Digital River 2006 Annual Report Download - page 100

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claims. To date, no significant costs have been incurred, either individually or collectively, in connection with
our indemnification provisions.
In addition, we are required by our processors to comply with credit card association operating rules, and
we have agreed to indemnify our processors for any fines they are assessed by credit card associations as a
result of processing payments for us. The credit card associations and their member banks set and interpret the
credit card rules. Visa, MasterCard, American Express, or Discover could adopt new operating rules or re-
interpret existing rules that we or our processors might find difficult to follow. We have had payment
processing agreements with certain of our payment processors terminated due to violations of their rules. We
also could be subject to fines or increased fees from MasterCard and Visa.
9. Long-Term Debt:
On April 16, 2004, in connection with our acquisition of element 5, we established a $45 million secured
revolving credit facility with Harris Trust and Savings Bank. This facility was repaid in full and terminated in
connection with the sale and issuance of our 1.25% convertible senior notes on June 1, 2004.
On June 1, 2004, we sold and issued $175 million in aggregate principal amount of 1.25% convertible
senior notes due January 1, 2024, in a private, unregistered offering. The notes were subsequently registered
for resale. The notes were sold at 100% of their principal amount. The initial purchasers exercised in full their
option to purchase up to an additional $20 million in aggregate principal amount of the notes on June 30,
2004, which purchase transaction closed on July 6, 2004.
We are required to pay interest on the notes on January 1 and July 1 of each year beginning January 1,
2005. The notes bear interest at a rate of 1.25% and, if specified conditions are met, are convertible into our
common stock at a conversion price of $44.063 per share. The notes may be surrendered for conversion under
certain circumstances, including the satisfaction of a market price condition, such that the price of our
common stock reaches a specified threshold; the satisfaction of a trading price condition, such that the trading
price of the notes falls below a specified level; the redemption of the notes by us, the occurrence of specified
corporate transactions, as defined in the related indenture; and the occurrence of a fundamental change, as
defined in the related indenture. The initial conversion price is equivalent to a conversion rate of approximately
22.6948 shares per $1,000 of principal amount of the notes. We will adjust the conversion price if certain
events occur, as specified in the related indenture, such as the issuance of our common stock as a dividend or
distribution or the occurrence of a stock subdivision or combination. If a fundamental change, such as a
change in our control, as defined in the related indenture, occurs on or before January 1, 2009, we also may
be required to purchase the notes for cash and pay an additional make-whole premium payable in our common
stock, or in the same form of consideration into which all, or substantially all, of the shares of our common
stock have been converted or exchanged in connection with the fundamental change, upon the repurchase or
conversion of the notes in connection with the fundamental change. Holders of the notes have the right to
require us to repurchase their notes prior to maturity on January 1, 2009, 2014 and 2019. We have the right to
redeem the notes, under certain circumstances, on or after July 1, 2007, and prior to January 1, 2009, and we
may redeem the notes at anytime on or after January 1, 2009.
A portion of the net proceeds of the offering was used to repay our senior secured revolving credit
facility with Harris Trust and Savings Bank. The balance is being used for general corporate purposes,
including working capital, capital expenditures, potential future acquisitions, investments, and the potential
repurchase of shares of our common stock.
We incurred interest expense of $2.5 million in 2006 and made interest payments of $2.4 million. We
incurred interest expense of $2.5 million in 2005 and made interest payments of $2.6 million. We incurred
interest expense of $1.5 million in 2004 and made no interest payments.
96
DIGITAL RIVER, INC.
Notes to Consolidated Financial Statements — (Continued)