##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009
 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
 DIGITAL RIVER, INC.
  DELAWARE
    
    41-1901640(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 9625 WEST 76TH STREET
EDEN PRAIRIE, MINNESOTA 55344
 (952) 253-1234
 
 þ o
 o o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008
    
    
    3Condensed Consolidated Statements of Income for the three months ended March 31, 2009 and 2008
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Qualitative and Quantitative Disclosure about Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    26PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    27Item 1A. Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 6. Exhibits
    
    
    40SIGNATURES
    
    
    41EXHIBIT INDEX
    
    
    42EX-12.1EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 DIGITAL RIVER, INC.
 
   (Unaudited)March 31,
    
    
    December 31,2009
    
    
    2008ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    347,863
    
    
    $
    490,335Short-term investments
    
    
    7,000
    
    
    
    10,000Accounts receivable, net of allowance of
$3,017 and $2,457
    
    
    61,411
    
    
    
    53,216Deferred income taxes
    
    
    7,606
    
    
    
    7,613Prepaid expenses and
other
    
    
    19,299
    
    
    
    42,522Total current assets
    
    
    443,179
    
    
    
    603,686Property and equipment, net
    
    
    44,417
    
    
    
    41,733Goodwill
    
    
    264,643
    
    
    
    273,788Intangible assets, net of accumulated amortization of
$67,138 and $66,345
    
    
    29,380
    
    
    
    32,222Long-term investments
    
    
    91,967
    
    
    
    93,213Deferred income taxes
    
    
    22,686
    
    
    
    24,824Other assets
    
    
    744
    
    
    
    786TOTAL ASSETS
    
    $
    897,016
    
    
    $
    1,070,252LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Convertible senior notes
    
    $
    
    
    
    $
    186,195Accounts payable
    
    
    202,603
    
    
    
    184,361Accrued payroll
    
    
    11,979
    
    
    
    14,841Deferred revenue
    
    
    15,530
    
    
    
    13,651Accrued acquisition costs
    
    
    255
    
    
    
    3,278Other accrued liabilities
    
    
    36,845
    
    
    
    41,336Total current liabilities
    
    
    267,212
    
    
    
    443,662NON-CURRENT LIABILITIES:Convertible senior notes
    
    
    8,805
    
    
    
    8,805Other liabilities
    
    
    15,612
    
    
    
    15,712Total non-current
liabilities
    
    
    24,417
    
    
    
    24,517TOTAL LIABILITIES
    
    
    291,629
    
    
    
    468,179COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred Stock, $.01 par value; 5,000,000 shares authorized; no
shares issued or
outstanding
    
    
    
    
    
    
    Common Stock, $.01 par value; 120,000,000 shares authorized;
44,405,401 and
43,225,401 shares issued
    
    
    444
    
    
    
    432Treasury stock at cost; 6,229,167 and
6,211,477 shares
    
    
    (216,600
    )
    
    
    (216,163
    )Additional paid-in
capital
    
    
    622,630
    
    
    
    623,778Retained earnings
    
    
    205,687
    
    
    
    189,096Accumulated other comprehensive
(loss)/income
    
    
    (6,774
    )
    
    
    4,930Total stockholders
equity
    
    
    605,387
    
    
    
    602,073TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    897,016
    
    
    $
    1,070,252
  3




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##### Table of Contents



DIGITAL RIVER, INC.
 
   Three Months EndedMarch 31,2009
    
    
    2008Revenue
    
    $
    102,931
    
    
    $
    103,634Costs and expensesDirect cost of services
    
    
    3,942
    
    
    
    4,175Network and infrastructure
    
    
    10,313
    
    
    
    10,188Sales and marketing
    
    
    38,447
    
    
    
    39,730Product research and development
    
    
    12,335
    
    
    
    12,670General and administrative
    
    
    9,129
    
    
    
    10,244Depreciation and amortization
    
    
    3,844
    
    
    
    3,834Amortization of acquisition-related intangibles
    
    
    2,003
    
    
    
    2,176Total costs and expenses
    
    
    80,013
    
    
    
    83,017Income from operations
    
    
    22,918
    
    
    
    20,617Interest Income
    
    
    1,189
    
    
    
    6,246Other expense, net
    
    
    (1,348
    )
    
    
    (749
    )Income before income tax expense
    
    
    22,759
    
    
    
    26,114Income tax expense
    
    
    6,168
    
    
    
    7,831Net income
    
    $
    16,591
    
    
    $
    18,283Net income per share  basic
    
    $
    0.45
    
    
    $
    0.47Net income per share  diluted
    
    $
    0.45
    
    
    $
    0.43Shares used in per-share calculation  basic
    
    
    36,706
    
    
    
    38,528Shares used in per-share calculation  diluted
    
    
    37,227
    
    
    
    43,506
  4




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##### Table of Contents



DIGITAL RIVER, INC.
 
