**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

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| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|

 

**FOR THEQUARTERLY PERIOD ENDED MARCH 31, 2002**

 

**OR**

 

| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**FOR THETRANSITION PERIOD FROM **              **TO **              

 

**Commissionfile number 000-24643**

 

**DIGITAL RIVER, INC.**

(Exact name of registrantas specified in its charter)

 

| **DELAWARE**                                                         |   | **41-1901640**                            |
|----------------------------------------------------------------------|--------|-------------------------------------------|
| (State or other  jurisdiction of   incorporation or organization)    |   | (I.R.S. Employer   Identification Number) |
|                                                                 |   |                                      |
| **9625  WEST 76TH STREET, SUITE 150  EDEN PRAIRIE, MINNESOTA 55344** |
| (Address of principal  executive offices)                            |
|                                                                 |
| **(952)  253-1234**                                                  |
| (Registrant’s telephone  number, including area code)           |

 

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Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling 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** |   | **26,779,745  SHARES**          |
|------------------------------------|--------|---------------------------------|
| (Class)                            |   | Outstanding as of May  13, 2002 |

 

 

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DIGITAL RIVER, INC.

 

Form 10-Q

 

Index

 
| PART  I.      | FINANCIAL INFORMATION                                                                                |
|---------------|------------------------------------------------------------------------------------------------------|
|          |                                                                                                 |
| Item  1.      | Financial Statements                                                                                 |
|          |                                                                                                 |
|          | Condensed  Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001                    |
|          |                                                                                                 |
|          | Condensed  Consolidated Statements of Operations for the three months ended March 31,  2002 and 2001 |
|          |                                                                                                 |
|          | Condensed  Consolidated Statements of Cash Flows for the three months ended March 31,  2002 and 2001 |
|          |                                                                                                 |
|          | 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 |
|               |                                                                                                      |  |

 

2

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**PART I.****  FINANCIAL INFORMATION**

 

**Item 1.****  Financial Statements**

 

**DIGITAL RIVER, INC.**

CONDENDSED CONSOLIDATEDBALANCE SHEETS

(in thousands, exceptshare data)

 
|                                                                                                                                |   | **March 31,  2002** |   | **December 31,  2001** |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|------------------------|--------|
|                                                                                                                                |   | **(unaudited)**     |   |                   |   |
| **ASSETS**                                                                                                                          |   |                |   |                   |   |
| CURRENT ASSETS:                                                                                                                     |   |                |   |                   |   |
| Cash and cash equivalents                                                                                                           |   | $                   | 22,847 |                   | $      | 21,677 |   |
| Short-term investments                                                                                                              |   | 7,978               |   | 9,978                  |   |
| Accounts receivable, net                                                                                                            |   | 10,947              |   | 8,719                  |   |
| Prepaid expenses and other                                                                                                          |   | 1,064               |   | 1,455                  |   |
| Total current assets                                                                                                                |   | 42,836              |   | 41,829                 |   |
| PROPERTY AND EQUIPMENT, net                                                                                                         |   | 15,990              |   | 16,146                 |   |
| GOODWILL                                                                                                                            |   | 16,026              |   | 11,273                 |   |
| OTHER INTANGIBLE ASSETS, net                                                                                                        |   | 12,534              |   | 8,934                  |   |
| OTHER ASSETS                                                                                                                        |   | 38                  |   | 45                     |   |
|                                                                                                                                |   | $                   | 87,424 |                   | $      | 78,227 |   |
|                                                                                                                                |   |                |   |                   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                       |   |                |   |                   |   |
| CURRENT LIABILITIES:                                                                                                                |   |                |   |                   |   |
| Notes payable                                                                                                                       |   | $                   | — |                   | $      | 2,500 |   |
| Accounts payable                                                                                                                    |   | 29,740              |   | 19,360                 |   |
| Accrued payroll                                                                                                                     |   | 2,299               |   | 2,803                  |   |
| Deferred revenue                                                                                                                    |   | 889                 |   | 1,106                  |   |
| Other accrued liabilities                                                                                                           |   | 4,033               |   | 2,036                  |   |
| Total current liabilities                                                                                                           |   | 36,961              |   | 27,805                 |   |
|                                                                                                                                |   |                |   |                   |   |
| STOCKHOLDERS’ EQUITY:                                                                                                          |   |                |   |                   |   |
| Preferred Stock, $.01 par value; 5,000,000 shares authorized; no  shares issued or outstanding                                      |   | —              |   | —                 |   |
| Common  Stock, $.01 par value; 60,000,000 shares authorized; 26,776,511 and  26,462,905 shares issued and outstanding, respectively |   | 268                 |   | 265                    |   |
| Additional paid-in capital                                                                                                          |   | 156,847             |   | 153,308                |   |
| Deferred compensation                                                                                                               |   | (8                  | )      | (37                    | )      |
| Accumulated deficit                                                                                                                 |   | (106,644            | )      | (103,114               | )      |
| Total stockholders’ equity                                                                                                     |   | 50,463              |   | 50,422                 |   |
|                                                                                                                                |   | $                   | 87,424 |                   | $      | 78,227 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

