Digital River 2006 Annual Report Download - page 23

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unless we are provided with a written notice at least 90 days before the end of the contract. As is common in
our industry, we have no material long-term or exclusive contracts or arrangements with any software or
digital products publishers that guarantee the availability of software or digital products. Software and digital
products publishers that currently supply software or digital products to us may not continue to do so and we
may be unable to establish new relationships with software or digital product publishers to supplement or
replace existing relationships.
The matters relating to the investigation by the Special Committee of the Board of Directors and the
restatement of our consolidated financial statements may result in additional litigation and governmental
enforcement actions.
On February 6, 2007, we announced that an internal review had discovered irregularities related to the
issuance of certain stock option grants primarily made between 1998 and 2002. As described in the
Explanatory Note immediately preceding Part I, Item 1, and in Note 2, “Restatement of Consolidated Financial
Statements,” in Notes to Consolidated Financial Statements in this Form 10-K, as a result of the internal
review, the Special Committee concluded, and the Audit Committee and Board of Directors agree, that we
used incorrect measurement dates for financial accounting purposes for certain stock option grants in prior
periods. Therefore, we have recorded additional non-cash stock-based compensation expense and related tax
effect with regard to certain past stock option grants, and we are restating previously filed financial statements
in this Form 10-K. The full year adjustment 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 sub-
stantial expenses for legal, accounting, tax and other professional services, have diverted management’s
attention from our business, and could in the future harm our business, financial condition, results of
operations and cash flows.
While we believe we have made appropriate judgments in determining the correct measurement dates for
our stock option grants, the SEC may disagree with the manner in which we have accounted for and reported,
or not reported, the financial impact. Accordingly, there is a risk we may have to further restate our prior
financial statements, amend prior filings with the SEC, or take other actions not currently contemplated.
Our past stock option granting practices and the restatement of prior financial statements have exposed us
to greater risks associated with litigation, regulatory proceedings and government enforcement actions. As
described in Part II, Item 1, “Legal Proceedings”, several derivative complaints had been filed in federal court
against our directors and certain of our executive officers pertaining to allegations relating to stock option
grants. On December 18, 2006, the SEC initiated an informal inquiry into our historical stock option practices.
We have provided the results of our internal review together with supporting documentation to the SEC. We
intend to continue to fully cooperate with the SEC’s inquiry. No assurance can be given regarding the
outcomes from litigation, regulatory proceedings or government enforcement actions relating to our past stock
option practices. The resolution of these matters will be time consuming, expensive, and may distract
management from the conduct of our business. Furthermore, if we are subject to adverse findings in litigation,
regulatory proceedings or government enforcement actions, we could be required to pay damages or penalties
or have other remedies imposed, which could harm our business, financial condition, results of operations and
cash flows.
Implementing our acquisition strategy could result in dilution and operating difficulties leading to a
decline in revenue and operating profit.
We have acquired, and intend to continue engaging in strategic acquisitions of businesses, technologies,
services and products. Since December 2005, we have acquired three businesses, Commerce5, Inc. (now
DR globalTech, Inc.), Direct Response Technologies, Inc. (now DR Marketing Solutions, Inc.) and Mind-
Vision, Inc. The process of integrating an acquired business, technology, service or product into our business
and operations may result in unforeseen operating difficulties and expenditures. Integration of an acquired
business also may disrupt our ongoing business, distract management and make it difficult to maintain
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