Digital River 2006 Annual Report Download - page 76

DIGITAL RIVER, INC.
Notes to Consolidated Financial Statements
December 31, 2006 and 2005
1. Nature of Operations and Summary of Significant Accounting Policies:
We provide outsourced e-commerce solutions globally to a wide variety of companies primarily in the
software and high-tech products markets. We were incorporated in 1994 and began building and operating
online stores for our clients in 1996. We generate revenue primarily based on the sales of products made in
those stores, and in addition, offer services designed to increase traffic to our clients’ online stores and to
improve the sales effectiveness of those stores.
Principles of Consolidation and Classification
The consolidated financial statements include the accounts of Digital River, Inc. and our wholly owned
subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Certain
reclassifications have been made to prior year balances in order to conform to the current year’s presentation.
Foreign Currency Translation
Substantially all of our foreign subsidiaries use the local currency of their respective countries as their
functional currency. Assets and liabilities are translated at exchange rates prevailing at the balance sheet dates.
Revenues, costs and expenses are translated into U.S. dollars at average exchange rates for the period. Gains
and losses resulting from translation are recorded as a component of equity. Gains and losses resulting from
foreign currency transactions are recognized as “other income, net.”
Cash and Cash Equivalents
We consider all short-term, highly liquid investments, primarily high grade commercial paper and money
market accounts, that are readily convertible into known amounts of cash and that have original or remaining
maturities of three months or less at the date of purchase to be cash equivalents. As of December 31, 2006
and 2005, cash balances of $2.9 million and $12.9 million, respectively, were held by banks or credit card
processors to secure potential future credit card fees, fines and chargebacks or for other payments. In addition,
at December 31, 2006 and 2005, $0.55 million and $0.4 million were restricted by letter of credit and
agreements required by international tax jurisdictions as security for potential tax liabilities.
Short-Term Investments
Our short-term investments consist of debt securities that are classified as available-for-sale and are
carried on our balance sheet at their market value with cumulative unrealized gains or losses recorded as a
component of accumulated other comprehensive income within stockholders’ equity. As of December 31, 2006
and 2005, all securities had dates to maturity or reset dates of less than three years. We classify all of our
available-for-sale securities as current assets, as these securities represent investments available for current
corporate purposes.
Property and Equipment
Property and equipment is stated at historical cost. Computer equipment, software and furniture are
depreciated under the straight-line method using estimated useful lives of three to seven years and leasehold
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