3

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**DIGITAL RIVER, INC.**

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

(inthousands, except per share data; unaudited)

 
|                                                                                             |   | **Three  months ended  March 31,** |   |
|--------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                             |   | **2002**                           |   | **2001** |   |
|                                                                                             |   |                               |   |   |   |
| REVENUE                                                                                          |   | $                                  | 18,070 |   | $ | 13,047 |   |
| COSTS AND EXPENSES (exclusive of depreciation and amortization expense  shown separately below): |   |                               |   |   |   |
| Direct cost of services                                                                          |   | 615                                |   | 557 |   |
| Network and infrastructure                                                                       |   | 2,712                              |   | 2,964 |   |
| Sales and marketing                                                                              |   | 8,013                              |   | 6,785 |   |
| Product research and development                                                                 |   | 3,274                              |   | 2,469 |   |
| General and administrative                                                                       |   | 1,615                              |   | 1,097 |   |
| Litigation and other charges                                                                     |   | 2,500                              |   | — |   |
| Depreciation and amortization                                                                    |   | 1,374                              |   | 1,120 |   |
| Amortization of goodwill and other intangibles and acquisition related  costs                    |   | 1,549                              |   | 4,644 |   |
| Total costs and expenses                                                                         |   | 21,652                             |   | 19,636 |   |
| LOSS FROM OPERATIONS                                                                             |   | (3,582                             | )      | (6,589 | ) |
| INTEREST INCOME                                                                                  |   | 52                                 |   | 348 |   |
| NET LOSS                                                                                         |   | $                                  | (3,530 | ) | $ | (6,241 | ) |
| BASIC AND DILUTED NET LOSS PER SHARE                                                             |   | $                                  | (0.13  | ) | $ | (0.28 | ) |
|                                                                                             |   |                               |   |   |   |
| BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                                     |   | 26,449                             |   | 22,482 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

4

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**DIGITAL RIVER, INC.**

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(inthousands; unaudited)

 
|                                                                             |   | **Three  months ended****March 31,** |   |
|----------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                             |   | **2002**                             |   | **2001** |   |
|                                                                             |   |                                 |   |   |   |
| OPERATING ACTIVITIES:                                                            |   |                                 |   |   |   |
| Net loss                                                                         |   | $                                    | (3,530 | ) | $ | (6,241 | ) |
| Adjustments to reconcile net loss to net cash provided by operating  activities: |   |                                 |   |   |   |
| Amortization of goodwill and other intangibles and acquisition related  costs    |   | 1,549                                |   | 4,644 |   |
| Depreciation and amortization                                                    |   | 1,374                                |   | 1,120 |   |
| Deferred compensation expense                                                    |   | 29                                   |   | 57 |   |
| Litigation and other charges                                                     |   | 2,500                                |   | — |   |
| Change in operating assets and liabilities:                                      |   |                                 |   |   |   |
| Accounts receivable and prepaid expenses                                         |   | (1,860                               | )      | (1,578 | ) |
| Accounts payable                                                                 |   | 6,639                                |   | 4,792 |   |
| Other current liabilities and deferred revenue                                   |   | (2,089                               | )      | (286 | ) |
| Net cash provided by operating activities                                        |   | 4,612                                |   | 2,508 |   |
| INVESTING ACTIVITIES:                                                            |   |                                 |   |   |   |
| Proceeds from sales of investments, net                                          |   | 2,000                                |   | 9,000 |   |
| Cash paid for acquisitions, net of cash received                                 |   | (2,598                               | )      | (307 | ) |
| Purchases of equipment                                                           |   | (976                                 | )      | (1,549 | ) |
| Patent acquisition costs                                                         |   | —                               |   | (7 | ) |
| Net cash provided by (used in) investing activities                              |   | (1,574                               | )      | 7,137 |   |
| FINANCING ACTIVITIES:                                                            |   |                                 |   |   |   |
| Exercise of stock options and warrants                                           |   | 632                                  |   | 143 |   |
| Repayment of notes payable                                                       |   | (2,500                               | )      | — |   |
| Net cash provided by (used in) financing activities                              |   | (1,868                               | )      | 143 |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                        |   | 1,170                                |   | 9,788 |   |
| CASH AND CASH EQUIVALENTS, beginning of period                                   |   | 21,677                               |   | 16,920 |   |
| CASH AND CASH EQUIVALENTS, end of period                                         |   | $                                    | 22,847 |   | $ | 26,708 |   |
|                                                                             |   |                                 |   |   |   |
| SUPPLEMENTAL CASH FLOW DISCLOSURE:                                               |   |                                 |   |   |   |
| Common Stock issued in acquisitions and earn-outs                                |   | $                                    | 2,910  |   | $ | 10,386 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

5

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**DIGITAL RIVER, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1. BASIS OF 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, 2001 as filed with theSecurities and Exchange Commission.  Theresults of operations for the three months ended March 31, 2002 are notnecessarily indicative of the results to be expected for any subsequent quarteror for the entire fiscal year ending December 31, 2002.  The December 31, 2001 balance sheet wasderived from audited financial statements, but does not include all disclosuresrequired by generally accepted accounting principles.

 

**2. PRINCIPLES OF CONSOLIDATION**

 

The condensed consolidated financial statements include the accounts ofDigital River, Inc. and its wholly owned subsidiaries. All intercompanybalances and transactions have been eliminated in consolidation.

 

**3. NET LOSS PER SHARE**

 

Basic loss per common share is computed by dividing net loss by theweighted average number of shares of common stock outstanding during the year.The computation of diluted earnings per common share is similar to thecomputation of basic loss per common share, except that the denominator is increasedfor the assumed conversion of convertible securities and the exercise ofdilutive options using the treasury stock method. The weighted average sharesused in computing basic and diluted loss per share were the same in each of thethree month periods ended March 31, 2002 and 2001. Stock options and warrantstotaling 5,818,149 and 7,521,752 for the three months ended March 31, 2002 and2001, respectively, were excluded from the computation of loss per share astheir effect is antidilutive.

