Digital River 2006 Annual Report Download - page 53

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development expenses will increase in absolute dollars in 2006 compared to 2005, as a result of (i) continued
investments in product development required to remain competitive, (ii) costs from acquisitions completed in
2005 and 2006, and (iii) recording expense related to stock-based compensation. See Note 6 — “Stock-Based
Compensation,” in the consolidated financial statements for a discussion of the impact of SFAS 123(R), “Share
Based Payment,” which we adopted on January 1, 2006.
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 expenses increased
to $8.2 million and $16.5 million, respectively, for the three and six months ended June 30, 2006 from
$5.3 million and $10.9 million for the same periods in the prior year, an increase of $2.9 million, or 55.5%,
and $5.6 million, or 51.1%, respectively. The increase 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, and from stock-based compensation expense related to
employee stock options and employee stock purchases recognized under SFAS 123(R). As a percentage of
revenue, general and administrative expense was 11.6% and 11.1% for the three and six months ended June 30,
2006, compared to 10.4% and 10.3% for the same periods in the prior year. We currently believe that general
and administrative expenses will increase in absolute dollars in 2006 compared to 2005, as we (i) continue to
invest in our infrastructure to support our continued organic growth, (ii) incur costs from acquisitions
completed in 2005 and 2006 and (iii) record expense related to stock-based compensation. See Note 6 —
“Stock-Based Compensation,” in the consolidated financial statements for a discussion of the impact of
SFAS 123(R), “Share Based Payment,” which we adopted on January 1, 2006.
AMORTIZATION OF ACQUISITION-RELATED INTANGIBLES. Our amortization of acquisition-related
intangibles line item consists of amortization of intangible assets recorded from 13 of our acquisitions during
the past four years. Amortization of acquisition-related intangible assets was $3.0 million and $5.9 million,
respectively, for the three and six months ended June 30, 2006 compared to $2.1 million and $4.5 million for
the same periods in the prior year. The increase was due to additional amortizable assets acquired throughout
2005 and the first half of 2006. We have purchased, and expect to continue purchasing, assets or businesses,
which may include the purchase of intangible assets.
OTHER INCOME, NET. Our other income, net line item is the total of interest income on our cash,
cash equivalents and short-term investments, interest expense on our debt and foreign currency transaction
gains and losses. Interest income was $5.8 million and $9.2 million, respectively, for the three and six months
ended June 30, 2006 compared to $2.3 million and $4.1 million for the same periods in the prior year. Interest
expense was $0.6 million and $1.2 million, respectively, for the three and six months ended June 30, 2006
compared to $0.6 million and $1.2 million for the same periods in the prior year. Gains from foreign currency
remeasurement were $1.2 million and $1.3 million, respectively, for the three and six months ended June 30,
2006 compared to losses of $0.7 million and $0.8 million for the same periods in the prior year. Gains and
losses from the sale of investments were immaterial for the three and six months ended June 30, 2006 and
2005.
INCOME TAXES. For the three months ended June 30, 2006, our tax expense was $7.3 million, made
up of approximately $9.6 million of current tax expense and $2.3 million of deferred tax benefit. For the three
months ended June 30, 2005, our tax expense was $5.2 million, made up of $4.3 million related to domestic
and $0.9 million to foreign operations.
During the three month period ended June 30, 2006, we recorded tax expense at a rate that reflects the
estimated impact of recent 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.
We commenced business operations in these locations on April 1, 2006. We have also established in the past
18 months, or are in the process of establishing, operations in Taipei, Taiwan, Tokyo, Japan, Seoul, Korea and
Rio de Janeiro, Brazil. These operating changes may reduce our effective tax rate from prior quarters.
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