excess of $552,000 recorded as goodwill. The Company will amortize intangible assets over a three-yearperiod.  Goodwill is not amortized butis subject to annual impairment testing. The agreement also includes an opportunity for an earnout based onRegSoft’s ongoing performance.

In March 2001, the Company purchased the Market Maker assets of CalicoCommerce, Inc. (Calico) in exchange for 1,630,368 shares of Common Stock valuedat $7,846,000 plus direct expenses.  Thevalue of the Common Stock was based on the closing market price on the date thetransaction was consummated.  The assetspurchased consisted of equipment, intellectual property and non-competitionagreements.  The Company is amortizinggoodwill, other intangibles and non-competition agreements over a three-yearperiod.  Under the agreement, Calicoalso has an earnout arrangement whereby it can earn up to an additional2,971,347 shares of Common Stock upon attaining certain business goals for aperiod of 13 months following the acquisition.

NetSales, Inc., from whom the Company purchased certain assets inAugust 2000, received an earnout payment of 84,000 shares of Common Stockvalued at $404,000 in March 2001.  TheCompany recorded such amount as additional goodwill and is amortizing thisamount on a straight-line basis over the goodwill life.

The former owners of Maagnum Internet Group, Inc., a company purchasedby the Company in April 1999, received earnout payments of 314,531 shares ofCommon Stock valued at $1,514,000 in March 2001 and 124,349 shares of CommonStock valued at $3,093,000 in March 2000. The Company charged such amounts to compensation expense and includedthis amount as amortization of goodwill and other intangibles and acquisitionrelated costs in the accompanying Condensed Consolidated Statements of Operations.  This amount would have increased general andadministrative expense had it been reported outside of that caption.

The following unaudited pro forma condensed results of operations forthe nine months ended September 30, 2001 and 2000 have been prepared as if eachof the acquisitions occurred on January 1, 2000:
|                             |   | **Nine  Months Ended** |       |
|----------------------------------|--------|------------------------|------------|
|                             |   | **September  30,**     |       |
|                             |   | **2001**               | ** ** | **2000** | ** ** |
|                             |   | **(In  Thousands)**    | ** ** |
| Revenue                          |   | $                      | 46,477     |   | $ | 32,228 |   |
| Loss from operations             |   | (26,624                | )     | (61,356 | )  |
| Net loss                         |   | (25,897                | )          | (59,799 | )  |
| Basic and diluted loss per share |   | $                      | (1.03      | )  | $ | (2.44 | )  |

 

This financial information does not purport to represent results thatwould actually have been obtained if the transactions had been in effect onJanuary 1, 2000 or any future results that may in fact be realized.

6.             SHARE REPURCHASE PROGRAM

In April 2001, the Company announced a share repurchase program of upto $5.0 million of its outstanding shares of Common Stock.  Repurchases will be at the Company’sdiscretion based on ongoing assessments of the capital needs of the businessand the market price of its shares.  Notime limit was set for completion of the repurchase program.

7.             SEGMENT INFORMATION:

The Company has two operating segments, Software and Digital CommerceServices and E-Business Services, which have been identified as components ofthe Company that are reviewed regularly by management to determine resourceallocation and assess performance. Unallocated corporate items consist of depreciation, amortization ofgoodwill and other intangibles and acquisition related costs, and interestincome for operational results and consist of certain cash, investments andgoodwill and other intangibles for total assets.  Segment information is as follows:

 

