##### 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, 2010
 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
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



PART I.
    
    FINANCIAL INFORMATION
    
    
    3Item 1.
    
    Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009
    
    
    3Condensed Consolidated Statements of Income for the three months ended March 31, 2010 and 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009
    
    
    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
    
    
    23Item 4.
    
    Controls and Procedures
    
    
    24PART II.
    
    OTHER INFORMATION
    
    
    25Item 1.
    
    Legal Proceedings
    
    
    25Item 1A.
    
    Risk Factors
    
    
    25Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 6.
    
    Exhibits
    
    
    26SIGNATURES
    
    
    27EXHIBIT INDEX
    
    
    28EX-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 31,2010
    
    
    2009ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    378,925
    
    
    $
    392,704Short-term investments
    
    
    15,168
    
    
    
    15,228Accounts receivable, net of allowance of $2,946 and $2,222
    
    
    44,972
    
    
    
    50,657Deferred income taxes
    
    
    9,899
    
    
    
    9,901Prepaid expenses and other
    
    
    17,004
    
    
    
    14,899Total current assets
    
    
    465,968
    
    
    
    483,389Property and equipment, net
    
    
    52,164
    
    
    
    54,343Goodwill
    
    
    271,542
    
    
    
    279,538Intangible assets, net of accumulated amortization of $74,580 and $74,158
    
    
    24,004
    
    
    
    25,605Long-term investments
    
    
    117,635
    
    
    
    119,581Deferred income taxes
    
    
    22,373
    
    
    
    22,416Other assets
    
    
    761
    
    
    
    770TOTAL ASSETS
    
    $
    954,447
    
    
    $
    985,642LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    170,119
    
    
    $
    192,301Accrued payroll
    
    
    12,309
    
    
    
    16,131Deferred revenue
    
    
    18,041
    
    
    
    17,879Accrued acquisition liabilities
    
    
    1,601
    
    
    
    2,001Other accrued liabilities
    
    
    39,512
    
    
    
    38,801Total current liabilities
    
    
    241,582
    
    
    
    267,113NON-CURRENT LIABILITIES:Convertible senior notes
    
    
    8,805
    
    
    
    8,805Other liabilities
    
    
    16,006
    
    
    
    15,505Total non-current liabilities
    
    
    24,811
    
    
    
    24,310TOTAL LIABILITIES
    
    
    266,393
    
    
    
    291,423STOCKHOLDERS 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;
45,961,719 and 44,917,986 shares issued
    
    
    460
    
    
    
    449Treasury stock at cost; 6,339,290 and 6,238,166 shares
    
    
    (219,776
    )
    
    
    (216,880
    )Additional paid-in capital
    
    
    658,975
    
    
    
    653,956Retained earnings
    
    
    245,834
    
    
    
    238,867Accumulated other comprehensive income
    
    
    2,561
    
    
    
    17,827Total stockholders equity
    
    
    688,054
    
    
    
    694,219TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    954,447
    
    
    $
    985,642
  3




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##### Table of Contents



DIGITAL RIVER, INC.
 
 
 Three Months EndedMarch 31,2010
    
    
    2009Revenue
    
    $
    98,726
    
    
    $
    102,931Costs and expenses (exclusive of depreciation and
amortization expense shown separately below):Direct cost of services
    
    
    4,637
    
    
    
    3,942Network and infrastructure
    
    
    11,432
    
    
    
    10,313Sales and marketing
    
    
    41,050
    
    
    
    38,447Product research and development
    
    
    15,689
    
    
    
    12,335General and administrative
    
    
    10,829
    
    
    
    9,129Depreciation and amortization
    
    
    5,481
    
    
    
    3,844Amortization of acquisition-related intangibles
    
    
    1,481
    
    
    
    2,003Total costs and expenses
    
    
    90,599
    
    
    
    80,013Income from operations
    
    
    8,127
    
    
    
    22,918Interest Income
    
    
    764
    
    
    
    1,189Other income (expense), net
    
    
    785
    
    
    
