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Putting the
Anyone, Anywhere, Anytime in E-Commerce
2006 Annual Report

Table of contents

  • Page 1
    Putting the Anyone, Anywhere, Anytime in E-Commerce 2006 Annual Report

  • Page 2
    financial highlights Revenue in thousands 325,000 275,000 225,000 175,000 125,000 75...,783 $101,201 2002 2003 2004 2005 2006 Operating Income (Loss) in thousands 70,000 60,000 50,000 40,000 30,000 20,000 10,000 thousands Earnings (Loss) Per Diluted Share $66,420 $67,595 1.50 1.25 1.00 $0.94 ...

  • Page 3
    ...Our multi-channel e-commerce solution is designed to help companies of all sizes maximize revenues as well as reduce the costs and risks of running an online business. Our comprehensive platform offers site development and hosting, order management, fraud prevention, export controls, tax management...

  • Page 4
    As we look ahead, we believe the growth business on a global scale. We have built a team opportunities for Digital River are more numerous of direct marketing experts that assist our clients than at any time in the company's history. in tapping new customers through a wide array of Consumers have ...

  • Page 5
    ...000-24643 DIGITAL RIVER, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of Incorporation or organization) 41-1901640 (I.R.S. Employer Identification No.) 9625 WEST 76TH STREET EDEN PRAIRIE, MINNESOTA 55344 (Address of principal executive offices...

  • Page 6
    ... Directors, Executive Officers and Corporate Governance ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships and Related Transactions, and Director Independence ...Principal Accountant Fees and Services...

  • Page 7
    ... Annual Report on Form 10-K ("Form 10-K") contain forward-looking statements that involve risks and uncertainties. Many of the forward-looking statements are located in "Management's Discussion and Analysis of Financial Condition and Results of Operations. "Forward-looking statements provide current...

  • Page 8
    ...which apparently resulted from errors in internal processes rather than any intentional backdating. During the relevant period, we granted 1,306 employees, consultants, officers and directors options to acquire approximately 16.8 million shares of our common stock. These option grants, awarded on 69...

  • Page 9
    ... terms for the periods from 1998 through 2006. We recorded $85,000, after-tax, of stock-based compensation in the 2006 financial statements related to the foregoing options. Due to its insignificance, the full year amount was recorded in the fourth quarter of 2006. In addition, the Company included...

  • Page 10
    ...export controls and management, tax compliance and management, digital product delivery via download, physical product fulfillment, multi-lingual customer service, online marketing including e-mail marketing, management of paid search programs, website optimization, web analytics, and reporting. Our...

  • Page 11
    ... of a global e-commerce system make it an expensive and potentially risky undertaking for any business. These factors also make a comprehensive outsourced offering, such as that provided by Digital River, an attractive alternative. Shift from Physical to Electronic Delivery of Software. Consumers...

  • Page 12
    ..., digital product delivery via download, physical product fulfillment, multi-lingual customer service, online marketing services including e-mail marketing, management of paid search programs, web analytics and, reporting. We also provide our clients with increased product visibility and sales...

  • Page 13
    ... platform, most clients can utilize our remote control toolset to make real-time changes to their online store, allowing them to address issues and take advantage of opportunities without technical assistance. Focus on Core Competency By utilizing our outsourced e-commerce services, businesses can...

  • Page 14
    ... types of Internet users. Services We provide a broad range of services to our clients, including design, development and hosting of online stores,, merchandising, order management, fraud prevention screening, denied parties screening, export controls, tax compliance and management, digital and...

  • Page 15
    ...digital products publishing clients. In addition, our model helps to address the shrinking supply of shelf space in retail stores, which limits the number of software titles available for sale. In addition to electronic fulfillment via download, we offer physical distribution services to our clients...

  • Page 16
    ... located in offices in the United States, Europe and Asia Pacific. These offices include staff dedicated to pre-sales, sales and sales support activities. Our client sales organization sells to executives within software companies, product manufacturers, and online channel partners who are looking...