 

**4.GOODWILL AND INTANGIBLE ASSETS**

 

In July 2001, the Financial Accounting Standards Board issued Statementof Financial Accounting Standards (SFAS) No. 141, “Business Combinations” andNo. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires allbusiness combinations initiated after June 30, 2001 to be accounted for usingthe purchase method.  Under SFAS No.142, goodwill and intangible assets with indefinite lives will no longer beamortized but are reviewed annually (or more frequently if impairment indicatorsarise) for impairment.  For acquisitionsconsummated by the Company subsequent to July 1, 2001, the Company adopted theprovisions of SFAS No. 141 and 142 effective July 1, 2001.  The Company has adopted the full provisionsof SFAS No. 141 and 142 effective January 1, 2002.  There were no impairments of goodwill identified upon adoption.

 

6

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Upon adoption of SFAS No. 142, the Company discontinued theamortization of goodwill.  The followingtable presents a reconciliation of net loss and net loss per share adjusted forthe exclusion of goodwill amortization:

 

|                        |   | **Three  months ended****March 31,** |       |
|-----------------------------|--------|--------------------------------------|------------|
|                        |   | **2002**                             |       | **2001** |   |
|                        |   |                                 |       |   |   |
| Reported net loss           |   | $                                    | (3,530,000 | ) | $ | (6,241,000 | ) |
| Add goodwill amortization   |   | —                               |       | 2,295,000 |   |
| Adjusted net loss           |   | $                                    | (3,530,000 | ) | $ | (3,946,000 | ) |
|                        |   |                                 |       |   |   |
| Reported net loss per share |   | $                                    | (0.13      | ) | $ | (0.28 | ) |
| Add goodwill amortization   |   | —                               |       | 0.10 |   |
| Adjusted net loss per share |   | $                                    | (0.13      | ) | $ | (0.18 | ) |

 

The changes in the carrying amount of goodwill for the three monthsended March 31, 2002, by operating segment, are as follows:

 

|                                |   | **Software and  Digital Commerce  Services Division** |      | **E-Business  Services Division** |   | **Total**  |   |
|-------------------------------------|--------|-------------------------------------------------------|-----------|-----------------------------------|--------|------------|--------|
|                                |   |                                                  |      |                              |   |       |   |
| Balance as of December 31, 2001     |   | $                                                     | 4,980,000 |                              | $      | 6,293,000  |   | $ | 11,273,000 |   |
| Goodwill acquired during the period |   | 298,000                                               |      | 4,455,000                         |   | 4,753,000  |   |
| Balance as of March 31, 2002        |   | $                                                     | 5,278,000 |                              | $      | 10,748,000 |   | $ | 16,026,000 |   |

 

Information regarding the Company’s other intangible assets is asfollows:

 

|                   |   | **As of March 31, 2002** |       |
|------------------------|--------|--------------------------|------------|
|                   |   | **Carrying****amount**   |       | **Accumulated****amortization** |   | **Net** |   |
|                   |   |                     |       |   |   |   |   |
| Customer base          |   | $                        | 14,117,000 |   | $ | 5,550,000 |   | $ | 8,567,000 |   |
| Non compete agreements |   | 3,150,000                |       | 1,885,000 |   | 1,265,000 |   |
| Technology/tradename   |   | 5,674,000                |       | 2,972,000 |   | 2,702,000 |   |
| Total                  |   | $                        | 22,941,000 |   | $ | 10,407,000 |   | $ | 12,534,000 |   |

 

|                   |   | **As of December 31, 2001** |       |
|------------------------|--------|-----------------------------|------------|
|                   |   | **Carrying****amount**      |       | **Accumulated****amortization** |   | **Net** |   |
|                   |   |                        |       |   |   |   |   |
| Customer base          |   | $                           | 9,317,000  |   | $ | 4,728,000 |   | $ | 4,589,000 |   |
| Non compete agreements |   | 3,050,000                   |       | 1,610,000 |   | 1,440,000 |   |
| Technology/tradename   |   | 5,425,000                   |       | 2,520,000 |   | 2,905,000 |   |
| Total                  |   | $                           | 17,792,000 |   | $ | 8,858,000 |   | $ | 8,934,000 |   |

 

7

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Amortization expense for the three months ended March 31, 2002 was$1,549,000.  Estimated amortizationexpense for the remaining life of the intangible assets, based on intangibleassets as of March 31, 2002, is as follows:

 

Year ending December 31,

 
| 2002 |   | $         | 5,738,000 |   |
|------|--------|-----------|-----------|--------|
| 2003 |   | 4,726,000 |      |
| 2004 |   | 3,190,000 |      |
| 2005 |   | 429,000   |      |

 

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

 

In March 2002, pursuant to an Asset Purchase Agreement between theCompany and Innuity Acquisition Corp. (“IAC”), the Company purchased certainassets and assumed approximately $3,600,000 in merchant liabilities in exchangefor approximately $2,400,000 in cash. The Company will amortize intangible assets acquired, consisting ofcustomer base, non-compete agreements and technology/tradename over athree-year period.  The agreementincludes an opportunity for a cash earn-out based on revenue generated from theIAC assets during the 12-month period following the close of thetransaction.  Such amounts, if any, willbe recorded as additional goodwill.