    (6,556
    )Income before income tax expense
    
    
    9,676
    
    
    
    17,551Income tax expense
    
    
    2,709
    
    
    
    4,231Net income
    
    $
    6,967
    
    
    $
    13,320Net income per share  basic
    
    $
    0.19
    
    
    $
    0.36Net income per share  diluted
    
    $
    0.18
    
    
    $
    0.36Shares used in per-share calculation  basic
    
    
    37,416
    
    
    
    36,706Shares used in per-share calculation  diluted
    
    
    38,220
    
    
    
    37,227
  4




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##### Table of Contents



DIGITAL RIVER, INC.
 
 
 Three Months EndedMarch 31,2010
    
    
    2009OPERATING ACTIVITIESNet income
    
    $
    6,967
    
    
    $
    13,320Adjustments to reconcile net income to net cash provided by operating
activitiesAmortization of acquisition-related intangibles
    
    
    1,481
    
    
    
    2,003Change in accounts receivable allowance, net of acquisitions
    
    
    751
    
    
    
    580Depreciation and amortization
    
    
    5,481
    
    
    
    3,844Debt financing costs  write-off
    
    
    
    
    
    
    5,208Stock-based compensation expense related to stock-based
compensation plans
    
    
    4,476
    
    
    
    3,711Excess tax benefits from stock-based compensation
    
    
    (442
    )
    
    
    (96
    )Deferred and other income taxes
    
    
    108
    
    
    
    1,555Change in operating assets and liabilities, net of acquisitionsAccounts receivable
    
    
    3,606
    
    
    
    (10,607
    )Prepaid and other assets
    
    
    (2,420
    )
    
    
    17,399Accounts payable
    
    
    (17,258
    )
    
    
    23,129Deferred revenue
    
    
    526
    
    
    
    2,191Income tax payable
    
    
    5,933
    
    
    
    83Other accrued liabilities
    
    
    (7,467
    )
    
    
    (7,729
    )Net cash provided by operating activities
    
    
    1,742
    
    
    
    54,591INVESTING ACTIVITIESPurchases of investments
    
    
    (11,675
    )
    
    
    (2,122
    )Sales of investments
    
    
    12,250
    
    
    
    10,000Cash paid for acquisitions, net of cash received
    
    
    (333
    )
    
    
    (3,017
    )Purchases of equipment and capitalized software
    
    
    (3,553
    )
    
    
    (6,894
    )Net cash used in investing activities
    
    
    (3,311
    )
    
    
    (2,033
    )FINANCING ACTIVITIESCash paid for convertible senior notes
    
    
    
    
    
    
    (186,660
    )Exercise of stock options
    
    
    486
    
    
    
    943Repurchase of restricted stock to satisfy tax withholding obligation
    
    
    (2,896
    )
    
    
    (436
    )Excess tax benefits from stock-based compensation
    
    
    442
    
    
    
    96Net cash used in financing activities
    
    
    (1,968
    )
    
    
    (186,057
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    (10,242
    )
    
    
    (8,973
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (13,779
    )
    
    
    (142,472
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    392,704
    
    
    
    490,335CASH AND CASH EQUIVALENTS, end of period
    
    $
    378,925
    
    
    $
    347,863SUPPLEMENTAL DISCLOSURES:Cash paid for interest on convertible senior notes
    
    $
    55
    
    
    $
    1,219Cash paid for income taxes
    
    $
    1,763
    
    
    $
    4,947
  5




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##### Table of Contents



1. BASIS OF PRESENTATION
  Summary of Significant Accounting Policies
  Software Development
  Comprehensive Income
   Three Months EndedMarch 31,2010
    
    
    2009Net Income
    
    $
    6,967
    
    
    $
    13,320Other comprehensive income/(loss):Unrealized foreign exchange gain/(loss) on the revaluation of
investments in foreign subsidiaries
    
    
    (15,334
    )
    