  • Page 17
    ...or customer data. We license certain encryption and authentication technology from third parties to provide secure transmission of confidential information such as credit card data. The security system is designed not to interfere with the end-user's experience on our clients' e-commerce sites. Data...

  • Page 18
    ... are present in each data center. Our network software constantly monitors our clients' e-commerce sites and internal system functions, and notifies systems engineers if any unexpected conditions arise. We lease multiple lines from diverse Internet service providers and maintain a policy of adding...

  • Page 19
    ... Ronning served as President of Digital River. From May 1995 to December 1999, Mr. Ronning served as Chairman of the Board of Directors of Tech Squared, Inc., a direct catalog marketer of software and hardware products. From May 1995 to July 1998, Mr. Ronning served as Chief Executive Officer, Chief...

  • Page 20
    ... one software publisher client, Symantec Corporation, accounted for approximately 30.2% of our revenue in 2006. In addition, revenues derived from proprietary Digital River services sold to Symantec end-users and sales of Symantec products through our oneNetwork retail and affiliate channel together...

  • Page 21
    ... sell products and services to end-users outside the United States and we intend to continue expanding our international presence. In 2006, our sales to international consumers represented approximately 41% of our total sales. Expansion into international markets, particularly the European and Asia...

  • Page 22
    ... resources to monitor these activities. Our failure to attract and retain software and digital products publishers, manufacturers, online retailers and online channel partners as clients would cause our revenue and operating profits to decline. We generate revenue by providing outsourced services...

  • Page 23
    ...to 2006 was recorded in the fourth quarter of 2006 due to its insignificance. Activities related to our internal review of historical stock option practices have required us to incur substantial expenses for legal, accounting, tax and other professional services, have diverted management's attention...

  • Page 24
    ... of competitive websites, web stores or services or products; • Our ability to continue to upgrade and develop our systems and infrastructure to meet emerging market needs and remain competitive in our service offerings; • Economic conditions, particularly those affecting e-commerce; • Client...

  • Page 25
    ... new clients from using our services. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary for secure transmission of confidential information, such as end-user credit card numbers. A party who circumvents our security...

  • Page 26
    ... capabilities custom-developed by companies, such as IBM Global Services and Accenture, Inc.; • Other providers of outsourced e-commerce solutions, such as GSI Commerce, Inc., Macrovision Corporation, and asknet Inc.; • Companies that provide technologies, services or products that support...

  • Page 27
    ..., brand recognition, system reliability and scalability, price, customer service, ease of use, speed to market, convenience and quality of delivery. The online channel partners and the other companies described above may compete directly with us by adopting a similar business model. Moreover, while...

  • Page 28
    ... to add software and hardware or to develop and upgrade existing technology, transaction-processing systems or network infrastructure to manage increased traffic on this platform may cause unanticipated systems disruptions, slower response times and degradation in client services, including impaired...

  • Page 29
    ... may become liable to clients who are dissatisfied with our services. We design, develop, implement and manage e-commerce solutions that are crucial to the operation of our clients' businesses. Defects in the solutions we develop could result in delayed or lost revenue, adverse enduser reaction, and...

  • Page 30
    ... management and technical resources. Our clients' sales cycles are lengthy, which may cause us to incur substantial expenses and expend management time without generating corresponding consumer revenue, which would impair our cash flow. We market our services directly to software publishers, online...

  • Page 31
    ... companies outside of the United States may be less favorable than those in the United States, giving greater rights to consumers, content owners and users. Compliance may be more costly or may require us to change our business practices or restrict our service offerings relative to those provided...

  • Page 32
    ... Competitive developments, including new products or services, or new relationships by our competitors; • Changes that affect our clients or the viability of their product lines; • Changes in financial estimates by securities analysts; • Conditions or trends in the Internet and online commerce...

  • Page 33
    ...we lease for our business operations: Description of Use Primary Locations Square Footage(1) Lease Expirations Corporate Office Facilities...Other U.S. Office Facilities ...Non-U.S. Office Facilities ... Off Site U.S. Data Centers ...Off Site non U.S. Data Centers ... Minnesota California, Colorado...