 
|                                                           |       | **Software  and Digital** |       | **E-Business** |   | **Unallocated** |   |             |   |
|----------------------------------------------------------------|------------|---------------------------|------------|----------------|--------|-----------------|--------|------------------|--------|
| **THREE  MONTHS ENDED**                                        |       | **Commerce  Services**    |       | **Services**   |   | **Corporate**   |   |             |   |
| **SEPTEMBER  30, 2001:**                                       |       | **Division**              |       | **Division**   |   | **Items**       |   | **Consolidated** |   |
|                                                           |       | **(in  thousands)**       | ** ** |
| Revenue                                                        |       | $                         | 10,629     |           | $      | 3,362           |   | $                | --     |   | $ | 13,991 |   |
| Gross profit (excludes depreciation                            |       |                      |       |           |   |            |   |             |   |
| and amortization expense)                                      |       | 8,855                     |       | 2,214          |   | --              |   | 11,069           |   |
| Income (loss) from operations                                  |       | 2,700                     |       | (2,110         | )      | (5,138          | )      | (4,548           | )      |
| Net income (loss)                                              |       | 2,700                     |       | (2,110         | )      | (4,964          | )      | (4,374           | )      |
| Total assets                                                   |       | 23,707                    |       | 9,903          |   | 42,376          |   | 75,986           |   |
|                                                           |       |                      |       |           |   |            |   |             |   |
|                                                           |       | **Software and Digital**  |       | **E-Business** |   | **Unallocated** |   |             |   |
| **THREE MONTHS ENDED**                                         |       | **Commerce Services**     |       | **Services**   |   | **Corporate**   |   |             |   |
| **SEPTEMBER 30, 2000:**                                        |       | **Division**              |       | **Division**   |   | **Items**       |   | **Consolidated** |   |
|                                                           |       | **(in thousands)**        |       |
| Revenue                                                        |       | $                         | 5,880      |           | $      | 1,727           |   | $                | --     |   | $ | 7,607 |   |
| Gross profit (excludes depreciation and amortization  expense) |       | 4,168                     |       | 1,130          |   | --              |   | 5,298            |   |
| Loss from operations                                           |       | (1,533                    | )          | (3,424         | )      | (3,499          | )      | (8,456           | )      |
| Net loss                                                       |       | (1,533                    | )          | (3,424         | )      | (3,117          | )      | (8,074           | )      |
| Total assets                                                   |       | 16,216                    |       | 6,845          |   | 49,270          |   | 72,331           |   |
|                                                           |       |                      |       |           |   |            |   |             |   |
|                                                           |       | **Software and Digital**  |       | **E-Business** |   | **Unallocated** |   |             |   |
| **NINE MONTHS ENDED**                                          |       | **Commerce Services**     |       | **Services**   |   | **Corporate**   |   |             |   |
| **SEPTEMBER 30, 2001:**                                        |       | **Division**              |       | **Division**   |   | **Items**       |   | **Consolidated** |   |
|                                                           |       | **(in thousands)**        |       |
| Revenue                                                        |       | $                         | 30,601     |           | $      | 9,491           |   | $                | --     |   | $ | 40,092 |   |
| Gross profit (excludes depreciation and amortization  expense) |       | 24,026                    |       | 6,474          |   | --              |   | 30,500           |   |
| Income (loss) from operations                                  |       | 5,900                     |       | (6,443         | )      | (15,918         | )      | (16,461          | )      |
| Net income (loss)                                              |       | 5,900                     |       | (6,443         | )      | (15,134         | )      | (15,677          | )      |
|                                                           |       |                      |       |           |   |            |   |             |   |
|                                                           |       | **Software and Digital**  |       | **E-Business** |   | **Unallocated** |   |             |   |
| **NINE MONTHS ENDED**                                          |       | **Commerce Services**     |       | **Services**   |   | **Corporate**   |   |             |   |
| **SEPTEMBER 30, 2000:**                                        | ** ** | **Division**              |       | **Division**   |   | **Items**       |   | **Consolidated** |   |
|                                                           |       | **(in thousands)**        |       |
| Revenue                                                        |       | $                         | 17,488     |           | $      | 3,637           |   | $                | --     |   | $ | 21,125 |   |
| Gross profit (excludes depreciation and amortization  expense) |       | 12,364                    |       | 2,134          |   | --              |   | 14,498           |   |
| Loss from operations                                           |       | (5,840                    | )          | (13,909        | )      | (14,570         | )      | (34,319          | )      |
| Net loss                                                       |       | (5,840                    | )          | (13,909        | )      | (12,949         | )      | (32,698          | )      |