    
    (15,336
    )Reduction in temporary impairment of auction rate securities
    
    
    52
    
    
    
    5,754Unrealized gain/(loss) on investments
    
    
    56
    
    
    
    (7
    )Tax expense
    
    
    (40
    )
    
    
    (2,115
    )Other comprehensive income/(loss)
    
    
    (15,266
    )
    
    
    (11,704
    )Comprehensive income/(loss)
    
    $
    (8,299
    )
    
    $
    1,616
 Foreign Currency
  6




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##### Table of Contents



Recent Accounting Pronouncements
 Accounting Standards Update (ASU) 2009-13  Multiple-Deliverable Revenue Arrangements:
 ASU 2010-06  Improving Disclosures about Fair Value Measurements:
 ASU 2010-09  Amendments to Certain Recognition and Disclosure Requirements:
 ASC 810  Consolidation of Variable Interest Entities:
  2. NET INCOME PER SHARE
  7




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##### Table of Contents



Three Months EndedMarch 31,2010
    
    
    2009Earnings per share  basicNet income  basic
    
    $
    6,967
    
    
    $
    13,320Weighted average shares outstanding  basic
    
    
    37,416
    
    
    
    36,706Earnings per share  basic
    
    $
    0.19
    
    
    $
    0.36Earnings per share  dilutedNet income  basic
    
    $
    6,967
    
    
    $
    13,320Exclude: Interest expense and amortized financingcost of convertible senior notes, net of tax benefit
    
    
    21
    
    
    
    21Net income  diluted
    
    $
    6,988
    
    
    $
    13,341Weighted average shares outstanding  basic
    
    
    37,416
    
    
    
    36,706Dilutive impact of non-vested stock and options outstanding
    
    
    604
    
    
    
    321Dilutive impact of convertible senior notes
    
    
    200
    
    
    
    200Weighted average shares outstanding  diluted
    
    
    38,220
    
    
    
    37,227Net income per share  diluted
    
    $
    0.18
    
    
    $
    0.36
   3. FAIR VALUE MEASUREMENTS
  Level 1 
    
Observable inputs such as quoted prices in active markets;
 Level 2 
    
Other observable inputs available at the measurement date, other than quoted prices
included in Level 1, either directly or indirectly, including:
 
    
    Quoted prices for similar assets or liabilities in active markets;
    
    Quoted prices for identical or similar assets in non-active markets;
    
    Inputs other than quoted prices that are observable for assets or liabilities; and
    
    Inputs that are derived principally from or corroborated by other observable market
data.
 Level 3 
    
    Unobservable inputs that cannot be corroborated by observable market data and reflect
the use of significant management judgment. These values are generally determined using
pricing models for which the assumptions utilize managements estimate of market participant
assumptions.
 Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
   8




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Fair Value MeasurementsAs of March 31, 2010Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Cash and cash equivalents
    
    $
    378,925
    
    
    $
    378,925
    
    
    $
    
    
    
    $
    Certificates of Deposit
    
    
    1,998
    
    
    
    1,998U.S. government sponsored entities
    
    
    2,005
    
    
    
    2,005
    
    
    
    
    
    
    
    Corporate Bonds
    
    
    11,165
    
    
    
    11,165
    
    
    
    
    
    
    
    Student loan bonds
    
    
    92,353
    
    
    
    
    
    
    
    
    
    
    
    92,353Total assets measured at fair value
    
    $
    486,446
    
    
    $
    394,093
    
    
    $
    
    
    
    $
    92,353
  Fair Value Measurements UsingSignificant Unobservable Inputs(Level 3)Short-term
    
    
    Long-termInvestments
    
    
    Investments
    
    
    TotalBalance as of December 31, 2008
    
    $
    
    
    
    $
    93,213
    
    
    $
    93,213Total gains or losses (realized/unrealized)included in other comprehensive income
    
    
    
    
    
    
    9,988
    
    
    
    9,988Purchases
    
    
    
    
    
    
    
    
    
    
    Issuances
    
    
    
    
    
    
    