 

In March 2002, pursuant to an Amended and Restated Asset PurchaseAgreement between the Company and Beyond.com Corporation (“Beyond.com”), inexchange for $2,910,311 in shares of our Common Stock (valued at the average ofthe closing price of our Common Stock for the 15 trading days ending on thesecond day prior to closing and the seven trading days immediately followingthe closing, or $13.06), the Company purchased those assets and assumed thoseliabilities of Beyond.com related to its eStores business, which manages onlinestores for clients.  The Company willamortize intangible assets acquired, consisting of customer base andnon-compete agreements, over a three-year period.  The agreement includes contingent earn-out provisions wherebyBeyond.com may receive (i) additional shares of our Common Stock valued at$962,500 if specified customers of Beyond.com remain our customers for 90 dayspost closing, (ii) additional shares of our Common Stock valued at $500,000 if90% or more of specified customers of Beyond.com enter into 12 month contractswith us within 60 days of the closing and (iii) additional shares of our CommonStock valued at $1,350,000 if specified customers enter into 12 month contractswith us within 60 days of the closing (with such shares valued as describedabove at $13.06 per share).

 

The former owners of FreeMerchant.com, a business purchased by theCompany in December 2001, received earn-out payments totaling $240,000 duringthe three months ended March 31, 2002. The Company recorded such amounts as additional goodwill.

 

Following is an allocation of the purchase price for the acquisitionsconsummated in the three months ended March 31, 2002:

 
| Tangible assets        |   | $          | 231,000   |   |
|------------------------|--------|------------|-----------|--------|
| Liabilities acquired   |   | (3,717,000 | )         |
| Customer base          |   | 4,800,000  |      |
| Non-compete agreements |   | 100,000    |      |
| Technology/tradename   |   | 249,000    |      |
| Goodwill               |   | 4,513,000  |      |
| Total purchase price   |   | $          | 6,176,000 |   |

 

8

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The following unaudited pro forma condensed results of operations forthe three months ended March 31, 2002 and 2001 has been prepared as if each ofthe acquisitions had occurred on January 1, 2001:

 
|                                 |   | **Three  months ended  March 31,** |       |
|--------------------------------------|--------|------------------------------------|------------|
|                                 |   | **2002**                           |       | **2001** |   |
|                                 |   |                               |       |   |   |
| Revenue                              |   | $                                  | 20,059,000 |   | $ | 14,641,000 |   |
| Loss from operations                 |   | (6,873,000                         | )          | (10,482,000 | ) |
| Net loss                             |   | (6,874,000                         | )          | (10,161,000 | ) |
| Basic and diluted net loss per share |   | $                                  | (0.26      | ) | $ | (0.45 | ) |

 

This financial information does not purport to represent results thatwould actually have been obtained if the transactions had been in effect onJanuary 1, 2001 or any future results that may in fact be realized.

 

**6.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 pending litigation and othercharges, depreciation, amortization of goodwill and other intangibles andacquisition related costs, and interest income for operational results andconsist of certain cash, investments and goodwill and other intangibles fortotal assets.  Segment information is asfollows:

 

|                                       |   | **Software and  Digital Commerce  Services Division** |       | **E-Business  Services Division** |   | **Unallocated  Corporate  Items** |   | **Consolidated** |       |
|--------------------------------------------|--------|-------------------------------------------------------|------------|-----------------------------------|--------|-----------------------------------|--------|------------------|------------|
| **Three months ended**

**March 31, 2002** |   |                                                  |       |                              |   |                              |   |             |       |
| Revenue                                    |   | $                                                     | 14,697,000 |                              | $      | 3,373,000                         |   | $                | —     |   | $ | 18,070,000 |   |
| Gross profit                               |   | 12,382,000                                            |       | 2,361,000                         |   | —                            |   | 14,743,000       |       |
| Income (loss) from operations              |   | 4,375,000                                             |       | (2,534,000                        | )      | (5,423,000                        | )      | (3,582,000       | )          |
| Net income (loss)                          |   | 4,375,000                                             |       | (2,534,000                        | )      | (5,371,000                        | )      | (3,530,000       | )          |
| Total assets at March 31, 2002             |   | $                                                     | 23,364,000 |                              | $      | 14,378,000                        |   | $                | 49,682,000 |   | $ | 87,424,000 |   |
|                                       |   |                                                  |       |                              |   |                              |   |             |       |
| **Three months ended**

**March 31, 2001** |   |                                                  |       |                              |   |                              |   |             |       |
| Revenue                                    |   | $                                                     | 10,512,000 |                              | $      | 2,535,000                         |   | $                | —     |   | $ | 13,047,000 |   |
| Gross profit                               |   | 7,803,000                                             |       | 1,723,000                         |   | —                            |   | 9,526,000        |       |
| Income (loss) from operations              |   | 1,649,000                                             |       | (2,474,000                        | )      | (5,764,000                        | )      | (6,589,000       | )          |
| Net income (loss)                          |   | 1,649,000                                             |       | (2,474,000                        | )      | (5,416,000                        | )      | (6,241,000       | )          |
| Total assets at March 31, 2001             |   | $                                                     | 17,539,000 |                              | $      | 8,012,000                         |   | $                | 52,962,000 |   | $ | 78,513,000 |   |

 

**7.RECENT ACCOUNTING PRONOUNCEMENTS**

 

In July 2001, the Financial Accounting Standards Board issued SFAS No.144, “Impairment or Disposal of Long-Lived Assets”, which is effective forfiscal years beginning after December 15, 2001. The provisions of thisstatement provide a single accounting model for impairment of long-livedassets. The Company adopted SFAS No. 144 effective January 1, 2002.  The adoption of this statement did not havea material impact on the Company’s financial position or results of operations.