  • Page 34
    ... of our current and former officers and directors in the U.S. District Court for the District of Minnesota. The action made general allegations regarding our purported stock option practices and on that basis asserted claims for violations of Section 10(b) of the Securities Exchange Act of 1934 (the...

  • Page 35
    ... the growth and development of our business and do not anticipate paying cash dividends for the foreseeable future. Issuer Purchases of Equity Securities In April 2005, our Board of Directors authorized a new share repurchase program of up to $50.0 million of our outstanding shares of common stock...

  • Page 36
    ...broad equity market index and a published industry line-of-business index. The following graph shows a total stockholder return of an investment of $100 in cash on December 31, 2001 for (i) the Company's Common Stock; (ii) the CRSP Total Return Index for the Nasdaq Stock Market (U.S. companies) (the...

  • Page 37
    ... is more fully described in Management's Discussion and Analysis-Restatement of Consolidated Financial Statements and in Note 2 to Consolidated Financial Statements of this Form 10-K. We have not amended any other previously-filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the...

  • Page 38
    ... per share data) 2002 As Restated(2) Statement of Operations Data: Revenue ...Costs and expenses (exclusive of depreciation and amortization expense shown separately below) Direct cost of services ...Network and infrastructure ...Sales and marketing ...Product research and development ...General...

  • Page 39
    ... Reported 2002 Adjustments As Restated(1) Statement of Operations Data: Revenue ...Costs and expenses (exclusive of depreciation and amortization expense shown separately below) Direct cost of services ...Network and infrastructure ...Sales and marketing ...Product research and development...

  • Page 40
    ...store merchandising and optimization, order management, fraud prevention screening, export controls and management, tax management, digital product delivery via download, physical product fulfillment, multi-lingual customer service, e-mail marketing, website optimization, web analytics and reporting...

  • Page 41
    ...revenues are recorded net of any associated costs. We also, to a lesser extent, provide fee-based client services, which include website design, custom development and integration, analytical marketing and email marketing services. If we receive payments for fee-based services in advance of delivery...

  • Page 42
    ...of grant using the Black-Scholes option pricing model. The fair value of restricted stock is determined based on the number of shares granted and the closing price of our common stock on the date of grant. Compensation expense for all share-based payment awards are recognized using the straight-line...

  • Page 43
    .... Revenue. Our revenue increased to $307.6 million in 2006 from $220.4 million in 2005 and $154.1 million in 2004. The revenue increases were primarily attributable to higher online sales activity across our client base, growth in the number of software publishers and online retailer clients we...

  • Page 44
    ... to 2006 as we continue to expand our worldwide customer service capacity, and as we expand the number of operating global data centers, expected increased network usage, which will drive higher Internet connection charges. Sales and Marketing. Our sales and marketing expense line item primarily...

  • Page 45
    ... to 2006 as we continue to expand our worldwide customer support capacity and expand the number of operating global data centers. Amortization of Acquisition Related Intangibles. Our amortization of acquisition-related intangibles line item consists of the amortization of intangible assets recorded...

  • Page 46
    ... established new locations in Shannon, Ireland and Luxembourg. We transferred existing non-U.S. operations to these locations and expanded these operations in order to more effectively manage current international activity and facilitate further international growth. We commenced business operations...

  • Page 47
    ... Ended September 30, 2006 2005 As Restated(1) Revenue ...100.0% Cost of Revenue (exclusive of depreciation and amortization expense shown separately below): Direct cost of services ...2.5 Network and infrastructure ...10.3 Sales and marketing ...37.8 Product research and development ...11.1 General...

  • Page 48
    ... 30, 2006 and 2005, respectively. The year-to-date growth is attributable to a larger number of international stores being operated for our clients as well as the European outsourced e-commerce providers we acquired in 2004 and 2005. DIRECT COST OF SERVICES. Our direct cost of services line item...

  • Page 49
    ... to support our growth initiatives, costs from recent acquisitions, development related to our expanded relationship with Microsoft and stock-based compensation expense related to employee stock options and employee stock purchases recognized under SFAS 123(R). During the first nine months of 2006...