    
    
    
    Settlements
    
    
    
    
    
    
    (10,400
    )
    
    
    (10,400
    )Transfers in and/or out of Level 3
    
    
    
    
    
    
    
    
    
    
    Balance as of December 31, 2009
    
    
    
    
    
    
    92,801
    
    
    
    92,801Total gains or losses (realized/unrealized)included in other comprehensive income
    
    
    
    
    
    
    52
    
    
    
    52Purchases
    
    
    
    
    
    
    
    
    
    
    Issuances
    
    
    
    
    
    
    
    
    
    
    Settlements
    
    
    
    
    
    
    (500
    )
    
    
    (500
    )Transfers in and/or out of Level 3
    
    
    
    
    
    
    
    
    
    
    Balance as of March 31, 2010
    
    $
    
    
    
    $
    92,353
    
    
    $
    92,353
 The following methods and assumptions were used to estimate the fair value of each class of
financial instrument:
 Cash and Cash equivalents.
 Certificates of Deposit.
 U.S government sponsored entities.
 Corporate Bonds.
 Auction Rate Securities (Student loan bonds in table).
 9




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
    
    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
   Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
     4. INVESTMENTS
 10




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Unrealized Gain/(Loss)
    
    
    
    
    
    
    Maturities/Reset DatesLess than 12 Greater than 12
    
    
    
    
    
    
    Less than 12 Greater than 12Balance, March 31, 2010
    
    Cost
    
    
    Months
    
    
    Months
    
    
    Fair Value
    
    
    Months
    
    
    MonthsU.S. government sponsored entities
    
    $
    1,999
    
    
    $
    6
    
    
    $
    
    
    
    $
    2,005
    
    
    $
    
    
    
    $
    2,005Corporate Bonds
    
    
    11,108
    
    
    
    57
    
    
    
    
    
    
    
    11,165
    
    
    
    5,169
    
    
    
    5,996Certificates of Deposit
    
    
    1,998
    
    
    
    
    
    
    
    
    
    
    
    1,998
    
    
    
    1,998
    
    
    
    Student loan bonds
    
    
    98,600
    
    
    
    
    
    
    
    (6,247
    )
    
    
    92,353
    
    
    
    
    
    
    
    92,353Total available-for-sale securities
    
    $
    113,705
    
    
    $
    63
    
    
    $
    (6,247
    )
    
    $
    107,521
    
    
    $
    7,167
    
    
    $
    100,354Balance, December 31, 2009U.S. government sponsored entities
    
    $
    3,999
    
    
    $
    (2
    )
    
    $
    
    
    
    $
    3,997
    
    
    $
    1,993
    
    
    $
    2,004Corporate Bonds
    
    
    11,221
    
    
    
    10
    
    
    
    
    
    
    
    11,231
    
    
    
    3,112
    
    
    
    8,119Student loan bonds
    
    
    99,100
    
    
    
    
    
    
    
    (6,299
    )
    
    
    92,801
    
    
    
    
    
    
    
    92,801Total available-for-sale securities
    
    $
    114,320
    
    
    $
    8
    
    
    $
    (6,299
    )
    
    $
    108,029
    
    
    $
    5,105
    
    
    $
    102,924
  5. BUSINESS COMBINATIONS, GOODWILL AND INTANGIBLE ASSETS
 Business Combinations
 Acquisitions completed in 2010
  Acquisitions completed in 2009
  Future Earn-outs
  6. STOCK-BASED COMPENSATION
  Three Months EndedMarch 31,2010
    
    
    2009Costs and expensesDirect cost of services
    
    $
    138
    
    
    $
    169Network and infrastructure
    
    
    198
    
    
    
    113Sales and marketing
    
    
    1,373
    
    
    
    1,517Product research and development
    
    
    725
    
    
    
    456General and administrative
    
    
    2,042
    
    
    
    1,456Stock-based compensation included in costs and expenses
    
    $
    4,476
    
    
    $
    3,711
 7. INCOME TAXES
  11




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8. CONTINGENCIES
 Litigation
    Indemnification Provisions
  12