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE COMPANY NOTES THAT, EXCEPT FOR THE HISTORICAL INFORMATION CONTAINEDHEREIN, THE MATTERS DISCUSSED BELOW CONTAIN FORWARD-LOOKING STATEMENTS WHICHINVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAYCAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, ORINDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS,PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKINGSTATEMENTS.  THE COMPANY EXPRESSLYDISCLAIMS ANY OBLIGATION TO UPDATE THIS INFORMATION OR PUBLICLY RELEASE ANYREVISION OR REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS REPORT.  SUCH FACTORS INCLUDE, AMONG OTHERS:  THE COMPANY’S LIMITED OPERATING HISTORY ANDVARIABILITY OF OPERATING RESULTS, EXPECTATION OF FUTURE LOSSES, RISKS ASSOCIATEDWITH ELECTRONIC SOFTWARE DELIVERY, DEPENDENCE ON THE INTERNET AND GROWTH INELECTRONIC COMMERCE AND INTERNET INFRASTRUCTURE DEVELOPMENT, DEPENDENCE ONSOFTWARE PUBLISHERS, DEPENDENCE ON ONLINE RETAILERS, SYSTEM DEVELOPMENT ANDELECTRONIC COMMERCE SECURITY RISKS, RAPID TECHNOLOGICAL CHANGES, COMPETITION INTHE ELECTRONIC COMMERCE INDUSTRY, THE IMPORTANCE OF ATTRACTING AND RETAININGPERSONNEL, MANAGEMENT OF THE COMPANY’S GROWTH, INTEGRATION OF ACQUIREDCOMPANIES, DEPENDENCE ON KEY EMPLOYEES AND OTHER RISK FACTORS REFERENCED IN THECOMPANY’S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000.

OVERVIEW

The Company is a leading provider of comprehensive electronic commerceoutsourcing solutions.  The Company wasincorporated in February 1994 and commenced offering products for sale throughits clients’ Web stores in August 1996. From inception through August 1996, the Company had no sales, and itsactivities related primarily to the development of its Commerce Network Server(“CNS”) technology related to electronic commerce.  In 1996, the Company began to focus its business developmentefforts on the software industry, building its inventory of software productsthrough contracts with software publishers. In 1997, the Company began to develop software distributionrelationships through contracts with online retailers.  As of September 30, 2001, the Company hadapproximately 10,000 software publisher clients and online retailer clientsthat are served by the Software and Digital Commerce Services Division.  In late 1998, the Company began to offer itscomprehensive electronic commerce outsourcing services in the form of atransaction fee-based e-commerce service to clients outside of the softwareindustry.  As of September 30, 2001, theCompany had 100 individual client contracts, plus multiple sites resulting fromsingle contracts and Market Maker installations under its E-Business ServicesDivision.

The Company derives its revenue primarily fromtransaction and service fees associated with the e-commerce services that theCompany provides to its clients.  Theseservices include Web commerce hosting, transaction processing, digital andphysical fulfillment services, fraud screening, customer service andmerchandising and analytical marketing services.  The Company acts as the merchant of record on the majority of thetransactions processed and has contractual relationships with its clients,primarily software publishers and online retailers, which obligate the Companyto pay to the client a specified percentage of each sale.  The Company retains its transaction fee andalso charges for various service fees. The Company also derives revenue from fees charged to use its software,integration, development and consulting services provided to its clients.  This revenue is recognized as services areperformed, except for software usage fee and certain integration anddevelopment fees, which are recognized evenly over the term of the contract.

The Company has a limited operating history upon whichinvestors may evaluate its business and prospects.  Since inception, the Company has incurred significant losses, andas of September 30, 2001, had an accumulated deficit of approximately $99.6million.  The Company intends 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, particularly with respect to theE-Business Services division.    There canbe no assurance that the Company’s revenue will increase or even continue attheir current level or that the Company will achieve or maintain profitabilityor generate cash from operations in future periods.  The Company’s prospects must be considered in light of the risks,expenses and difficulties frequently encountered by companies in their earlystage of development, particularly companies in new and rapidly evolvingmarkets such as electronic commerce.  Toaddress these risks, the Company must, among other things, maintain existingand develop new relationships with software publishers, online retailers andE-Business Services clients, implement and successfully execute its businessand marketing strategy, continue to develop and upgrade its technology andtransaction-processing systems, provide superior customer service and orderfulfillment, respond to competitive developments, and attract, retain andmotivate qualified personnel.  There canbe no assurance that the Company will be successful in addressing such risks,and the failure to do so would have a material adverse effect on the Company’sbusiness, financial condition and results of operations.  The Company’s current and future expenselevels are based largely on its planned operations and estimates of futurerevenue.  Revenue and operating resultsgenerally depend on the volume and timing of orders received, which aredifficult to forecast.  The Company maybe unable to adjust spending in a timely manner to compensate for anyunexpected revenue shortfall. Accordingly, any significant shortfall in revenue would have animmediate adverse effect on the Company’s business, financial condition andresults of operations.  The Company isalso likely to continue to see revenue in it’s Software and Digital CommerceServices Division fluctuate on a seasonal basis that is typical for thesoftware publishing market in general. The Company believes that its fiscal first and fourth quarters areseasonally stronger than its second and third quarters due to the timing ofdemand for tax preparation software and the Christmas selling period.  In addition, it is the Company’s belief thatsoftware publishers avoid new product releases in the summer months.  In view of the rapidly evolving nature ofthe Company’s business and its limited operating history, the Company is unableto accurately forecast its revenue and believes that period-to-periodcomparisons of its operating results are not necessarily meaningful and shouldnot be relied upon as an indication of future performance.

