Digital River 2006 Annual Report Download - page 61

Foreign exchange rate fluctuations may adversely impact our consolidated results of operations as
exchange rate fluctuations on transactions denominated in currencies other than our functional currencies result
in gains and losses that are reflected in our consolidated statement of income. To the extent the U.S. dollar
weakens against foreign currencies, the translation of these foreign currency-denominated transactions will
result in increased net revenues and operating expenses. Conversely, our net revenues and operating expenses
will decrease when the U.S. dollar strengthens against foreign currencies. The following schedule summarizes
revenue, costs and expenses and income from operations that would have resulted had exchange rates in the
current period been the same as those in effect in the comparable prior-year period for operating results.
The effect on our consolidated statements of operations from changes in exchange rates versus the
U.S. Dollar is as follows (in thousands):
At Prior
Year
Rates(1)
Exchange
Rate
Effect(2)
As
Reported
At Prior
Year
Rates(1)
Exchange
Rate
Effect(2)
As
Restated(3)
At Prior
Year
Rates(1)
Exchange
Rate
Effect(2)
As
Restated(3)
Year Ended
December 31,
2006
Year Ended
December 31,
2005
Year Ended
December 31,
2004
Revenue . ............... $307,071 $ 561 $307,632 $220,625 $ (217) $220,408 $150,182 $3,948 $154,130
Costs and expenses ......... 239,621 416 240,037 153,981 7 153,988 118,553 1,632 120,185
Income from operations . ..... 67,450 145 67,595 66,644 (224) 66,420 31,629 2,316 33,945
Other income, net .......... 20,351 1,536 21,887 7,210 (2,243) 4,967 1,611 30 1,641
Income before income tax
expense ............... $ 87,801 $1,681 $ 89,482 $ 73,854 $(2,467) $ 71,387 $ 33,240 $2,346 $ 35,586
(1) Represents the outcome that would have resulted had exchange rates in the current period been the same
as those in effect in the comparable prior-year period for operating results.
(2) Represents the increase (decrease) in reported amounts resulting from changes in exchange rates from
those in effect in the comparable prior-year period for operating results.
(3) See Note 2, “Restatement of Consolidated Financial Statements,” in Notes to Consolidated Financial
Statements.
Transaction Exposure
The Company enters into short term foreign currency forward contracts to offset the foreign exchange
gains and losses generated by the re-measurement of certain assets and liabilities recorded in non-functional
currencies. Changes in the fair value of these derivatives are recognized in current earnings in other income
and expense.
Translation Exposure
Foreign exchange rate fluctuations may adversely impact our consolidated financial position as well as
our consolidated results of operations. Foreign exchange rate fluctuations may adversely impact our financial
position as the assets and liabilities of our foreign operations are translated into U.S. dollars in preparing our
consolidated balance sheet. These gains or losses are recognized as an adjustment to stockholders’ equity
through accumulated other comprehensive income/(loss) net of tax benefit or expense. The potential loss in
fair value resulting from a hypothetical 10% adverse currency movement is $16.0 million and $11.6 million
for 2006 and 2005, respectively.
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