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9. DEBT
     10. SUBSEQUENT EVENTS
   11. RESTATEMENT OF FIRST QUARTER 2009 FINANCIALS
  13




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DIGITAL RIVER, INC.
 Three Months EndedMarch 31, 2009As Previously
    
    
    Adjust-Reported
    
    
    ments
    
    
    As RestatedRevenue
    
    $
    102,931
    
    
    $
    
    
    
    $
    102,931Costs and expenses (exclusive of depreciation and
amortization expense shown separately below):Direct cost of services
    
    
    3,942
    
    
    
    
    
    
    
    3,942Network and infrastructure
    
    
    10,313
    
    
    
    
    
    
    
    10,313Sales and marketing
    
    
    38,447
    
    
    
    
    
    
    
    38,447Product research and development
    
    
    12,335
    
    
    
    
    
    
    
    12,335General and administrative
    
    
    9,129
    
    
    
    
    
    
    
    9,129Depreciation and amortization
    
    
    3,844
    
    
    
    
    
    
    
    3,844Amortization of acquisition-related intangibles
    
    
    2,003
    
    
    
    
    
    
    
    2,003Total costs and expenses
    
    
    80,013
    
    
    
    
    
    
    
    80,013Income from operations
    
    
    22,918
    
    
    
    
    
    
    
    22,918Interest Income
    
    
    1,189
    
    
    
    
    
    
    
    1,189Other expense, net
    
    
    (1,348
    )
    
    
    (5,208
    )
    
    
    (6,556
    )Income before income tax expense
    
    
    22,759
    
    
    
    (5,208
    )
    
    
    17,551Income tax expense
    
    
    6,168
    
    
    
    (1,937
    )
    
    
    4,231Net income
    
    $
    16,591
    
    
    $
    (3,271
    )
    
    $
    13,320Net income per share  basic
    
    $
    0.45
    
    
    $
    (0.09
    )
    
    $
    0.36Net income per share  diluted
    
    $
    0.45
    
    
    $
    (0.09
    )
    
    $
    0.36Shares used in per-share calculation  basic
    
    
    36,706
    
    
    
    36,706
    
    
    
    36,706Shares used in per-share calculation  diluted
    
    
    37,227
    
    
    
    37,227
    
    
    
    37,227
 14




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##### Table of Contents



DIGITAL RIVER, INC.
 March 31, 2009As Previously
    
    
    Adjust-Reported
    
    
    ments
    
    
    As RestatedASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    347,863
    
    
    $
    
    
    
    $
    347,863Short-term investments
    
    
    7,000
    
    
    
    
    
    
    
    7,000Accounts receivable, net of allowance
    
    
    61,411
    
    
    
    
    
    
    
    61,411Deferred income taxes
    
    
    7,606
    
    
    
    
    
    
    
    7,606Prepaid expenses and other
    
    
    19,299
    
    
    
    
    
    
    
    19,299Total current assets
    
    
    443,179
    
    
    
    
    
    
    
    443,179Property and equipment, net
    
    
    44,417
    
    
    
    
    
    
    
    44,417Goodwill
    
    
    264,643
    
    
    
    
    
    
    
    264,643Intangible assets, net of accumulated amortization
    
    
    29,380
    
    
    
    
    
    
    
    29,380Long-term investments
    
    
    91,967
    
    
    
    
    
    
    
    91,967Deferred income taxes
    
    
    22,686
    
    
    
    
    
    
    
    22,686Other assets
    
    
    744
    
    
    
    
    
    
    
    744TOTAL ASSETS
    
    $
    897,016
    
    
    $
    
    
    
    $
    897,016LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    202,603
    
    
    $
    
    
    
    $
    202,603Accrued payroll
    
    
    11,979
    
    
    
    
    
    
    
    11,979Deferred revenue
    
    
    15,530
    
    
    
    
    
    
    