 

RESULTS OFOPERATIONS

The following table sets forth certain items from the Company’scondensed consolidated statements of operations as a percentage of totalrevenue for the periods indicated.
|                                                                                             |   | **Three  Months Ended** |       | **Nine  Months Ended** |       |
|--------------------------------------------------------------------------------------------------|--------|-------------------------|------------|------------------------|------------|
|                                                                                             |   | **September  30,**      |       | **September  30,**     |       |
|                                                                                             |   | **2001**                | ** ** | **2000**               | ** ** | **2001** | ** ** | **2000** | ** ** |
| Revenue                                                                                          |   | 100.0                   | %          | 100.0                  | %          | 100.0 | % | 100.0 | % |
| Costs and expenses (exclusive of depreciation and  amortization expense shown separately below): |   |                    |       |                   |       |   |   |   |   |
| Direct cost of services                                                                          |   | 5.5                     |       | 5.6                    |       | 5.0 |   | 4.7 |   |
| Network and infrastructure                                                                       |   | 15.3                    |       | 24.8                   |       | 19.0 |   | 26.7 |   |
| Sales and marketing                                                                              |   | 47.2                    |       | 82.1                   |       | 49.5 |   | 93.2 |   |
| Product research and development                                                                 |   | 19.7                    |       | 37.6                   |       | 19.9 |   | 51.8 |   |
| General and administrative                                                                       |   | 8.0                     |       | 15.1                   |       | 8.0 |   | 17.1 |   |
| Depreciation                                                                                     |   | 8.8                     |       | 11.8                   |       | 8.8 |   | 10.6 |   |
| Amortization of goodwill and other intangibles and  acquisition related costs                    |   | 28.0                    |       | 34.2                   |       | 30.9 |   | 58.4 |   |
| Total costs and expenses                                                                         |   | 132.5                   |       | 211.2                  |       | 141.1 |   | 262.5 |   |
| Loss from operations                                                                             |   | (32.5                   | )          | (111.2                 | )          | (41.1 | ) | (162.5 | ) |
| Interest income                                                                                  |   | 1.2                     |       | 5.1                    |       | 2.0 |   | 7.7 |   |
| Net loss                                                                                         |   | (31.3                   | %)         | (106.1                 | %)         | (39.1 | %) | (154.8 | %) |

 

REVENUE

Revenue increased to $14.0 million for the quarter ended September 30,2001 from $7.6 million for the quarter ended September 30, 2000 and increasedto $40.1 million for the nine months ended September 30, 2001, up from $21.1million for the same period of 2000. Revenue for the Software and Digital Commerce Services divisionincreased to $10.6 million for the quarter ended September 30, 2001 from $5.9million for the quarter ended September 30, 2000 and increased to $30.6 millionfor the nine months ended September 30, 2001, up from $17.5 million for thesame period of 2000.  The increase inboth the quarter and nine-month periods was primarily a result of growth in thenumber of the Company’s software publisher and online retailer clients as wellas increasing market acceptance of electronic software delivery.  Revenue for the E-Business Services divisionincreased to $3.4 million for the quarter ended September 30, 2001 from $1.7million for the quarter ended September 30, 2000 and increased to $9.5 millionfor the nine months ended September 30, 2001, up from $3.6 million for the sameperiod of 2000.  This increase resultedfrom the addition of new clients contracted and ongoing fees earned on existingclients.                International sales withinthe Software and Digital Commerce Services division represented approximately25% and 26% of divisional revenue for the quarters ended September 30, 2001 and2000, respectively, and 23% and 24% of total revenue for the nine-month periodsended September 30, 2001 and 2000, respectively.  International sales within the E-Business Services divisionrepresented approximately 17% and 14% of divisional revenue for the quarter andnine months ended September 30, 2001, respectively.  There was no international revenue in the E-Business Servicesdivision during 2000.

