Digital River 2006 Annual Report Download - page 7

The Business section and other parts of this Annual Report on Form 10-K (“Form 10-K”) contain
forward-looking statements that involve risks and uncertainties. Many of the forward-looking statements are
located in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.
“Forward-looking statements provide current expectations of future events based on certain assumptions and
include any statement that does not directly relate to any historical or current fact. Forward-looking statements
can also be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,”
“predicts,” and similar terms. Forward- looking statements are not guarantees of future performance and our
actual results may differ significantly from the results discussed in the forward-looking statements. Factors that
might cause such differences include, but are not limited to, those discussed in the subsection entitled “Risk
Factors” under Part I, Item 1A of this Form 10-K. We assume no obligation to revise or update any forward-
looking statements for any reason, except as required by law.
Explanatory Note
In this Form 10-K, we are restating our consolidated balance sheet as of December 31, 2005, and the
related consolidated statements of operations, shareholders’ equity and cash flows for each of the years ended
December 31, 2005 and December 31, 2004, and each of the quarters in 2005.
This Form 10-K also reflects the restatement of “Selected Consolidated Financial Data” in Item 6 for the
years ended December 31, 2005, 2004, 2003, and 2002, and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in Item 7 for the years ended December 31, 2005, and
December 31, 2004.
Previously filed annual reports on Form 10-K and quarterly reports on Form 10-Q affected by the
restatements have not been amended and should not be relied upon.
On February 6, 2007, we announced the substantial completion of an internal investigation into our
historical stock option granting practices. Since that date, we have completed one additional witness interview,
which did not alter the results of the investigation. The investigation uncovered irregularities related to the
issuance of certain stock option grants made between 1998 and 2005. A Special Committee of the Board
oversaw the investigation. The Special Committee authorized the General Counsel and Chief Financial Officer
(who joined Digital River in January 2006 and February 2005, respectively) to conduct the investigation, with
the assistance of outside counsel and forensic experts.
In particular, as a result of the internal investigation, the Special Committee concluded, and the Audit
Committee and Board of Directors agree, that we used incorrect measurement dates for financial accounting
purposes for certain stock option grants in prior periods. Therefore, we have recorded additional non-cash
stock-based compensation expense and related tax effect with regard to certain past stock option grants, and
we are restating previously filed financial statements in this Form 10-K. These adjustments, after-tax,
amounted to $9.4 million, spread out over the nine year period from 1998 through 2006. The full year
adjustment to 2006 was recorded in the fourth quarter of 2006 due to its insignificance.
The Special Committee investigation examined each stock option grant from August 1998 through
December 2006 (the “relevant period”), a total of 69 distinct grant dates. These grants include all of the
options granted since our initial public offering in August 1998. In all cases, the investigation considered the
particular facts and circumstances surrounding each grant date, including all available documentation, relevant
email archives, and interviews with present and former directors, officers, employees, and advisors.
Based on the totality of the evidence and the applicable law, the Special Committee found that no officer
or director engaged in any wrongdoing for personal enrichment. The Special Committee also concluded that
no director or member of the committee charged with awarding stock options to employees (the Stock Option
Committee) knowingly failed to comply with the relevant accounting principles.
The Special Committee’s analysis determined that eighteen grant dates, representing three million shares,
were not the proper measurement dates for the related options. Specifically, the Special Committee’s
investigation identified certain non-officer employee grants for which the Stock Option Committee, with the
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