   Three Months EndedMarch 31,2009
    
    
    2008OPERATING ACTIVITIESNet income
    
    $
    16,591
    
    
    $
    18,283Adjustments to reconcile net income to net cash provided by operating activitiesAmortization of acquisition-related intangibles
    
    
    2,003
    
    
    
    2,176Change in accounts receivable allowance, net of acquisitions
    
    
    580
    
    
    
    411Depreciation and amortization
    
    
    3,844
    
    
    
    3,834Stock-based compensation expense related to stock-based
compensation plans
    
    
    3,711
    
    
    
    3,031Excess tax benefits from stock-based compensation
    
    
    (96
    )
    
    
    (412
    )Deferred and other income taxes
    
    
    1,555
    
    
    
    5,345Change in operating assets and liabilities (net of acquisitions)Accounts receivable
    
    
    (10,607
    )
    
    
    4,374Prepaid and other assets
    
    
    17,399
    
    
    
    3,732Accounts payable
    
    
    23,129
    
    
    
    4,798Deferred revenue
    
    
    2,191
    
    
    
    1,248Income tax payable
    
    
    2,020
    
    
    
    (7,357
    )Other accrued liabilities
    
    
    (7,729
    )
    
    
    5,190Net cash provided by operating activities
    
    
    54,591
    
    
    
    44,653INVESTING ACTIVITIESPurchases of investments
    
    
    (2,122
    )
    
    
    (94,714
    )Sales of investments
    
    
    10,000
    
    
    
    122,050Cash paid for acquisitions, net of cash received
    
    
    (3,017
    )
    
    
    (16,481
    )Purchases of equipment and capitalized software
    
    
    (6,894
    )
    
    
    (4,192
    )Net cash (used in)/provided by investing activities
    
    
    (2,033
    )
    
    
    6,663FINANCING ACTIVITIESCash paid for convertible senior notes
    
    
    (186,660
    )
    
    
    Exercise of stock options
    
    
    943
    
    
    
    1,985Repurchase of common stock
    
    
    
    
    
    
    (137,858
    )Repurchase of restricted stock to satisfy tax withholding obligation
    
    
    (436
    )
    
    
    (355
    )Excess tax benefits from stock-based compensation
    
    
    96
    
    
    
    412Net cash used in financing activities
    
    
    (186,057
    )
    
    
    (135,816
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    (8,973
    )
    
    
    8,512NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (142,472
    )
    
    
    (75,988
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    490,335
    
    
    
    381,788CASH AND CASH EQUIVALENTS, end of period
    
    $
    347,863
    
    
    $
    305,800SUPPLEMENTAL DISCLOSURES:Cash paid for interest on convertible senior notes
    
    $
    1,219
    
    
    $
    1,219Cash paid for income taxes
    
    $
    4,947
    
    
    $
    8,772
  5




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##### Table of Contents



DIGITAL RIVER, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  1. BASIS OF PRESENTATION
  Summary of Significant Accounting Policies
  Software Development
  Stock-Based Compensation Expense
     Comprehensive Income
  6




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##### Table of Contents



DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Three Months EndedMarch 31,2009
    
    
    2008Net Income
    
    $
    16,591
    
    
    $
    18,283Other comprehensive income:Unrealized foreign exchange (loss)/gain on the revaluation of
investments in foreign subsidiaries
    
    
    (15,336
    )
    
    
    15,233Reduction in temporary impairment of auction rate securities
    
    
    5,754
    
    
    
    Unrealized (loss)/gain on investments
    
    
    (7
    )
    
    
    1,312Tax expense
    
    
    (2,115
    )
    
    
    Other comprehensive income
    
    
    (11,704
    )
    
    
    16,545Comprehensive income
    
    $
    4,887
    
    
    $
    34,828
 Foreign Currency
 Disclosures about Derivative Instruments and Hedging Activities, an
amendment of FAS 133 Accounting for Derivative Instruments and Hedging
Activities
    2. NET INCOME PER SHARE
   7




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##### Table of Contents



DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Three Months EndedMarch 31,2009
    
    
    2008Earnings per share  basicNet income  basic
    
    $
    16,591
    
    
    $
    18,283Weighted average shares outstanding  basic
    
    
    36,706
    
    
    
    38,528Earnings per share  basic
    
    $
    0.45
    
    
    $
    0.47Earnings per share  dilutedNet income  basic
    
    $
    16,591
    
    
    $
    18,283Exclude: Interest expense and amortized financing
cost of convertible senior notes, net of tax benefit
    
    
    21
    
    
    
    434Net income  diluted
    
    $
    16,612
    
    
    $
    18,717Weighted average shares outstanding  basic
    
    
    36,706
    
    
    
    38,528Dilutive impact of non-vested stock and options outstanding
    
    
    321
    
    
    
    553Dilutive impact of convertible senior notes
    
    
    200
    
    
    
    4,425Weighted average shares outstanding  diluted
    
    
    37,227
    
    
    
    43,506Net income per share  diluted
    
    $
    0.45
    
    
    $
    0.43
   3. BUSINESS COMBINATIONS, GOODWILL AND INTANGIBLE ASSETS
 Business Combinations
  Acquisitions completed in 2008
   8