GROSS PROFIT

Cost of revenue, which consists of direct cost of services and networkand infrastructure costs (both shown exclusive of depreciation and amortizationexpense), increased to $2.9 million in the quarter ended September 30, 2001from $2.3 million in the quarter ended September 30, 2000 and increased to $9.6million for the nine months ended September 30, 2001, up from $6.6 million forthe same period of 2000.  The grossprofit margin for the Software and Digital Commerce Services division rose inthe quarter ended September 30, 2001 to 83.3% from 70.9% for the quarter endedSeptember 30, 2000 and rose in the nine months ended September 30, 2001 to78.5% from 70.7% for the same period of 2000. The gross profit margin for the E-Business Services division increasedin the quarter ended September 30, 2001 to 65.9% from 65.4% for the quarterended September 30, 2000 and increased in the nine months ended September 30,2001 to 68.2% from 58.7% for the same period of 2000.  The increase in margin in both divisions in the current yearquarter and nine month periods is due in part to leveraging the fixed costinfrastructure and better margins on service fees for implementing clientcontracts.  The Company believes thatInternet commerce and related services could become more competitive in thefuture.  Accordingly, the Company mayreduce or alter its pricing structure and policies in the future and any suchchange could reduce gross margins.

SALES ANDMARKETING

Sales and marketing expense increased to $6.6 million in the quarterended September 30, 2001 from $6.2 million in the quarter ended September 30,2000 and increased to $19.9 million in the nine months ended September 30, 2001,from $19.7 million in the same period of 2000. Sales and marketing expense for the Software and Digital CommerceServices division increased to $4.1 million in the quarter ended September 30,2001 from $3.6 million for the quarter ended September 30, 2000 and increasedto $12.4 million in the nine months ended September 30, 2001, from $11.1million in the same period of 2000.  Themain component of the increase in the current year quarter was an increase incredit card fees, corresponding to the increase in revenue.  The increase in the current year nine-monthperiod is primarily due to an increase in credit card fees, partially offset bya decrease in advertising and marketing expense.  Sales and marketing expense for the E-Business Services divisiondecreased to $2.5 million in the quarter ended September 30, 2001 from $2.6million for the quarter ended September 30, 2000 and decreased to $7.5 millionfor the nine months ended September 30, 2001, from $8.6 million in the sameperiod of 2000.  This decrease in thecurrent year quarter and nine month periods resulted primarily from a decreasein advertising and marketing expense, partially offset by an increase inpersonnel costs.  As a percentage ofrevenue, sales and marketing expense was 47.2% and 49.5% in the quarter andnine month periods ended September 30, 2001, respectively, compared to 82.1%and 93.2% for the same periods of 2000. The decrease as a percentage of revenue in the current year periodsprimarily reflects the Company’s increased revenue volume in 2001 over2000.  The Company expects that salesand marketing expense will increase in absolute dollars over time as theCompany continues to build its sales and marketing infrastructure and developmarketing programs.

PRODUCT RESEARCHAND DEVELOPMENT

Product research and development expense decreased to $2.8 million inthe quarter ended September 30, 2001 from $2.9 million in the quarter endedSeptember 30, 2000 and decreased to $8.0 million in the nine months endedSeptember 30, 2001, compared to $10.9 million in the same period of 2000.  Product research and development expense forthe Software and Digital Commerce Services division decreased to $1.2 millionin the quarter ended September 30, 2001 from $1.3 million for the quarter endedSeptember 30, 2000 and decreased to $3.5 million in the nine months endedSeptember 30, 2001, compared to $4.6 million in the same period of 2000.  Product research and development expense forthe E-Business Services division was $1.5 million in both the quarter endedSeptember 30, 2001 and 2000 and decreased to $4.5 million in the nine monthsended September 30, 2001, compared to $6.4 million for the same period of2000.  The decrease in product researchand development expenses in both divisions in the current year nine monthperiod is primarily due to a decrease in consulting fees offset by an increasein personnel costs.  As a percentage ofrevenue, product research and development expense was 19.7% and 19.9% in the quarterand nine month periods ended September 30, 2001, respectively, compared to37.6% and 51.8% for the same periods of 2000, primarily reflecting theCompany’s increased revenue volume and decreased consulting expense.  The Company expects that product researchand development expense will increase in absolute dollars over time as theCompany invests in projects critical to attaining its strategic objectives.