  • Page 50
    ... order to more effectively manage current international activity and facilitate further international growth. We commenced business operations in these locations on April 1, 2006. These operating changes generally reduce our effective tax rate compared to prior years. During the quarter, we recorded...

  • Page 51
    ... June 30, 2006 and 2005, respectively. That growth is attributable to a larger number of international stores being operated for our clients as well as the European outsourced e-commerce providers we acquired in 2004 and 2005. DIRECT COST OF SERVICES. Our direct cost of services line item primarily...

  • Page 52
    ... in 2006 compared to 2005 as we continue to expand our worldwide customer service capacity, as we expand the number of operating global data centers, expected increased network usage, which will drive higher Internet connection charges, and as we record expense related to stock-based compensation...

  • Page 53
    ... changes in foreign operations. We established new locations in Shannon, Ireland and Luxembourg. We transferred existing non-U.S. operations to these locations and expanded these operations in order to more effectively manage current international activity and facilitate further international growth...

  • Page 54
    ... Months Ended March 31, 2006 2005 As Restated(1) Revenue ...Cost of Revenue (exclusive of depreciation and amortization expense shown separately below): Direct cost of services ...Network and infrastructure ...Sales and marketing ...Product research and development ...General and administrative...

  • Page 55
    ... March 31, 2006 and 2005, respectively. That growth is attributable to a larger number of international stores being operated for our clients as well as the European outsourced e-commerce providers we acquired in 2004 and 2005. DIRECT COST OF SERVICES. Our direct cost of services line item primarily...

  • Page 56
    ... to employee stock options and employee stock purchases recognized under SFAS 123(R). During the first quarter of 2006, we continued to advance our remote-control technology, as well as the international and e-marketing capabilities. We capitalized approximately $0.4 million of software development...

  • Page 57
    ...The major components of our working capital are cash and cash equivalents, short-term investments and short-term receivables net of client and merchant payables. Our primary source of internal liquidity is our operating activities. Net cash provided by operating activities in 2006, 2005 and 2004 was...

  • Page 58
    ... 2004, we acquired element 5 AG (now Digital River GmbH), a privately held company based in Germany. Under the terms of the acquisition, we paid $120 million in cash to acquire all of the outstanding shares of capital stock of element 5. Net cash provided by financing activities in 2006, 2005 and...

  • Page 59
    ... sales continue to increase globally and buyers appear increasingly comfortable shopping and purchasing online. In our core market, trends continue to favor the transition from packaged, physical delivery of software products to electronic download. In addition, our strategic marketing programs...

  • Page 60
    ... equivalents and short-term investments is maintained in a variety of securities, including government obligations and money market funds. Investments are classified as available-for-sale securities and carried at their market value with cumulative unrealized gains or losses recorded as a component...

  • Page 61
    ... Financial Statements. Transaction Exposure The Company enters into short term foreign currency forward contracts to offset the foreign exchange gains and losses generated by the re-measurement of certain assets and liabilities recorded in non-functional currencies. Changes in the fair value of...

  • Page 62
    ... at page 68 of this report. QUARTERLY FINANCIAL DATA (UNAUDITED) March 31 Quarter Ended June 30 September 30 December 31 (In thousands, except per share data) 2006 Revenue ...Income from operations ...Net income ...Net income per share - basic ...Net income per share - diluted ... $78,014 20,824...

  • Page 63
    ... from 2003 to 2006, include: • The General Counsel and CFO, both experienced with public companies and stock option granting procedures, attend all Board and Committee meetings; • We adopted new Equity Grant Procedures, eliminating all delegated authority to management to make equity awards; and...

  • Page 64
    ... financial reporting. (d) Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders Digital River, Inc. We have audited management's assessment, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting, that Digital River...

  • Page 65
    ... respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Digital River, Inc. and...

  • Page 66
    ... Part III of this report is incorporated by reference to our Proxy Statement in connection with our 2006 Annual Meeting to be filed in accordance with Regulation 14A under the Securities Exchange Act of 1934, as amended. ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Other than the...