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##### Table of Contents



DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Future Earn-outs
  Pro Forma Operating Results (Unaudited)
  Three Months EndedMarch 31,2009
    
    2008Revenue
    
    $
    102,931
    
    
    $
    104,232Income from operations
    
    
    22,918
    
    
    
    20,360Net income
    
    
    16,591
    
    
    
    18,028Basic net income per share
    
    $
    0.45
    
    
    $
    0.47Diluted net income per share
    
    $
    0.45
    
    
    $
    0.42
  Goodwill and Other Intangible Assets
    9




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##### Table of Contents



DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 As of March 31, 2009Carrying Amount
    
    
    Accumulated
    
    
    Carrying AmountGross
    
    
    Amortization
    
    
    NetCustomer relationships
    
    $
    60,955
    
    
    
    38,392
    
    
    $
    22,563Non-compete agreements
    
    
    5,253
    
    
    
    5,244
    
    
    
    9Technology/tradename
    
    
    30,310
    
    
    
    23,502
    
    
    
    6,808Total
    
    $
    96,518
    
    
    $
    67,138
    
    
    $
    29,380
 As of December 31, 2008Carrying Amount
    
    
    Accumulated
    
    
    Carrying AmountGross
    
    
    Amortization
    
    
    NetCustomer relationships
    
    $
    62,265
    
    
    $
    37,931
    
    
    $
    24,334Non-compete agreements
    
    
    5,312
    
    
    
    5,301
    
    
    
    11Technology/tradename
    
    
    30,991
    
    
    
    23,114
    
    
    
    7,877Total
    
    $
    98,568
    
    
    $
    66,346
    
    
    $
    32,222
  Year2009
    
    $
    5,3522010
    
    
    5,6772011
    
    
    4,6002012
    
    
    4,4422013
    
    
    2,5222014
    
    
    2,388Thereafter
    
    
    4,399Total
    
    $
    29,380
 4. STOCKHOLDERS EQUITY
 Option and Restricted Stock Awards
 2007 Plan
  1998 Plan
  General Stock Award Information
  10




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##### Table of Contents



DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   WeightedShares
    
    
    
    
    
    
    Options
    
    
    AverageAvailable
    
    
    Options
    
    
    Price
    
    
    Pricefor Grant
    
    
    Outstanding
    
    
    Per Share
    
    
    Per ShareBalance, December 31, 2007
    
    
    2,848,728
    
    
    
    2,778,310
    
    
    $
    2.59 -        $57.36
    
    
    $
    28.41Granted
    
    
    (807,000
    )
    
    
    807,000
    
    
    
    19.28-41.44
    
    
    
    31.10Restricted stock effect on shares
available for grant
    
    
    (278,952
    )
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AExercised
    
    
    
    
    
    
    (425,774
    )
    
    
    4.56-38.17
    
    
    
    16.84Canceled/expired
    
    
    213,686
    
    
    
    (213,686
    )
    
    
    9.13-56.61
    
    
    
    38.59Balance, December 31, 2008
    
    
    1,976,462
    
    
    
    2,945,850
    
    
    $
    2.59 -        $57.36
    
    
    $
    30.08Granted
    
    
    (40,000
    )
    
    
    40,000
    
    
    
    24.07 - 25.61
    
    
    
    24.99Restricted stock effect on shares
available for grant
    
    
    (1,701,453
    )
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AExercised
    
    
    
    
    
    
    (46,823
    )
    
    
    6.37 - 27.28
    
    
    
    20.13Canceled/expired
    
    
    44,126
    
    
    
    (44,126
    )
    
    
    4.65 - 55.39
    
    
    
    38.86Balance, March 31, 2009
    
    
    279,135
    
    
    
    2,894,901
    
    
    $
    2.59 -        $57.36
    
    
    $
    30.04
   Options Outstanding
    
    
    Options ExercisableWeighted
    
    Weighted
    
    
    Aggregate
    
    
    
    
    
    
    Weighted
    
    
    AggregateNumber
    
    
    Average
    
    Average
    
    
    Intrinsic
    
    
    Number
    
    
    Average
    
    
    IntrinsicExercise Price
    
    Outstanding
    
    
    Life Remaining
    
    Price
    
    
    Value
    
    
    Exercisable
    
    
    Price
    
    
    Value$2.59 - $3.88
    
    
    19,187
    
    
    1.8 years
    
    $
    2.74
    
    
    $
    519,489
    
    
    
    19,187
    
    
    $
    2.74
    
    
    $
    519,4894.56 - 7.55
    
    
    146,195
    
    
    2.2 years
    
    
    5.37
    
    
    
    3,573,927
    
    
    
    146,195
    
    
    
    5.37
    
    
    
    3,573,9279.55 - 13.92
    
    
    336,021
    
    
    3.5 years
    
    
    11.76
    
    
    
    6,068,234
    
    
    
    295,845
    
    
    