GENERAL ANDADMINISTRATIVE

General and administrative expense decreased to $1.1 million in thequarter ended September 30, 2001 from $1.2 million in the quarter endedSeptember 30, 2000 and decreased to $3.2 million in the nine months endedSeptember 30, 2001, compared to $3.6 million in the same period of 2000.  As a percentage of revenue, general andadministrative expense was 8.0% in the quarter and nine month periods endedSeptember 30, 2001, compared to 15.1% and 17.1% for the same periods of 2000,primarily reflecting the Company’s revenue growth.  The Company expects general and administrative expense toincrease in absolute dollars in the future, particularly as the Companycontinues to build infrastructure to support its growth.

AMORTIZATION OFGOODWILL AND OTHER INTANGIBLES AND ACQUISITION RELATED COSTS

Amortization of goodwill and other intangibles and acquisition relatedcosts increased to $3.9 million in the quarter ended September 30, 2001 from$2.6 million in the quarter ended September 30, 2000, reflecting theamortization of goodwill and other intangibles from acquisitions consummatedduring 2001.  Amortization of goodwilland other intangibles and acquisition related costs for the nine months endedSeptember 30, 2001 totaled $12.4 million, compared to $12.3 million in the sameperiod of 2000 reflecting higher amortization of goodwill and other intangiblesin 2001, offset by higher earnout payments during 2000.

INTEREST INCOME

Interest income consists of earnings on the Company’s cash, cashequivalents and investments.  Thedecrease from the prior period was attributable to lower cash and investmentbalances in 2001 along with lower interest rates during the current year.

INCOME TAXES

The Company paid no income taxes in any reported period.  The Company has incurred a net loss for eachperiod since inception.  As of September30, 2001, the Company had approximately $85.5 million of net operating losscarryforwards for federal income tax purposes, which expire beginning in2009.  Due to the uncertainty of futureprofitability, a valuation allowance equal to the deferred tax asset has been recorded.  Certain changes in ownership that resultedfrom the sales of Common and Preferred Stock will limit the future annualrealization of the tax net operating loss carryforwards to a specifiedpercentage under Section 382 of the Internal Revenue Code.

LIQUIDITY ANDCAPITAL RESOURCES

During the nine months ended September 30, 2001, the Company’soperations used $836,000 of cash compared to $17.1 million in the same periodof the prior year.  The significantimprovement is mainly due to the reduction in the net loss in 2001 compared to2000.  The Company generated cashthrough the net sales of investments in the nine months ended September 30,2001, totaling $7.0 million, compared to net sales of $22.4 million in the sameperiod of the prior year.  Investmentsin equipment and for acquired companies totaled $6.0 million in the currentyear nine-month period, compared to $8.3 million in the same period of theprior year.

As of September 30, 2001, the Company had $17.4 million of cash andcash equivalents and $7.9 million of short-term investments.  The Company’s principal commitmentsconsisted of obligations outstanding under operating leases and a $2,500,000note payable to the former shareholders of RegSoft, due on February 2, 2002.  Although the Company has no materialcommitments for capital expenditures, it anticipates continued capitalexpenditures consistent with its anticipated growth in operations,infrastructure and personnel.  TheCompany anticipates that it will expend approximately $14 million over the next18 months on capital expenditures based on its current anticipated growthrate.  The Company further anticipatesthat it will expend approximately $15 million over the next 18 months onproduct development based on its current anticipated growth rate inoperations.  The Company may also usecash to acquire or license technology, products or businesses related to theCompany’s current business.  The Companyalso anticipates that it will experience growth in its operating expenses forthe foreseeable future and that its operating expenses will be a material useof the Company’s cash resources.

