Digital River 2006 Annual Report Download - page 40

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The discussion in this Annual 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 elsewhere in this Annual Report. When used in this
document, the words “believes,” “expects,” “anticipates,” “intends,” “plans,” and similar expressions, are
intended to identify certain of these forward-looking statements. However, these words are not the exclusive
means of identifying such statements. In addition, any statements that refer to expectations, projections or
other characterizations of future events or circumstances are forward-looking statements. The cautionary
statements made in this document should be read as being applicable to all related forward-looking statements
wherever they appear in this document.
The following information has been adjusted to reflect the restatement of our financial results, which is
more fully 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 of this
Form 10-K.
Overview
We provide outsourced e-commerce solutions globally to a wide variety of companies primarily in the
software and high-tech products markets. We offer our clients a broad range of services that enable them to
effectively build, manage, and grow online sales on a global basis. We focus on helping our clients mitigate
risk and grow their revenues. Our services include online store design, development, and hosting, store
merchandising and optimization, order management, fraud prevention screening, export controls and manage-
ment, tax management, digital product delivery via download, physical product fulfillment, multi-lingual
customer service, e-mail marketing, website optimization, web analytics and reporting.
Acquisitions and Comparability of Results
We acquired SWReg in March 2005, Commerce5, Inc. (now DR globalTech, Inc.) in December 2005,
Direct Response Technologies, Inc. (now DR Marketing Solutions, Inc.) in January 2006 and MindVision, Inc.
in June 2006. The results of these acquisitions must be factored into any comparison of our 2006 results to the
results for 2005 or 2004. See Note 5 of our consolidated financial statements for the year ended December 31,
2006, for pro forma financial information as if these entities had been acquired on January 1, 2005.
Critical Accounting Policies
We prepare our consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America. As such, we are required to make certain estimates, judgments and
assumptions that we believe are reasonable based upon the information available. These estimates and
assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the periods presented. The significant accounting policies
that we believe are the most critical in fully understanding and evaluating our reported financial results are the
following:
Revenue Recognition. We recognize revenue from services rendered once all the following criteria
for revenue recognition have been met: (1) pervasive evidence of an agreement exists; (2) the services
have been rendered; (3) the fee is fixed and determinable and not subject to refund or adjustment; and
(4) collection of the amounts due is reasonably assured.
We evaluate the criteria outlined in Emerging Issues Task Force, (“EITF”) Issues No. 99-19, Reporting
Revenue Gross as a Principal Versus Net as an Agent, in determining whether it is appropriate to record
the gross amount of product sales and related costs or the net amount earned as net revenue. We act as
the merchant of record on most of the transactions processed and have contractual relationships with our
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