    11.88
    
    
    
    5,308,10416.72 - 22.98
    
    
    383,314
    
    
    5.1 years
    
    
    22.01
    
    
    
    2,994,752
    
    
    
    327,242
    
    
    
    22.48
    
    
    
    2,400,86023.01 - 30.69
    
    
    647,017
    
    
    6.6 years
    
    
    27.84
    
    
    
    1,470,126
    
    
    
    458,124
    
    
    
    28.45
    
    
    
    803,87331.84 - 57.36
    
    
    1,363,167
    
    
    8.2 years
    
    
    40.87
    
    
    
    
    
    
    
    540,678
    
    
    
    43.17
    
    
    
    $2.59 - $57.36
    
    
    2,894,901
    
    
    6.6 years
    
    $
    30.04
    
    
    $
    14,626,528
    
    
    
    1,787,271
    
    
    $
    26.90
    
    
    $
    12,606,253
   11




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##### Table of Contents



DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 WeightedRestricted
    
    
    AverageStock
    
    
    Intrinsic ValueNon-Vested Balance, December 31, 2007
    
    
    233,404
    
    
    $
    50.64Granted
    
    
    498,550
    
    
    
    29.04Vested
    
    
    (66,010
    )
    
    
    49.42Forfeited
    
    
    (312,582
    )
    
    
    33.61Non-Vested Balance, December 31, 2008
    
    
    353,362
    
    
    $
    35.45Granted
    
    
    1,137,250
    
    
    
    25.18Vested
    
    
    (85,806
    )
    
    
    38.26Forfeited
    
    
    (2,948
    )
    
    
    30.89Non-Vested Balance,March 31, 2009
    
    
    1,401,858
    
    
    $
    26.96
 Inducement Equity Incentive Plan
  Employee Stock Purchase Plan
  Expense Information under SFAS 123(R)
  Three Months EndedMarch 31,2009
    
    
    2008Costs and expensesDirect cost of services
    
    $
    169
    
    
    $
    192Network and infrastructure
    
    
    113
    
    
    
    32Sales and marketing
    
    
    1,517
    
    
    
    1,102Product research and development
    
    
    456
    
    
    
    262General and administrative
    
    
    1,456
    
    
    
    1,443Stock-based compensation included in costs and expenses
    
    
    3,711
    
    
    
    3,031Tax benefit
    
    
    (1,287
    )
    
    
    (1,040
    )Stock-based compensation expense, net of tax
    
    $
    2,424
    
    
    $
    1,991
 Valuation Information under SFAS 123(R)
  12




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##### Table of Contents



DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Three Months EndedMarch 31,2009
    
    2008Risk-free interest rate
    
    
    1.2
    %
    
    
    2.0
    %Expected life (years)
    
    
    3.1
    
    
    
    3.5Volatility factor
    
    
    0.45
    
    
    
    0.46Expected dividends
    
    
    
    
    
    
    
    5. INCOME TAXES
     6. DEBT
  13




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##### Table of Contents



DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    7. FAIR VALUE MEASUREMENTS
        14




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##### Table of Contents



DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   
    
    determination of the penalty coupon rate, frequency of reset period associated with each
ARS
    
    an average redemption period of seven years
    
    a contribution of the ARS paying its contractually stated interest rate
    
    determination of the risk adjusted discount rate based on LIBOR rates for these
maturities plus market information on student loan credit spreads
   Fair Value MeasurementsAs of March 31, 2009Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Cash equivalents
    
    $
    347,863
    
    
    $
    347,863
    
    
    $
    
    
    
    $
    Short-term investments
    
    
    7,000
    
    
    
    7,000
    
    
    
    Long-term investments
    
    
    91,967
    
    
    
    
    
    
    
    
    
    
    
    91,967Total assets measured at fair value
    
    $
    446,830
    
    
    $
    354,863
    
    
    $
    
    
    
    $
    91,967
   15




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##### Table of Contents



DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Fair Value Measurements UsingSignificant Unobservable Inputs(Level 3)Short-term
    
    
    Long-termInvestments
    
    
    Investments
    
    
    TotalBalance as of December 31, 2007
    
    $
    119,750
    
    
    $
    
    
    
    $
    119,750Total gains or losses (realized/unrealized)Included in other comprehensive income
    
    
    
    
    
    
    (16,287
    )
    
    
    (16,287
    )Purchases, issuances, and settlements
    
    
    (10,250
    )
    
    
    
    
    
    
    (10,250
    )Transfers in and/or out of Level 3
    
    
    (109,500
    )
    
    
    109,500
    
    
    
    Balance as of December 31, 2008
    
    $
    
    
    
    $
    93,213
    
    
    $
    93,213Total gains or losses (realized/unrealized)Included in other comprehensive income
    
    
    
    
    
    
    5,754
    
    
    
    5,754Purchases, issuances, and settlements
    
    
    
    
    
    
    
    
    
    
    Transfers in and/or out of Level 3
    
    
    
    
    
    
    (7,000
    )
    