In April 2001, the Company initiated a share repurchase program of upto $5.0 million of its outstanding shares of Common Stock.  Repurchases will be at the Company’sdiscretion based on ongoing assessments of the capital needs of the businessand the market price of its shares.  Notime limit was set for completion of the repurchase program.  Through September 30, 2001, the Companyexpended approximately $267,000 to repurchase its shares.

The Company believes that existing sources of liquidity and the resultsof its operations will provide adequate cash to fund its operations for atleast the next 18 months, although the Company may seek to raise additionalcapital during that period.

RECENT ACCOUNTINGPRONOUNCEMENTS

On June 29, 2001, the Financial Accounting Standards Board approved forissuance Statement of Financial Accounting Standards (SFAS) 141, BusinessCombinations, and SFAS 142, Goodwill and Intangible Assets. Major provisions ofthese Statements are as follows: all business combinations initiated after June30, 2001 must use the purchase method of accounting; the pooling of interestmethod of accounting is prohibited except for transactions initiated beforeJuly 1, 2001; intangible assets acquired in a business combination must berecorded separately from goodwill if they arise from contractual or other legalrights or are separable from the acquired entity and can be sold, transferred,licensed, rented or exchanged, either individually or as part of a relatedcontract, asset or liability; goodwill and intangible assets with indefinitelives are not amortized but tested for impairment annually, except in certaincircumstances, and whenever there is an impairment indicator; all acquiredgoodwill must be assigned to reporting units for purposes of impairment testingand segment reporting; effective January 1, 2002, goodwill from acquisitionsinitiated prior to July 1, 2001 will no longer be subject to amortization.  These new rules were applicable to ouracquisitions of RegSoft.com and Orbit Commerce, Inc.  Accordingly, goodwill totaling $3,375,000 resulting from theseacquisitions is not being amortized. Management is currently reviewing the provisions of these Statements onour previous acquisitions and their impact on the Company's results ofoperations.

 

ITEM 3.  QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUTMARKET RISK

The Company does not enter into financial instruments for trading orspeculative purposes and does not currently utilize derivative financialinstruments.  The operations of theCompany are conducted primarily in the United States and as such are notsubject to material foreign currency exchange rate risk.  The Company has no long-term debt.

 

PART II.                OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Beginning in August 2001, the Company and certain of its officers anddirectors were named as defendants in several class action shareholdercomplaints filed in the United States District Court for the Southern Districtof 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-792.  Similar complaints were filed in the same Court against numerous publiccompanies that conducted initial public offerings ("IPOs") of theircommon stock since the mid-1990s. In each of these complaints, the plaintiffsallege that the Company, certain of its officers and directors and its IPOunderwriters violated the federal securities laws because the Company's IPOregistration statement and prospectus contained untrue statements of materialfact or omitted material facts regarding the compensation to be received by,and the stock allocation practices of, the IPO underwriters.  The plaintiffs seek unspecified monetarydamages and other relief.

On August 8, 2001, all of the above-referenced lawsuits wereconsolidated for pretrial purposes before United States Judge Shira Scheindlinof the Southern District of New York. Judge Scheindlin held an initial case management conference on September7, 2001, at which time she ordered, among other things, that the time for alldefendants to respond to any complaint be postponed until further order of theCourt.  Thus, the Company has not beenrequired to answer any of the complaints, and no discovery has been served onthe Company.  The Company believes theselawsuits are without merit and intends to defend against them vigorously.

The Company is also party to patent litigation, along with otherdefendants, regarding United States Patent No. 6,014,651 owned by ChristopherM. Crawford of Washington, D.C. The case has been filed and is pending in theUS District Court in the District of Columbia. No substantive actions havetaken place as yet in this case. The parties are scheduled for the initialmeeting with the court on November 27, 2001. The parties will discuss thestatus of the case and the scheduling of the case through discovery andtrial.  The parties will also have theinitial settlement demands presented on or before that time by the Plaintiff. 

The company has received an opinion from counsel that it does notinfringe the Crawford patent and is presently actively investigating thevalidity of the patent.  The Companybelieves that it has meritorious defenses to these allegations and intends tovigorously defend against them.

