Digital River 2006 Annual Report Download - page 45

We currently believe that sales and marketing expenses will increase in absolute dollars in 2007 compared
to 2006, as we continue to grow and expand our reach to clients, and continue to offer increased levels of
strategic marketing services.
Product Research and Development. Our product research and development expense line item includes
the costs of personnel and related expenses associated with developing and enhancing our technology
platforms and related systems. Product research and development expense was $32.3 million in 2006,
compared to $20.7 million and $14.3 million in 2005 and 2004, respectively. The increase in 2006 from 2005
resulted primarily from increases in personnel related expenses to support our growth initiatives, costs from
recent acquisitions, development related to our expanded relationship with Microsoft and stock-based compen-
sation expense related to employee stock options and employee stock purchases recognized under SFAF
123(R). During 2006, we continued to advance our remote-control technology, as well as the international and
e-marketing capabilities. We capitalized $0.1 million of software development costs related to those efforts
during 2006. The increase in 2005 from 2004 resulted primarily from increases in personnel related expenses.
We capitalized approximately $0.4 million of software development costs during 2005. As a percentage of
revenue, product research and development expense increased to 10.5% in 2006 from 9.4% in 2005 and 9.3%
in 2004.
We currently believe that product research and development expenses will increase in absolute dollars in
2007 compared to 2006, as a result of continued investments in product development required to remain
competitive.
General and Administrative. Our general and administrative expense line item primarily includes the
costs of executive, accounting, and administrative personnel and related expenses, insurance expense, and
professional fees for legal, tax and audit services. General and administrative expense increased to
$34.2 million in 2006 from $21.5 million in 2005 and $17.0 million in 2004. The increase in 2006 from 2005
resulted primarily from the addition of personnel and facilities to support our global expansion, such as our
offices in Ireland and Luxembourg, as well as those gained through acquisition of other businesses, from
stock-based compensation expense related to employee stock options and employee stock purchases recognized
under SFAS 123(R), and costs incurred for activities related to our internal review of historical stock option
practices. The increase in 2005 from 2004 resulted primarily from the addition of personnel and facilities to
support our growth as well as those gained through acquisitions of other businesses. As a percentage of
revenue, general and administrative expense increased to 11.1% in 2006 from 9.7% in 2005. As a percentage
of revenue, general and administrative expense declined to 9.7% in 2005 from 11.0% in 2004 due to our
ability to spread administrative costs over the higher revenue base.
We currently believe that general and administrative expenses will increase in absolute dollars in 2007
compared to 2006, as we continue to invest in our infrastructure to support our continued organic growth. We
may also incur additional expenses to resolve matters related to our historical stock option practices.
Depreciation and Amortization. Our depreciation and amortization expense line item includes the
depreciation of computer equipment and office furniture and the amortization of purchased and internally
developed software, leasehold improvements made to our leased facilities, and debt financing costs. Computer
equipment, software and furniture are depreciated under the straight-line method using three to seven years
lives, and leasehold improvements are amortized over the shorter of the life of the asset or the remaining
length of the lease. Depreciation and amortization expense increased to $11.0 million in 2006 from $8.8 million
in 2005 and $8.2 million in 2004. The increased expenses in 2006 and 2005 resulted primarily from increases
in our assets, as gross capitalized property and equipment increased to $56.4 million on December 31, 2006,
from $52.0 million and $41.1million on December 31, 2005 and 2004, respectively. We currently believe that
depreciation and amortization expenses will increase in absolute dollars in 2007 compared 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 from our 14 acquisitions in the past four years.
Amortization of acquisition related intangibles increased to $12.1 million in 2006 from $8.7 million in 2005
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