    
    (7,000
    )Balance as of March 31, 2009
    
    $
    
    
    
    $
    91,967
    
    
    $
    91,967
 8. LITIGATION
  16




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The discussion in this Quarterly Report contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed below. Additional
factors that could cause or contribute to such differences include, but are not limited to, those
identified below, and those discussed in the section entitled Risk Factors, included in Item 1A
of Part II of this Quarterly Report. When used in this document, the words believes, expects,
anticipates, intends, plans, and similar expressions, are intended to identify certain of
these forward-looking statements. However, these words are not the exclusive means of identifying
such statements. In addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking statements. The cautionary
statements made in this document should be read as being applicable to all related forward-looking
statements wherever they appear in this document.
 Overview
     th
  17




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Critical Accounting Policies
  Revenue Recognition. (
      Allowance for Doubtful Accounts.
 Credit Card Chargeback Reserve.
 18




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##### Table of Contents



Goodwill, Intangibles and Other Long-Lived Assets.
 Income Taxes and Deferred Taxes
 Stock-Based Compensation Expense
   Business Combinations
 Results of Operations
  19




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##### Table of Contents



Three Months EndedMarch 31,2009
    
    2008Revenue
    
    
    100.0
    %
    
    
    100.0
    %Cost of Revenue (exclusive of depreciation and
amortization expense shown separately below):Direct cost of services
    
    
    3.8
    
    
    
    4.0Network and infrastructure
    
    
    10.0
    
    
    
    9.8Sales and marketing
    
    
    37.4
    
    
    
    38.3Product research and development
    
    
    12.0
    
    
    
    12.3General and administrative
    
    
    8.9
    
    
    
    9.9Depreciation and amortization
    
    
    3.7
    
    
    
    3.7Amortization of acquisition-related costs
    
    
    1.9
    
    
    
    2.1Total costs and expenses
    
    
    77.7
    
    
    
    80.1Income from operations
    
    
    22.3
    
    
    
    19.9Interest Income
    
    
    1.1
    
    
    
    6.0Other expense, net
    
    
    (1.3
    )
    
    
    (0.7
    )Income before income tax expense
    
    
    22.1
    
    
    
    25.2Income tax expense
    
    
    6.0
    
    
    
    7.6Net income
    
    
    16.1
    %
    
    
    17.6
    %
  REVENUE.
  DIRECT COST OF SERVICES.
  NETWORK AND INFRASTRUCTURE.
  20




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##### Table of Contents



SALES AND MARKETING.
   PRODUCT RESEARCH AND DEVELOPMENT.
  GENERAL AND ADMINISTRATIVE.
  21




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DEPRECIATION AND AMORTIZATION.
  AMORTIZATION OF ACQUISITION-RELATED INTANGIBLES.
  INTEREST INCOME.
 OTHER EXPENSE, NET.
 INCOME TAXES.
 Off Balance Sheet Arrangements
  22




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Liquidity and Capital Resources
       
    
    determination of the penalty coupon rate, frequency of reset period associated with each
ARS
    
    an average redemption period of seven years
    
    a contribution of the ARS paying its contractually stated interest rate
    
    determination of the risk adjusted discount rate based on LIBOR rates for these
maturities plus market information on student loan credit spreads
    23




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##### Table of Contents



Payment due by period (in thousands)Total Amount
    
    Apr-Dec
    
    
    
    
    
    
    
    
    
    2014 andContractual Obligations
    
    Committed
    
    2009
    
    2010-2011
    
    2012-2013
    
    ThereafterOperating Lease Obligations
    
    $
    12,071
    
    
    $
    3,912
    
    
    $
    6,563
    
    
    $
    1,505
    
    
    $
    91Convertible Senior Notes
    
    
    10,456
    
    
    
    55
    
    
    
    220
    
    
    
    220
    
    
    
    9,961Total
    
    $
    22,527
    
    
    $
    3,967
    
    
    $
    6,783
    
    
    $
    1,725
    
    
    $
    10,052
     24




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##### Table of Contents



Item 3. Qualitative and Quantitative Disclosure about Market Risk
 Interest Rate Risk
   Foreign Currency Risk
   Transaction Exposure
  Translation Exposure
  Other Market Risks
 Investments in auction-rate securities
  25




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##### Table of Contents



Item 4. Controls and Procedures
 (a)
    
    We are committed to maintaining disclosure controls and procedures designed to ensure that
information required to be disclosed in our periodic reports filed under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow for timely decisions regarding required disclosure. Our
management, under the supervision and with the participation of our Chief Executive Officer
and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures as of March 31, 2009. Based upon this
evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated
under the Securities Exchange Act of 1934) were effective in providing reasonable assurance
that material information required to be disclosed by us in this Form 10-Q was recorded,
processed, summarized and reported in a timely manner.(b)
    
    During the quarter ended March 31, 2009, there was no change in our internal control over
financial reporting that materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
 Limitations on the Effectiveness of Controls
  26




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
    27




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##### Table of Contents



Item 1A. Risk Factors
 The risks described below are not the only ones facing our company. Additional risks not presently
known to us or that we currently deem immaterial also may impair our business operations. Our
business financial condition or results of operations could be materially adversely affected by any
of these risks and the value of our common stock could decline due to any of these risks. This
quarterly report also contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including the risks faced by us described below and elsewhere in
this report.
 We may experience significant fluctuations in our revenues, operating results, growth rate, and
stock price.
    