 

**8.LITIGATION AND OTHER CHARGES**

** **

During the three months ended March 31, 2002, the Company recorded acharge for pending litigation of $2,300,000. This reserve was established basedupon developments in new and existing litigation for which managementdetermined, in the first quarter of 2002, that payment is both probable andestimable. Additionally, the Company recorded a charge of $200,000 during thethree months ended March 31, 2002 in connection with its decision during theperiod to consolidate one of its offices.

 

9

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**Item 2.****  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*TheCompany notes that, except for the historical information contained herein, thematters discussed below contain forward-looking statements which involve knownand unknown risks, uncertainties and other factors which may cause the actualresults, performance or achievements of the Company, or industry results, to bematerially different from any future results, performance or achievementsexpressed or implied by such forward-looking statements.  The Company expressly disclaims anyobligation to update this information or publicly release any revision orreflect 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, risksassociated with electronic software delivery, dependence on the Internet andgrowth in electronic commerce and Internet infrastructure development,dependence on software publishers, dependence on online retailers, systemdevelopment and electronic commerce security risks, rapid technologicalchanges, competition in the electronic commerce industry, the importance ofattracting and retaining personnel, management of the company’s growth,integration of acquired companies, dependence on key employees and other riskfactors referenced in the Company’s Form 10-K for the year ended December 31,2001.*

 

**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.  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.  The Company currently offers more than32,000 companies the ability to cut costs and grow their businesses by usingits complete e-commerce systems and services.

 

The Company derives its revenue primarily from transaction and servicefees associated with the e-commerce services that the Company provides to itsclients.  These services include Webcommerce development and hosting, transaction processing, digital delivery,integration to physical fulfillment, 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 which investors mayevaluate its business and prospects. Since inception, the Company has incurred significant losses, and as ofMarch 31, 2002, had an accumulated deficit of $106,644,000.  The Company intends to expend financial andmanagement resources on the development of additional services, sales andmarketing, technology and operations to support larger-scale operations andgreater service offerings, particularly with respect to the E-Business Servicesdivision.  Although the Company expectsto generate positive cash flow from operations in 2002, there can be noassurance that the Company’s revenue will increase or even continue at itscurrent level or that the Company will achieve or maintain profitability orgenerate cash from operations in future periods.

 

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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 evolving marketssuch as electronic commerce.  To addressthese risks, the Company must, among other things, maintain existing anddevelop 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 expense levels are based largely onits planned operations and estimates of future revenue.  Revenue and operating results generallydepend on the volume and timing of orders received, which are difficult toforecast.  The Company may be unable toadjust spending in a timely manner to compensate for any unexpected revenueshortfall.  Accordingly, any significantshortfall in revenue could have an immediate adverse effect on the Company’sbusiness, financial condition and results of operations.  The Company is also likely to continue tosee revenue in it’s Software and Digital Commerce Services Division fluctuateon a seasonal basis typical for the software publishing market in general.  The Company believes that its fiscal firstand fourth quarters are seasonally stronger than its second and third quartersdue to the timing of demand for tax preparation software and the holidayselling period.  In addition, it is theCompany’s belief that software publishers avoid new product releases in the summermonths.  In view of the rapidly evolvingnature of the Company’s business and its limited operating history, the Companyis unable to 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.

 

**Resultsof Operations**

 

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  March 31,** |   |
|-------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                          |   | **2002**                           |   | **2001** |   |
|                                                                          |   |                               |   |   |   |
| Revenue                                                                       |   | 100.0                              | %      | 100.0 | % |
| Operating expenses                                                            |   |                               |   |   |   |
| Direct cost of services                                                       |   | 3.4                                |   | 4.3 |   |
| Network and infrastructure                                                    |   | 15.0                               |   | 22.7 |   |
| Sales and marketing                                                           |   | 44.4                               |   | 52.0 |   |
| Product research and development                                              |   | 18.1                               |   | 18.9 |   |
| General and administrative                                                    |   | 8.9                                |   | 8.4 |   |
| Pending litigation and other charges                                          |   | 13.8                               |   | — |   |
| Depreciation and amortization                                                 |   | 7.6                                |   | 8.6 |   |
| Amortization of goodwill and other intangibles and acquisition related  costs |   | 8.6                                |   | 35.6 |   |
| Total operating expenses                                                      |   | 119.8                              |   | 150.5 |   |
| Loss from operations                                                          |   | (19.8                              | )      | (50.5 | ) |
| Interest income, net                                                          |   | 0.3                                |   | 2.7 |   |
| Net loss                                                                      |   | (19.5                              | )%     | (47.8 | )% |

 

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***REVENUE***. Revenue increased to $18,070,000 for thethree months ended March 31, 2002 from $13,047,000 for the same period in theprior year, an increase of $5,023,000 or 38.5%.  Revenue for the Software and Digital Commerce Services divisionincreased to $14,697,000 for the three months ended March 31, 2002 from$10,512,000 for the three months ended March 31, 2001.  The increase in the current year periodprimarily resulted from growth in the number of the Company’s softwarepublisher and online retailer clients as well as increasing market acceptanceof electronic software delivery.  Inaddition, results for the current period include the impact of revenuegenerated by RegSoft.com, a company acquired by the Company in August 2001.  Revenue for the E-Business Services divisionincreased to $3,373,000 for the three months ended March 31, 2002 from$2,535,000 for the three months ended March 31, 2001.  The increase in the current year period primarily reflects theimpact of the Company’s acquisitions of Orbit Commerce assets in September2001, the FreeMerchant.com assets pf Network Commerce in December 2001 and theCCNow assets of Innuity Acquisition Corp. in March 2002.