    15,530Accrued acquisition costs
    
    
    255
    
    
    
    
    
    
    
    255Other accrued liabilities
    
    
    36,845
    
    
    
    (1,937
    )
    
    
    34,908Total current liabilities
    
    
    267,212
    
    
    
    (1,937
    )
    
    
    265,275NON-CURRENT LIABILITIES:Convertible senior notes
    
    
    8,805
    
    
    
    
    
    
    
    8,805Other liabilities
    
    
    15,612
    
    
    
    
    
    
    
    15,612Total non-current liabilities
    
    
    24,417
    
    
    
    
    
    
    
    24,417TOTAL LIABILITIES
    
    
    291,629
    
    
    
    (1,937
    )
    
    
    289,692STOCKHOLDERS EQUITY:Preferred Stock
    
    
    
    
    
    
    
    
    
    
    Common Stock
    
    
    444
    
    
    
    
    
    
    
    444Treasury stock at cost
    
    
    (216,600
    )
    
    
    
    
    
    
    (216,600
    )Additional paid-in capital
    
    
    622,630
    
    
    
    5,208
    
    
    
    627,838Retained earnings
    
    
    205,687
    
    
    
    (3,271
    )
    
    
    202,416Accumulated other comprehensive income
    
    
    (6,774
    )
    
    
    
    
    
    
    (6,774
    )Total stockholders equity
    
    
    605,387
    
    
    
    1,937
    
    
    
    607,324TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    897,016
    
    
    $
    
    
    
    $
    897,016
 15




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##### Table of Contents



DIGITAL RIVER, INC.
 Three Months EndedMarch 31, 2009As Previously
    
    
    Adjust-Reported
    
    
    ments
    
    
    As RestatedOPERATING ACTIVITIES:Net income
    
    $
    16,591
    
    
    $
    (3,271
    )
    
    $
    13,320Adjustments to reconcile net income to net cash provided by
operating activitiesAmortization of acquisition-related intangibles
    
    
    2,003
    
    
    
    
    
    
    
    2,003Change in accounts receivable allowance, net of acquisitions
    
    
    580
    
    
    
    
    
    
    
    580Depreciation and amortization
    
    
    3,844
    
    
    
    
    
    
    
    3,844Debt financing costs  write-off
    
    
    
    
    
    
    5,208
    
    
    
    5,208Stock-based compensation expense related to stock-basedcompensation plans
    
    
    3,711
    
    
    
    
    
    
    
    3,711Excess tax benefits from stock-based compensation
    
    
    (96
    )
    
    
    
    
    
    
    (96
    )Deferred income taxes and other
    
    
    1,555
    
    
    
    
    
    
    
    1,555Change in operating assets and liabilities, net of acquisitionsAccounts receivable
    
    
    (10,607
    )
    
    
    
    
    
    
    (10,607
    )Prepaid and other assets
    
    
    17,399
    
    
    
    
    
    
    
    17,399Accounts payable
    
    
    23,129
    
    
    
    
    
    
    
    23,129Deferred revenue
    
    
    2,191
    
    
    
    
    
    
    
    2,191Income tax payable
    
    
    2,020
    
    
    
    (1,937
    )
    
    
    83Accrued payroll and other accrued liabilities
    
    
    (7,729
    )
    
    
    
    
    
    
    (7,729
    )Net cash provided by operating activities
    
    
    54,591
    
    
    
    
    
    
    
    54,591INVESTING ACTIVITIES:Purchases of investments
    
    
    (2,122
    )
    
    
    
    
    
    
    (2,122
    )Sales of investments
    
    
    10,000
    
    
    
    
    
    
    
    10,000Cash paid for acquisitions, net of cash received
    
    
    (3,017
    )
    
    
    
    
    
    
    (3,017
    )Purchases of equipment and capitalized software
    
    
    (6,894
    )
    
    
    
    
    
    
    (6,894
    )Net cash used in investing activities
    
    
    (2,033
    )
    
    
    
    
    