    
    Client Development, Retention and Satisfaction. We generate revenue by providing
services to a wide variety of companies, primarily in the software and high-tech products
markets. Therefore, it is important to our ongoing success that we maintain our key client
relationships and, at the same time, develop new client relationships. If we cannot develop
and maintain satisfactory relationships with software and digital products publishers,
manufacturers of consumer electronics and other goods, online retailers and online channel
partners on acceptable commercial terms, we will likely experience a decline in revenue and
operating profit. We also depend on our clients creating and supporting products that
consumers will purchase. If we are unable to obtain sufficient quantities of products for
any reason, or if the quality of service provided by these publishers and manufacturers
falls below a satisfactory level, we could also experience a decline in revenue, operating
profit and consumer satisfaction, and our reputation could be harmed. Our contracts with
our clients are generally one to two years in duration, with an automatic renewal provision
for additional one-year periods, unless we are provided with a written notice before the
end of the contract. We have no material long-term or exclusive contracts or arrangements
with any clients that guarantee the availability of products. Clients that currently supply
products to us may not continue to do so, and we may be unable to establish new
relationships with clients to supplement or replace existing relationships. Defects in the
e-commerce solutions we develop could result in delayed or lost revenue, adverse end-user
and/or client reaction, negative publicity, and/or claims brought against us, which could
require expensive corrections and liability and negatively affect our revenues, operating
results and stock price.Sales of products for one client, Symantec Corporation, accounted for approximately 23.8% of
our revenue in the first quarter of 2009. In addition, revenues derived from proprietary
Digital River services sold to Symantec consumers and sales of Symantec products through our
oneNetworkDirect retail and affiliate channel together accounted for approximately 8.3% of
total Digital River revenue in the first quarter of 2009. In addition, a limited number of
other software and physical goods clients contribute a large portion of our annual revenue.
If any one of these key contracts is not renewed or otherwise terminates, or if revenues
from these clients decline for any other reason (such as competitive developments), our
revenue would decline and our ability to sustain profitability would be impaired. If our
contract with Symantec is not renewed, renegotiated or otherwise terminated, or if revenues
from Symantec and Symantec-related services decline for any other reason, our revenue and
our ability to sustain profitability could be materially adversely impaired.
    
    Fluctuations in Demand. Our quarterly and annual operating results are subject to
fluctuations in demand for the products or services offered by us or our clients, such as
anti-virus software and anti-spyware software and
 28




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##### Table of Contents



consumer electronics. In particular, sales of anti-virus software represented a significant
portion of our revenues in recent years, and continue to be very important to our business.
Demand for anti-virus software is subject to the unpredictable introduction of significant
computer viruses. To the extent that software publishers successfully introduce products or
services not sold through our platform that are competitive with the products and services
offered by our current clients (including anti-virus products and services), our revenues
could be materially adversely affected.
    
    Seasonal Fluctuations. Our revenue is likely to fluctuate on a seasonal basis that is
typical for the software publishing market, consumer electronics market, and computer and
video games markets. Softening or weakening of traditionally high-volume periods, such as
the holiday season, can materially adversely affect our revenues and operating results.
    
    Changes in the E-commerce and Marketing Industries. The nature of our business and the
e-commerce industry in which we operate has undergone, and continues to undergo, rapid
development and change. Thus, our chances of financial and operational success should be
evaluated in light of the risks, uncertainties, expenses, delays and difficulties
associated with operating a business in a relatively rapidly changing industry. If we are
unable to address these issues, we may not be financially or operationally successful.
    
    Dependence on Key Personnel. Our future success significantly depends on our ability to
continue to identify, attract, hire, train, retain and motivate highly skilled personnel,
including the continued services and performance of our senior management. Competition for
these personnel is intense, particularly in the Internet industry. Our performance also
depends on our ability to retain and motivate our key technical employees who are skilled
in maintaining our proprietary technology platforms. The loss of the services of any of our
executive officers or key employees could harm our business if we are unable to effectively
replace that officer or employee, or if that person should decide to join a competitor or
otherwise directly or indirectly compete with us. Further, we may need to incur additional
operating expenses and divert other management time in order to search for a replacement.
    
    Operating Expenses. Our operating expenses are based on our expectations of future
revenue. These expenses are relatively fixed in the short-term. If our revenue for a
quarter falls below our expectations and we are unable to quickly reduce spending in
response, our operating results for that quarter would be harmed.
    