  • Page 67
    ... 10.7(8) 10.8(9) 10.9(8) Stock Purchase Agreement, dated as of April 17, 2004, by and among Digital River, Inc., Blitz F03-1424 GmbH, a company organized under the laws of Germany and a wholly owned subsidiary of Digital River, and the selling shareholders of element 5 Informationstechnologien und...

  • Page 68
    ... Program for Non-Employee Directors. Second Amended and Restated Symantec Online Store Agreement, by and among Symantec Corporation, Symantec Limited, Digital River, Inc. and Digital River Ireland Limited effective April 1, 2006‡ 1998 Equity Incentive Plan (formerly known as 1998 Stock Option...

  • Page 69
    ... 2003. (11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, filed on November 13, 2003. (12) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 2003, filed on March 15, 2004. (13...

  • Page 70
    ... this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Eden Prairie, State of Minnesota, on March 1, 2007. DIGITAL RIVER, INC. By: /s/ Joel A. Ronning Joel A. Ronning Chief Executive Officer We, the undersigned, directors and officers of...

  • Page 71
    ...the Public Company Accounting Oversight Board (United States), the effectiveness of Digital River, Inc.'s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of...

  • Page 72
    DIGITAL RIVER, INC. Consolidated Balance Sheets December 31, 2006 December 31, 2005 As Restated(1) (In thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents ...Short-term investments ...Accounts receivable, net of allowance of $2,339 and $1,023 ...Deferred income taxes ...Prepaid expenses and...

  • Page 73
    DIGITAL RIVER, INC. Consolidated Statements of Operations For the Years Ended December 31 2006 2005 2004 As Restated(1) As Restated(1) (In thousands) Revenue ...Costs and expenses Direct cost of services ...Network and infrastructure ...Sales and marketing...Product research and development ......

  • Page 74
    ... gain (loss) . . Sale of common stock ...Stock Issued for Acquisition ...Exercise of stock options ...Stock-based compensation ...Tax withheld in restricted stock vesting . . Tax benefit of stock-based compensation ...Common stock issued under the Employee Stock Purchase Plan ...- - - - 4,000...

  • Page 75
    ...: Principal amount on line of credit ...- - Repayment of principal on line of credit ...- - Proceeds from convertible senior notes ...- - Proceeds from sales of common stock ...172,780 - Exercise of stock options ...21,118 23,199 Sales of common stock under employee stock purchase plan ...2,109...

  • Page 76
    ... provide outsourced e-commerce solutions globally to a wide variety of companies primarily in the software and high-tech products markets. We were incorporated in 1994 and began building and operating online stores for our clients in 1996. We generate revenue primarily based on the sales of products...

  • Page 77
    ...Such assets consist of customer lists and user base, trademarks and trade names, developed technologies and other acquired intangible assets, including contractual agreements. Identifiable intangible assets are amortized using the straight-line method over the estimated useful lives, generally three...

  • Page 78
    ...of enterprise digital license management and other services. We account for this investment using the cost method. Through this investment, we intend to establish a strategic partnership with Intraware that will enhance our access to the enterprise segment of the software and digital products market...

  • Page 79
    ...revenues are recorded net of any associated costs. We also, to a lesser extent, provide fee-based client services, which include website design, custom development and integration, analytical marketing and email marketing services. If we receive payments for fee-based services in advance of delivery...

  • Page 80
    ...of grant using the Black-Scholes option pricing model. The fair value of restricted stock is determined based on the number of shares granted and the closing price of our common stock on the date of grant. Compensation expense for all share-based payment awards are recognized using the straight-line...

  • Page 81
    DIGITAL RIVER, INC. Notes to Consolidated Financial Statements - (Continued) prior to 2006, accounted for forfeitures as they occurred. In March 2005 the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 ("SAB 107"), which provides supplemental implementation guidance for ...

  • Page 82
    ... to the issuance of certain stock option grants made between 1998 and 2005. A Special Committee of the Board oversaw the investigation. The Special Committee authorized the General Counsel and Chief Financial Officer (who joined Digital River in January 2006 and February 2005, respectively) to...