    
    (2,033
    )FINANCING ACTIVITIES:Cash paid for convertible senior notes
    
    
    (186,660
    )
    
    
    
    
    
    
    (186,660
    )Exercise of stock options
    
    
    943
    
    
    
    
    
    
    
    943Repurchase of restricted stock to satisfy tax withholding obligation
    
    
    (436
    )
    
    
    
    
    
    
    (436
    )Excess tax benefits from stock-based compensation
    
    
    96
    
    
    
    
    
    
    
    96Net cash used in financing activities
    
    
    (186,057
    )
    
    
    
    
    
    
    (186,057
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    (8,973
    )
    
    
    
    
    
    
    (8,973
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (142,472
    )
    
    
    
    
    
    
    (142,472
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    490,335
    
    
    
    
    
    
    
    490,335CASH AND CASH EQUIVALENTS, end of period
    
    $
    347,863
    
    
    $
    
    
    
    $
    347,863
 16




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##### Table of Contents



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 and Item 1A of Part 1 of the Form 10-K for the period ended
December 31, 2009. 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. We have no obligation to update the matters set
forth herein, whether as a result of new information, future events or otherwise.
 Overview
      17




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##### Table of Contents



th
  Results of Operations
  Three Months EndedMarch 31,2010
    
    
    2009(1)Revenue
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses (exclusive of depreciation and
amortization expense shown separately below):Direct cost of services
    
    
    4.7
    
    
    
    3.8Network and infrastructure
    
    
    11.6
    
    
    
    10.0Sales and marketing
    
    
    41.6
    
    
    
    37.4Product research and development
    
    
    15.9
    
    
    
    12.0General and administrative
    
    
    10.9
    
    
    
    8.9Depreciation and amortization
    
    
    5.6
    
    
    
    3.7Amortization of acquisition-related costs
    
    
    1.5
    
    
    
    1.9Total costs and expenses
    
    
    91.8
    
    
    
    77.7Income from operations
    
    
    8.2
    
    
    
    22.3Interest Income
    
    
    0.8
    
    
    
    1.1Other income (expense), net
    
    
    0.8
    
    
    
    (6.4
    )Income before income tax expense
    
    
    9.8
    
    
    
    17.0Income tax expense
    
    
    2.7
    
    
    
    4.1Net income
    
    
    7.1
    %
    
    
    12.9
    %
  REVENUE.
   18




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##### Table of Contents



DIRECT COST OF SERVICES.
  NETWORK AND INFRASTRUCTURE.
  SALES AND MARKETING.
  PRODUCT RESEARCH AND DEVELOPMENT.
  GENERAL AND ADMINISTRATIVE.
  DEPRECIATION AND AMORTIZATION.
 19




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##### Table of Contents



AMORTIZATION OF ACQUISITION-RELATED INTANGIBLES.
 INTEREST INCOME.
 OTHER INCOME (EXPENSE), NET.
 INCOME TAXES.
 Off Balance Sheet Arrangements
  20




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##### Table of Contents



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
 21




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##### Table of Contents



Application of Critical Accounting Policies
 Critical Accounting Estimates and Policies
  Recent Accounting Pronouncements
 Accounting Standards Update (ASU) 2009-13  Multiple-Deliverable Revenue Arrangements:
 ASU 2010-06  Improving Disclosures about Fair Value Measurements:
 ASU 2010-09  Amendments to Certain Recognition and Disclosure Requirements:
 ASC 810  Consolidation of Variable Interest Entities:
  22




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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
  23




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##### Table of Contents



Item 4.
    
    Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  Limitations on the Effectiveness of Controls
  24




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
  
 Item 1A.
    
    Risk Factors
  
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
 None
 25




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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.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. 26




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##### Table of Contents



Date:       May 4, 2010
    DIGITAL RIVER, INC.By:
    /s/ Thomas M. DonnellyThomas M. DonnellyChief Financial Officer
(Principal Financial and Accounting Officer) 27




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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.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. 28