    Infrastructure and Operations. The introduction by us of new websites, web stores or
services, and the continued upgrading, development and maintenance of our systems,
infrastructure and operations to meet emerging market needs, leverage technical
innovations, and remain competitive in our service and product offerings, may require a
substantial investment of our resources and result in significant capital expenditures and
operating costs. In addition, a disruption in our systems, infrastructure and/or
operations, including hardware, software, network and Internet failures or outages, force
majeure events, and similar events, could result in damage or interruption to our services,
loss of sales, and materially and adversely affect our business, results of operations and
financial condition.
    
    Chargebacks. Digital River incurs chargeback processing fees on chargebacks associated
with the products and services we sell. We use estimates based on historical experience
and current trends to determine accrued chargeback expenses. If we change our estimates or
if our estimates are not accurate due to a higher-than-anticipated number of actual
chargebacks, our revenues and operating results may be affected.
    
    Other Factors. Our revenues, operating results, continued growth, and stock price may
be affected by factors generally affecting all businesses offering the same or similar
services to those offered by us, located in similar geographic locations as our offices,
and operating in similar industries as the e-commerce, payment processing, retailer, and
other industries in which we operate, including changes in general macroeconomic
conditions, global unrest and terrorism, changes in consumer spending, conditions or trends
in the Internet and online commerce industries in the United States and around the world,
changes to U.S. and foreign laws, rules and regulations relating and/or applicable to our
business and related changes in the costs of compliance, and changes to generally accepted
accounting principles and disclosures.Additional factors that may affect our revenues, operating results, continued growth, and
our stock price include:
 29




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##### Table of Contents



o
    
    Competitive developments, including the introduction of new products and
services and the announcement of new client and strategic acquisitions, partnerships
and relationships by our competitors;o
    
    Changes that affect our clients or the viability of their product lines,
including changes to the financial and operational health and stability of our clients,
competition in the markets for our clients products, acquisitions of and by our
clients and third parties, and client decisions to delay new product launches or to
invest in e-commerce initiatives;o
    
    Changes in our relationships with third party partners whose services are
integral to our service offering, including warehousing relationships, distributors,
and service providers;o
    
    Our announcement of significant acquisitions, strategic partnerships, joint
ventures or capital commitments or results of operations or other developments related
to those acquisitions, and our ability to successfully integrate and manage acquired
businesses;o
    
    Sales or other transactions involving our common stock or our convertible
notes.
 Failure to properly manage and sustain our expansion efforts could strain our management and other
resources.
  Our international operations and these efforts may not be successful in generating additional
revenue.
  §
    
    Changes in regulatory requirements and tariffs;§
    
    Uncertainty of application of local commercial, tax, privacy and other laws and
regulations;§
    
    Reduced protection of intellectual property rights;§
    
    Difficulties in physical distribution for international sales;§
    
    Higher incidences of credit card and other payment-related fraud and difficulties in
accounts receivable collection;§
    
    The burden and cost of complying with a variety of foreign laws, rules and regulations;§
    
    The possibility of unionization of our workforce outside the United States, particularly
in Europe;§
    
    Political, social and economic instability and constraints on international trade and;§
    
    Import and export license requirements and restrictions of the United States and every
other country in which we operate.
   30




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##### Table of Contents



New obligations to collect or pay transaction taxes could substantially increase the cost to us of
doing business.
  We could be liable for fraudulent, improper or illegal uses of our platforms.
   Loss of our credit card acceptance privileges would seriously hamper our ability to process the
sale of merchandise.
  Implementing our acquisition strategy could result in dilution and operating difficulties leading
to a decline in revenue and operating profit.
  31




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We may need to raise additional capital to achieve our business objectives, which could result in
dilution to existing investors or increase our debt obligations.
  Security breaches could hinder our ability to securely transmit confidential information and could
materially affect our reputation, business operations, operating results and financial condition.
  32




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##### Table of Contents



Protecting our intellectual property is critical to our success.
   Claims against us related to infringement of other parties intellectual property rights, or other
products we deliver, could require us to expend significant resources, enter into unfavorable
licenses or require us to change our business plans.
   33




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##### Table of Contents



If our internal control over financial reporting or disclosure controls and procedures are not
effective, there may be errors in our financial statements that could require a restatement or our
filings may not be timely and investors may lose confidence in our reported financial information,
which could lead to a decline in our stock price.
    Political and economic conditions, and current turmoil in United States and global markets, may
adversely affect our revenue and results of operations.
   Because the e-commerce industry is highly competitive and has low barriers to entry, we may be
unable to compete effectively.
 34




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##### Table of Contents



§
    
    In-house development of e-commerce capabilities using tools or applications from
companies, such as Art Technology Group, Inc. and IBM Corporation;§
    
    E-Commerce capabilities custom-developed by companies, such as IBM Global Services and
Accenture, Inc.;§
    
    Other providers of outsourced e-commerce solutions, such as GSI Commerce, Inc. and
asknet Inc.;§
    
    Companies that provide technologies, services or products that support a portion of the
e-commerce process, such as payment processing, including CyberSource Corporation and
PayPal Corp.;§
    
