Digital River 2006 Annual Report Download - page 56

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 increased to $7.6 million
for the three months ended March 31, 2006 from $4.5 million for the same period in the prior year, an
increase of $3.1 million, or 69.0%. The increase was primarily driven by increases in personnel-related
expenses, outside consulting fees and from stock-based compensation expense related 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 costs related to these efforts in the three
months ended March 31, 2005. We did not capitalize any costs related to software development during the
three months ended March 31, 2006 and do not expect to capitalize any such costs for the balance of 2006. As
a percentage of revenue, product research and development expense was 9.7% in the three months ended
March 31, 2006, compared to 8.2% for the same period in the prior year. We currently believe that product
research and 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) incurring a full year of
costs in 2006 related to acquisitions completed in 2005, 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, professional fees, including legal and accounting, and shareholder and compliance expenses. General
and administrative expenses increased to $8.3 million for the three months ended March 31, 2006 from
$5.6 million for the same period in the prior year, an increase of $2.6 million, or 46.8%. The increase resulted
primarily from the addition of personnel and facilities to support our growth 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 10.6% for the three months ended March 31, 2006, compared to 10.3% for the
same period 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 a full year of costs in 2006 related to acquisitions completed in 2005 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 our 15 acquisitions in the last
four years. Amortization of acquisition-related intangibles assets was $2.8 million for the three months ended
March 31, 2006 compared to $2.4 million for the same period in the prior year. The increase was due to
additional amortizable assets acquired throughout 2005 and the first quarter 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 $3.4 million and $1.8 million for the three months ended March 31,
2006 and 2005, respectively. Interest expense was $0.6 million and $0.6 million for the three months ended
March 31, 2006 and 2005, respectively. Gains and losses from foreign currency remeasurement were
$0.1 million for the three months ended March 31, 2006 and immaterial for the same period in the prior year.
Gains and losses from the sale of investments were immaterial for the three months ended March 31, 2006
and 2005.
INCOME TAXES. For the three months ended March 31, 2006, our tax expense was $7.4 million, made
up of approximately $8.9 million of current tax expense and $1.5 million of deferred tax benefit. For the three
months ended March 31, 2005, our tax expense was $2.9 million, made up of $1.7 million related to domestic
and $1.2 million to foreign operations.
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