 

International sales represented approximately 19.3% and 16.9% of totalrevenue in the three-month periods ended March 31, 2002 and 2001, respectively.

 

***GROSS PROFIT***. Cost ofrevenue, which consists of direct cost of services and network andinfrastructure costs (both shown exclusive of depreciation and amortizationexpense), decreased to $3,327,000 in the three months ended March 31, 2002 from$3,521,000 for the same period in the prior year.  The decrease in costs in the current year period primarilyresulted from efficiencies and cost control measures put in place in thecustomer service area partially offset by increases in information systems andbandwidth costs.  The gross profitmargin for the Software and Digital Commerce Services division rose in thethree months ended March 31, 2002 to 84.2% from 74.2% for the three monthsended March 31, 2001.  The gross profitmargin for the E-Business Services division increased in the three months endedMarch 31, 2002 to 70.0% from 67.9% for the three months ended March 31,2001.  The increase in margin in bothdivisions in the current year period is primarily due to leveraging the Company’sinfrastructure over significantly more revenue and clients.  The Company believes that Internet commerceand related services could become more competitive in the future.  Accordingly, the Company may reduce or alterits pricing structure and policies in the future and any such change couldreduce gross margins.

 

***SALES AND MARKETING***. Sales andmarketing expense consists primarily of personnel and related expenses,advertising and promotional expenses, credit card chargebacks and bad debtexpense, and credit card transaction fees. Sales and marketing expense increased to $8,013,000 in the three monthsended March 31, 2002 from $6,785,000 for the same period in the prior year, anincrease of $1,228,000 or 18.1%.  Theincrease in the current year period primarily resulted from an increase incredit card fees and chargeback costs of approximately $1,100,000 along with anincrease in personnel costs, offset by a decrease in advertising and marketingexpense.  Sales and marketing expensefor the Software and Digital Commerce Services division increased to $5,512,000for the three months ended March 31, 2002 from $4,380,000 for the three monthsended March 31, 2001.  Sales andmarketing expense for the E-Business Services division increased to $2,501,000for the three months ended March 31, 2002 from $2,405,000 for the three monthsended March 31, 2001.  As a percentageof revenue, sales and marketing expense decreased to 44.4% for the three monthsended March 31, 2002 from 52.0% for the three months ended March 31, 2001,primarily reflecting the Company’s increased revenue.  The Company expects that sales and marketing expense willcontinue to increase in absolute dollars as the Company continues to build itssales and marketing infrastructure and develops marketing programs and asvolume-driven credit card expenses increase. As a percentage of revenue, these expenses are expected to decrease asrevenue increases.

 

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***PRODUCT RESEARCH AND DEVELOPMENT***. Productresearch and development expense consists primarily of personnel and relatedexpenses and consulting costs associated with developing and enhancing theCompany’s CNS and related internal systems. Product research and development expenses increased to $3,274,000 in thethree months ended March 31, 2002 from $2,469,000 for the same period in theprior year, an increase of $805,000 or 32.6%. The increase in the current year period primarily resulted from anincrease in personnel costs, offset by a decrease in consulting costs, relatedto the development of the Company’s next generation platform.  Product research and development expense forthe Software and Digital Commerce Services division increased to $1,406,000 forthe three months ended March 31, 2002 from $1,027,000 for the three monthsended March 31, 2001.  Product researchand development expense for the E-Business Services division increased to$1,868,000 for the three months ended March 31, 2002 from $1,442,000 for thethree months ended March 31, 2001.  As apercentage of revenue, product research and development expense decreased to18.1% for the three months ended March 31, 2002 from 18.9% for the three monthsended March 31, 2001, primarily reflecting the Company’s increasedrevenue.  As a percentage of revenue,these expenses are expected to decrease as revenue increases.

 

***GENERAL AND ADMINISTRATIVE***. General andadministrative expense consists primarily of executive, accounting andadministrative personnel and related expenses including professional fees andinvestor relations expenses.  Generaland administrative expenses increased to $1,615,000 in the three months endedMarch 31, 2002 from $1,097,000 for the same period in the prior year, anincrease of $518,000 or 47.2%.  Theincrease in the current year period primarily resulted from an increase inlegal costs related to the outstanding claims against the Company. In addition,the Company has incurred increased personnel and insurance related costs in thecurrent year period.  General and administrativeexpense for the Software and Digital Commerce Services division increased to$1,088,000 for the three months ended March 31, 2002 from $748,000 for thethree months ended March 31, 2001. General and administrative expense for the E-Business Services divisionincreased to $527,000 for the three months ended March 31, 2002 from $349,000for the three months ended March 31, 2001. As a percentage of revenue, general and administrative expense increasedto 8.9% for the three months ended March 31, 2002 from 8.4% for the threemonths ended March 31, 2001, primarily reflecting the increase in legal fees inthe current year three-month period. The Company expects that general and administrative expense will increasein absolute dollars over time as the Company defends its position related tolegal claims and as it continues to build infrastructure to support its growth.

 

***LITIGATION AND OTHER CHARGES***. During thethree months ended March 31, 2002, the Company recorded a charge for pendinglitigation of $2,300,000.  This reservewas established based upon developments in new and existing litigation forwhich management determined, in the first quarter of 2002, that payment is bothprobable and estimable.  Additionally,the Company recorded a charge of $200,000 during the three months ended March31, 2002 in connection with its decision during the period to consolidate oneof its offices.