  • Page 83
    ...which apparently resulted from errors in internal processes rather than any intentional backdating. During the relevant period, we granted 1,306 employees, consultants, officers and directors options to acquire approximately 16.8 million shares of our common stock. These option grants, awarded on 69...

  • Page 84
    DIGITAL RIVER, INC. Notes to Consolidated Financial Statements - (Continued) The incremental impact from recognizing stock-based compensation expense resulting from the investigation of past stock option...169) 85 Total 1998-2003 impact ...2004 ...2005 ...2006 ... 10,655 Total ...$11,900 $ 9,388 80

  • Page 85
    DIGITAL RIVER, INC. Notes to Consolidated Financial Statements - (Continued) The following table presents the effects of the stock-based compensation and related tax adjustments made to the Company's previously reported consolidated balance sheet as of December 31, 2005 (in thousands, except share ...

  • Page 86
    ...(1) Reported Adjustments Restated(1) Statement of Operations Data: Revenue ...Costs and expenses (exclusive of depreciation and amortization expense shown separately below) Direct cost of services ...Network and infrastructure ...Sales and marketing ...Product research and development . General...

  • Page 87
    ... used in investing activities...FINANCING ACTIVITIES: Principal amount on line of credit ...Repayment of principal on line of credit ...Proceeds from convertible senior notes ...Proceeds from sales of common stock ...Exercise of stock options ...Sales of common stock under employee stock purchase...

  • Page 88
    ... number of shares of common stock outstanding during the period. Diluted earnings per common share is calculated by dividing net income, adjusted to exclude interest expense and financing cost amortization related to potentially dilutive securities, by the weighted average number of common shares...

  • Page 89
    ... if such shares were issued and outstanding for the purposes of calculating GAAP diluted earnings per share beginning with the issuance of our 1.25% convertible senior notes on June 1, 2004. 4. Short-Term Investments: As of December 31, 2006 and 2005, our available-for-sale securities consisted of...

  • Page 90
    ...we acquired all of the capital stock of Direct Response Technologies, Inc. (Direct Response), a privately held company based in Pittsburgh, Pennsylvania, for approximately $15.0 million in cash. Direct Response, a provider of tools for managing affiliate networks, is now named DR Marketing Solutions...

  • Page 91
    ... recorded as goodwill as of December 31, 2006, as they were considered part of the purchase price. In November 2004, we acquired all of the outstanding capital stock of BlueHornet Networks, Inc. BlueHornet is a leading provider of e-mail marketing campaign management services and related customer...

  • Page 92
    ... test using a two-step approach based in the fourth quarter of each fiscal year and reassess any intangible assets, including goodwill, recorded in connection with earlier acquisitions. Our assessment has indicated that there is no impairment of goodwill for the years ended December 31, 2006, 2005...

  • Page 93
    DIGITAL RIVER, INC. Notes to Consolidated Financial Statements - (Continued) The changes in the net carrying amount of goodwill for the years ended December 31, 2006...Amount Gross Amortization Net Customer relationships ...Non-compete ...acquired during the years ended December 31, 2006, 2005...

  • Page 94
    ...and gave us the flexibility to grant restricted stock awards, restricted stock unit awards and performance shares, in addition to incentive and non-statutory stock options, to our directors, employees, and consultants under the combined plan. We call our new amended and restated plan our 1998 Equity...

  • Page 95
    ...(In thousands) December 31 Year Ended December 31, 2006 (In thousands) Costs and expenses Direct cost of services ...Network and infrastructure ...Sales and marketing ...Product research and development . . General and administrative ...Stock-based compensation included in costs and expenses ...Tax...

  • Page 96
    ...average period the stock options are expected to remain outstanding and is based on historical exercise patterns. We used historical closing stock price volatility for a period equal to the expected term of the options granted. The dividend yield assumption is based on our history and expectation of...

  • Page 97
    DIGITAL RIVER, INC. Notes to Consolidated Financial Statements - (Continued) The provision (benefit) for income taxes is composed of the following (in thousands): 2006 Year Ended December 31, 2005 2004 As Restated(1) As Restated(1) Current tax expense (benefit): United States federal ...State and ...