    Companies that offer various online marketing services, technologies and products,
including ValueClick, Inc., aQuantive, Inc. and Omniture, Inc.;§
    
    High-traffic, branded websites that generate a substantial portion of their revenue from
e-commerce and may offer or provide to others the means to offer their products for sale,
such as Amazon.com, Inc.; and§
    
    Web hosting, web services and infrastructure companies that offer portions of our
solution and are seeking to expand the range of their offering, such as Network Solutions,
LLC, Akamai Technologies, Inc., Yahoo!, Inc., eBay, Inc. and Hostopia.com, Inc.
   Compliance with laws, rules and regulations, and changes in applicable laws, rules and regulations,
may substantially increase our costs of doing business, limit our Internet activities, or otherwise
adversely affect our ability to offer our services.
   35




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##### Table of Contents



§
    
    User privacy with respect to adults and minors;§
    
    Our ability to collect and/or share necessary information that allows us to conduct
business on the Internet;§
    
    Export compliance;§
    
    Pricing, taxation, and regulatory fees;§
    
    Fraud;§
    
    Advertising;§
    
    Intellectual property rights;§
    
    Information security;§
    
    Quality of products and services;§
    
    Taxes; and§
    
    Recycling of consumer products.
  We are subject to regulations relating to consumer privacy.
    Failure to develop our technology to accommodate increased traffic could reduce demand for our
services and impair the growth of our business.
 36




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##### Table of Contents



System failures could reduce the attractiveness of our service offerings.
   §
    
    Fire, flood and other natural disasters;§
    
    Operator negligence, improper operation by, or supervision of, employees, physical and
electronic break-ins, misappropriation, computer viruses and similar events;§
    
    Power loss, computer systems failures, and Internet and telecommunications failure; and§
    
    Other events beyond our control.
  Our clients sales cycles are lengthy, which may cause us to incur substantial expenses and expend
management time without generating corresponding consumer revenue, which would impair our cash
flow.
  37




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##### Table of Contents



The listing of our network addresses on anti-spam lists could harm our ability to service our
clients and deliver goods over the Internet.
  We are exposed to foreign currency exchange risk.
  Changes in our tax rates could affect our future results.
  Developments in accounting standards may cause us to increase our recorded expenses, which in turn
would jeopardize our ability to demonstrate sustained profitability.
  Provisions of our charter documents, other agreements and Delaware law may inhibit potential
acquisition bids for us.
  38




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##### Table of Contents



The investment of our substantial cash balance and our investments in marketable debt securities
are subject to risks which may cause losses and affect the liquidity of these investments.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 None
 39




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##### Table of Contents



Item 6. Exhibits
  EXHIBITNUMBER
    
    DESCRIPTION OF DOCUMENTS3.1
    
    
    (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.4.2
    
    
    (4)
    
    Form of Senior Debt Indenture.4.3
    
    
    (4)
    
    Form of Subordinated Debt Indenture.4.4
    
    
    
    
    References are made to Exhibits 3.1 and 3.2.4.5
    
    
    (5)
    
    Indenture dated as of June 1, 2004 between Digital River, Inc. and Wells Fargo Bank,
N.A. as trustee, including therein the form of the Note.12.1
    
    
    
    
    Computation of Ratio of Earnings to Fixed Charges.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.
 
 (1)
    
    Filed as an exhibit to the Companys Current Report on Form 8-K, filed
on June 1, 2006, 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 exhibits 4.2 and 4.3 to our Registration Statement on Form
S-3, File No. 333-56787, declared effective on February 12, 2002, and
incorporated herein by reference.(5)
    
    Filed as exhibit 99.1 to our Current Report on Form 8-K, filed on July
13, 2004 and incorporated herein by reference. 40




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##### Table of Contents



Date: May 8, 2009
    DIGITAL RIVER, INC.By:
    /s/ Thomas M. DonnellyThomas M. DonnellyChief Financial Officer
(Principal Financial and Accounting Officer) 41




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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION OF DOCUMENTS3.1
    
    
    (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.4.2
    
    
    (4)
    
    Form of Senior Debt Indenture.4.3
    
    
    (4)
    
    Form of Subordinated Debt Indenture.4.4
    
    
    
    
    References are made to Exhibits 3.1 and 3.2.4.5
    
    
    (5)
    
    Indenture dated as of June 1, 2004 between Digital River, Inc. and Wells Fargo Bank,
N.A. as trustee, including therein the form of the Note.12.1
    
    
    
    
    Computation of Ratio of Earnings to Fixed Charges.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.
 
 (1)
    
    Filed as an exhibit to the Companys Current Report on Form 8-K, filed
on June 1, 2006, 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 exhibits 4.2 and 4.3 to our Registration Statement on Form
S-3, File No. 333-56787, declared effective on February 12, 2002, and
incorporated herein by reference.(5)
    
    Filed as exhibit 99.1 to our Current Report on Form 8-K, filed on July
13, 2004 and incorporated herein by reference. 42