 

***AMORTIZATION OF GOODWILL AND OTHERINTANGIBLES AND ACQUISITION RELATED COSTS***.Amortization ofgoodwill and other intangibles and acquisition related costs decreased to$1,549,000 in the three months ended March 31, 2002 from $4,644,000 for thesame period in the prior year, a decrease of $3,095,000.  The decrease is primarily related to theimpact of the Company’s adoption of Statement of Financial Accounting StandardsNo. 142, resulting in goodwill no longer being amortized (see Note 4 of Notesto Condensed Consolidated Financial Statements).  In addition, earn-out payments, valued at $1,514,000, were madein the three months ended March 31, 2001. There were no earn-out payments in the three months ended March 31,2002.

 

***INCOME TAXES***. The Companypaid no income taxes in any reported period. The Company has incurred a net loss for each period sinceinception.  As of March 31, 2002, theCompany had approximately $85,930,000 of net operating loss carryforwards forfederal income tax purposes, which expire beginning in 2009.  Due to the uncertainty of futureprofitability, a valuation allowance equal to the deferred tax asset has beenrecorded.  Certain changes in ownershipthat resulted from the sales of common and preferred stock will limit thefuture annual realization of the tax operating loss carryforwards to aspecified percentage under Section 382 of the Internal Revenue Code.

 

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**Liquidityand Capital Resources**

 

During the three months ended March 31, 2002, the Company’s operationsgenerated $4,612,000 of cash compared to $2,508,000 in the same period of theprior year.  The improvement is mainlydue to the reduction in the net loss in the current year three-month periodcompared to the same period last year. Net cash used in investing activities during the three months endedMarch 31, 2002, totaled $1,574,000. This was comprised of investments in equipment and for acquiredcompanies totaling $3,574,000 offset by net sales of investments of$2,000,000.  Net cash used in financingactivities during the three months ended March 31, 2002 totaled $1,868,000,comprised of the payoff of a $2,500,000 note payable offset by cash receivedupon the exercise of stock options and warrants of $632,000.

 

As of March 31, 2002, the Company had $22,847,000 of cash and cashequivalents and $8,000,000 of short-term investments.  The Company’s principal commitments consisted of obligationsoutstanding under operating leases. Although the Company has no material commitments for capitalexpenditures, it anticipates continued capital expenditures consistent with itsanticipated growth in operations, infrastructure and personnel.  The Company anticipates that it will expendapproximately $14,000,000 over the next 21 months on capital expenditures basedon its current anticipated growth rate. The Company further anticipates that it will expend approximately$19,000,000 over the next 21 months on product development based on its currentanticipated growth rate in operations. The Company may also use cash to acquire or license technology, productsor businesses related to the Company’s current business.  The Company also anticipates that it willexperience growth in its operating expenses for the foreseeable future and thatits operating expenses will be a material use of the Company’s cash resources.

 

In April 2001, the Company initiated a share repurchase program of upto $5,000,000 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 March 31, 2002, the Company expendedapproximately $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.  In January2002, the Company filed a universal shelf registration statement with theSecurities and Exchange Commission pursuant to which the Company will bepermitted to issue up to $100,000,000 in common stock, preferred stock, debtsecurities and/or warrants.  The sale ofadditional equity or convertible securities could result in additional dilutionto the Company’s stockholders.  Therecan be no assurances that financing will be available in amounts or on termsacceptable to the Company, if at all.

 

**RecentAccounting Pronouncements**

 

In July 2001, the Financial Accounting Standards Board issued SFAS No.144, “Impairment or Disposal of Long-Lived Assets”, which is effective forfiscal years beginning after December 15, 2001. The provisions of thisstatement provide a single accounting model for impairment of long-livedassets. The Company adopted SFAS No. 144 effective January 1, 2002.  The adoption of this statement did not havea material impact on the Company’s financial position or results of operations.

 

**Item 3.****  Qualitative and QuantitativeDisclosure About Market 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.

 

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**PART II.****  OTHER INFORMATION**

 

**Item 1****.  Legal Proceedings**

 

On February 27, 2002, ePedas Sdn Bhd initiated an arbitration beforethe American Arbitration Association against the Company.  The demand for arbitration alleges breach ofcontract and tortious interference claims against the Company.  The prayer for relief requests RM 28,809,137.09(Ringit Malaysia or approximately US $7,581,150) plus pre-judgment interest,punitive damages, all legal costs and other unspecified fees and expenses.  The case has been transferred to theInternational Section of the American Arbitration Association.  The Company responded to ePedas’ demand onApril 12, 2002.  In that response, theCompany denied all allegations set forth in ePedas’ demand and counterclaimedagainst ePedas for breach of contract. The Company is seeking damages of at least $30,822, as well as the costsof the arbitration, reasonable costs for experts and other witnesses, and alllegal costs.

 

The Company is party to a patent infringement lawsuit filed against itand over 200 additional defendants regarding United States Patent No. 4,500,919assigned to the Massachusetts Institute of Technology. The suit was filed inApril 2002 and is pending in the U.S. District Court in the Eastern District ofTexas. The Company presently intends to tender the defense of the lawsuit toits vendor and to seek full indemnification from its vendor.  In addition, the Company will analyze thepatent infringement allegations.

 

**Item 2.****  Changes in Securities and Use ofProceeds**

 

(c)  On March 31, 2002, pursuantto an Amended and Restated Asset Purchase Agreement dated February 9, 2002, asamended March 15, 2002, between Digital River and Beyond.com Corporation(“Beyond.com”), in exchange for 222,842 shares of the Company’s Common Stock,the Company purchased those assets and assumed those liabilities of Beyond.comrelated to its eStores business, which manages online stores for clients. Theagreement includes contingent earn-out provisions whereby Beyond.com mayreceive up to an additional 215,353 shares of Common Stock as a contingentearn-out based upon specified customers of Beyond.com contracting with theCompany.