 

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

                (c)           On September 14, 2001, pursuant to anAsset Purchase Agreement dated as of September 14, 2001 (the "PurchaseAgreement") by and between the Company and Orbit Commerce, Inc.  ("Orbit"), the Company purchasedsubstantially all of the assets of Orbit in exchange for 727,939 shares ofCommon Stock of the Company and $964,000. The Purchase Agreement includes a contingent earnout whereby Orbit canreceive additional shares of Common Stock of the Company based upon therevenues generated by the assets acquired from Orbit over the 15 monthsfollowing the closing.

                Theissuance and sale of the unregistered securities were deemed to be exempt fromthe registration and prospectus delivery requirements under the Securities Actof 1933, as amended (the Securities Act), in reliance upon Section 4(2) of theSecurities Act and Regulation D promulgated thereunder, as a transaction by anissuer not involving any public offering. The recipients of securities represented their intentions to acquire thesecurities for investment only and not with a view to or for sale in connectionwith any distribution thereof and appropriate legends were affixed to thesecurities issued in such transactions. All recipients had adequate access, through their relationship with theCompany, to information about Digital River.

ITEM 6.  EXHIBITSAND REPORTS ON FORM 8-K

(A)          EXHIBITS
| **EXHIBIT** |   |                                                                                                                                                                                |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **NUMBER**  |   | **DESCRIPTION  OF DOCUMENTS**                                                                                                                                                       |
| 3.1(1)      |   | Amended and Restated Certificate of Incorporation                                                                                                                              |
| 3.2(1)      |   | Bylaws of the Registrant                                                                                                                                                       |
| 4.1(1)      |   | Specimen Common Stock Certificate                                                                                                                                              |
| 11.1(2)     |   | Statement of Computation of Per Share Earnings                                                                                                                                 |
|        |   |                                                                                                                                                                                |
| (1)         |   | Filed as an exhibit to the Company’s Registration Statement  on Form S-1, File No. 333-56787, declared effective on August 11, 1998,  incorporated herein by reference.   |
| (2)         |   | See Note 4 to Condensed Consolidated Financial  Statements.                                                                                                                    |
|             |        |                                                                                                                                                                                     |  |

 

(B)           REPORTS ON FORM 8-K

                The Company filed one currentreport on Form 8-K/A during the quarter ended September 30, 2001, on August 10,2001, providing certain financial statements of ConnectInc.com, Co., a Delawarecorporation (“ConnectInc”) and a wholly-owned subsidiary of Calico Commerce,Inc., a Delaware corporation, from whom the Company acquired certain assets onMarch 20, 2001and providing additional disclosure to the footnotes to the proforma unaudited condensed consolidated financial statements .  The Company provided the audited financialstatements of ConnectInc as of December 31, 2000 and 1999 and for the periodfrom February 1, 2000 to December 31, 2000, the period from January 1, 2000 toJanuary 31, 2000, and for the year ended December 31, 1999.  The Company also provided unaudited proforma condensed consolidated financial statements as of and for the year endedDecember 31, 2000.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
| Date:   November 13, 2001 | DIGITAL RIVER, INC. |
|--------------------------------|---------------------|
|                           |                |
|                           |                |
|                           | By:                 | /s/ Robert E. Strawman |
|                           |                | Robert E. Strawman |
|                           |                | Chief Financial Officer |
|                           |                | (Principal Financial and Accounting |
|                           |                | Officer) |

 

EXHIBIT INDEX
| **EXHIBIT** |   |                                                                                                                                                                                |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **NUMBER**  |   | **DESCRIPTION  OF DOCUMENTS**                                                                                                                                                       |
| 3.1(1)      |   | Amended and Restated Certificate of Incorporation                                                                                                                              |
| 3.2(1)      |   | Bylaws of the Registrant                                                                                                                                                       |
| 4.1(1)      |   | Specimen Common Stock Certificate                                                                                                                                              |
| 11.1(2)     |   | Statement of Computation of Per Share Earnings                                                                                                                                 |
|        |   |                                                                                                                                                                                |
| (1)         |   | Filed as an exhibit to the Company’s Registration  Statement on Form S-1, File No. 333-56787, declared effective on August 11,  1998, incorporated herein by reference.   |
| (2)         |   | See Note 4 to Condensed Consolidated Financial  Statements.                                                                                                                    |
|             |        |                                                                                                                                                                                     |  |