  • Page 98
    ... Section 382 of the Internal Revenue Code. Any future release of this valuation allowance will reduce goodwill. In accordance with SFAF 123(R), which we adopted January 1, 2006, tax savings from expected future deductions based on the expense attributable to our stock option plans are reflected in...

  • Page 99
    ...the potential liability of online intermediaries like ourselves are either unclear or less favorable. These claims, whether meritorious or not, could be time consuming and costly to resolve, cause service upgrade delays, require expensive changes in our methods of doing business, or could require us...

  • Page 100
    ...repay our senior secured revolving credit facility with Harris Trust and Savings Bank. The balance is being used for general corporate purposes, including working capital, capital expenditures, potential future acquisitions, investments, and the potential repurchase of shares of our common stock. We...

  • Page 101
    ... common stock and general market conditions. No time limit was set for the completion of the repurchase program. During 2005, we repurchased a total of 483,371 shares at a weighted average price per share of $27.20. No shares were repurchased during 2006 or 2004. 11. Employee Benefit Plans: Option...

  • Page 102
    DIGITAL RIVER, INC. Notes to Consolidated Financial Statements - (Continued) A Summary of the changes in outstanding options is as follows: Shares Available for Grant Options Price per Share Weighted Average Price per Share Options Outstanding Balance, December 31, 2003 ...Granted ...Exercised ......

  • Page 103
    .... Segment Information: We view our operations and manage our business as one reportable segment, providing outsourced e-commerce solutions globally to a variety of companies, primarily in the software and high-tech products markets. Factors used to identify our single operating segment include the...

  • Page 104
    ... sales of product from one software publisher, Symantec Corporation, accounted for approximately 30.2%, 29.7% and 27.2% of our total revenue in 2006, 2005 and 2004, respectively. In addition, revenues derived from proprietary Digital River services sold to Symantec end-users and dealer network sales...

  • Page 105
    ... Quarterly Quarter Ended March 31 2005 As Previously Reported Adjustments As Restated(1) June 30 As Previously Reported Adjustments As Restated(1) Statement of Operations Data: Revenue...Costs and expenses Direct cost of services ...Network and infrastructure ...Sales and marketing ...Product...

  • Page 106
    ... As Restated(1) December 31 As Previously Reported Adjustments As Restated(1) Statement of Operations Data: Revenue...Costs and expenses Direct cost of services ...Network and infrastructure ...Sales and marketing ...Product research and development ...General and administrative ...Depreciation and...

  • Page 107
    DIGITAL RIVER, INC. Notes to Consolidated Financial Statements - (Continued) The following tables present the effects of adjustments made to our previously reported quarterly consolidated balance sheets (in thousands): September 30, 2005 As Previously Reported Adjustments As Restated(1) ASSETS ...

  • Page 108
    DIGITAL RIVER, INC. Notes to Consolidated Financial Statements - (Continued) March 31, 2005 As Previously Reported Adjustments As Restated(1) ASSETS CURRENT ASSETS: Cash and cash equivalents ...Short-term investments ...Accounts receivable, net of allowance ...Deferred income taxes...Prepaid ...

  • Page 109
    Digital River, Inc. Schedule II For Years Ended December 31, 2005, 2004 and 2003 (In thousands) 2006 Balance at Beginning of Year Charges to Costs and Expenses ...... $ 319 1,774 $1,061 3,008 Charged / (Credited) to Expenses $ (234) (2,536) Charged / (Credited) to Other Accounts(1) $1,146 $2,246 ...

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    ...ficers Joel A. Ronning Chief Executive Officer Thomas M. Donnelly Chief Financial Officer form 10-K Additional information constituting part of the 2006 Annual Report is contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the Securities and...

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    Corporate Headquarters 9625 West 76th Street Eden Prairie, Minnesota 55344 Digital River, GmbH Cologne, Germany Digital River, UK Ltd London, United Kingdom Digital River International S.a.r.l. Luxembourg, Luxembourg Digital River Ireland, Ltd Shannon, Ireland DR APAC, Inc. Taipei, Taiwan Digital ...