 

The issuance and sale of the unregistered securities were deemed to beexempt from the registration and prospectus delivery requirements under theSecurities Act of 1933, as amended (the Securities Act), in reliance uponSection 4(2) of the Securities Act and Regulation D promulgated thereunder, asa transaction by an issuer not involving any public offering.  The recipients of securities representedtheir intentions to acquire the securities for investment only and not with aview to or for sale in connection with any distribution thereof and appropriatelegends were affixed to the securities issued in such transactions.  All recipients had adequate access, throughtheir relationship with the Company, to information about Digital River.

 

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**Item 6.****  Exhibits and Reports on Form 8-K**

 

(A) Exhibits

 
| **EXHIBIT  NUMBER** |   | **DESCRIPTION OF DOCUMENTS**                                                                                                                       |
|---------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                               |
| 2.1                 | (1)    | First Amendment to the Amended  and Restated Asset Purchase Agreement dated as of March 25, 2002 by and  between the Company and Beyond.com        |
| 2.2                 | (1)    | Post-Closing Amendment to the  Amended and Restated Asset Purchase Agreement dated as of March 31, 2002 by  and between the Company and Beyond.com |
| 3.1                 | (2)    | Amended and Restated  Certificate of Incorporation, as currently in effect                                                                         |
| 3.2                 | (3)    | Amended and Restated Bylaws, as  currently in effect                                                                                               |
| 4.1                 | (4)    | Specimen of Common Stock  Certificate                                                                                                              |
| 11.1                | (5)    | Statement of Computation of Per  Share Earnings                                                                                                    |

 

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| (1) | Filed as an exhibit to the  Company’s Current Report on Form 8-K, filed on April 15, 2002, and  incorporated herein by reference.                                             |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Filed as an exhibit to the  Company’s Registration Statement on Form S-3, File No. 333-81626, declared  effective on February 12, 2002, and incorporated herein by reference. |
| (3) | Filed as an exhibit to the  Company’s Annual Report on Form 10-K for the year ended December 31, 2000,  filed on March 27, 2001, and incorporated herein by reference.        |
| (4) | Filed as an exhibit to the  Company’s Registration Statement on Form S-1, File No. 333-56787, declared  effective on August 11, 1998, and incorporated herein by reference.   |
| (5) | See Note 3 to Condensed  Consolidated Financial Statements.                                                                                                                        |

 

(B) Reports on Form 8-K

 

On January 31, 2002, the Company filed a current report on Form 8-Krelated to the announcement of its financial results for the three months andyear ended December 31, 2001.  Inaddition, the Company reported that it was filing with the Securities andExchange Commission a shelf registration statement on Form S-3, allowing it toissue up to an aggregate of $100,000,000 of common stock, preferred stock, debtsecurities and/or warrants.

 

On February 11, 2002, the Company filed a current report on Form 8-Kannouncing that it had amended and restated the agreement to acquire certainassets from Beyond.com Corporation.  Becausecertain closing conditions related to the acquisition of Beyond.com’sgovernment systems business could not be met, the Company elected not toacquire that portion of Beyond.com’s business. The new agreement provided thatthe Company would acquire only Beyond.com’s eStores business.

 

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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:  | May 14, 2002 |                                            | DIGITAL RIVER, INC. |   |
|--------|--------------|-------------------------------------------------|---------------------|--------|
|   |         |                                            |                |   |
|   |         |                                            |
|   |         | By:                                             | /s/ CARTER D. HICKS |
|   |         | Carter D. Hicks                                 |
|   |         | *Chief Financial Officer*                       |
|   |         | *(Principal Financial and  Accounting Officer)* |
|        |              |                                                 |                     |        |  |  |

 

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EXHIBIT INDEX

 
| **EXHIBIT  NUMBER** |   | **DESCRIPTION OF DOCUMENTS**                                                                                                                       |
|---------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                               |
| 2.1                 | (1)    | First Amendment to the Amended  and Restated Asset Purchase Agreement dated as of March 25, 2002 by and  between the Company and Beyond.com        |
| 2.2                 | (1)    | Post-Closing Amendment to the  Amended and Restated Asset Purchase Agreement dated as of March 31, 2002 by  and between the Company and Beyond.com |
| 3.1                 | (2)    | Amended and Restated  Certificate of Incorporation, as currently in effect                                                                         |
| 3.2                 | (3)    | Amended and Restated Bylaws, as  currently in effect                                                                                               |
| 4.1                 | (4)    | Specimen of Common Stock  Certificate                                                                                                              |
| 11.1                | (5)    | Statement of Computation of Per  Share Earnings                                                                                                    |

 

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| (1) | Filed as an exhibit to the  Company’s Current Report on Form 8-K, filed on April 15, 2002, and  incorporated herein by reference.                                             |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Filed as an exhibit to the  Company’s Registration Statement on Form S-3, File No. 333-81626, declared  effective on February 12, 2002, and incorporated herein by reference. |
| (3) | Filed as an exhibit to the  Company’s Annual Report on Form 10-K for the year ended December 31, 2000,  filed on March 27, 2001, and incorporated herein by reference.        |
| (4) | Filed as an exhibit to the  Company’s Registration Statement on Form S-1, File No. 333-56787, declared  effective on August 11, 1998, and incorporated herein by reference.   |
| (5) | See Note 3 to Condensed  Consolidated Financial Statements.                                                                                                                        |

 

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