Digital River 2006 Annual Report Download - page 31

be harmed by these and similar regulations because the European Union privacy directive prohibits transmis-
sion of personal information outside the European Union. The United States and the European Union have
negotiated an agreement providing a “safe harbor” for those companies who agree to comply with the
principles set forth by the U.S. Department of Commerce and agreed to by the European Union. Failure to
comply with these principles may result in fines, private lawsuits and enforcement actions. These enforcement
actions can include interruption or shutdown of operations relating to the collection and sharing of information
pertaining to citizens of the European Union.
Compliance with future laws imposed on e-commerce may substantially increase our costs of doing
business or otherwise adversely affect our ability to offer our services.
Because our services are accessible worldwide, and we facilitate sales of products to end-users worldwide,
international jurisdictions may claim that we are requiredtocomplywiththeirlaws.LawsregulatingInternet
companies outside of the United States may be less favorable than those in the United States, giving greater rights
to consumers, content owners and users. Compliance may be more costly or may require us to change our business
practices or restrict our service offerings relative to those provided in the United States. Any failure to comply with
foreign laws could subject us to penalties ranging from fines to bans on our ability to offer our services.
As our services are available over the Internet in multiple states and foreign countries, these jurisdictions
may claim that we are required to qualify to do business as a foreign corporation in each state or foreign
country. We and/or our subsidiaries are qualified to do business only in certain states. Failure to qualify as a
foreign corporation in a required jurisdiction could subject us to taxes and penalties and could result in our
inability to enforce contracts in these jurisdictions.
In addition, we are subject to United States laws governing the conduct of business with other countries,
such as export control laws, which prohibit or restrict the export of goods, services and technology to
designated countries, denied persons or denied entities from the United States. Violation of these laws could
result in fines or other actions by regulatory agencies and result in increased costs of doing business and
reduced profits. In addition, any significant changes in these laws, particularly an expansion in export control
laws, will increase our costs of compliance and may further restrict our overseas client base.
We are exposed to foreign currency exchange risk.
Sales outside the United States accounted for approximately 41% of our total sales in 2006. The results
of operations of, and certain of our intercompany balances associated with, our internationally focused
websites are exposed to foreign exchange rate fluctuations. Upon translation, net sales and other operating
results from our international operations may differ materially from expectations, and we may record
significant gains or losses on the remeasurement of intercompany balances. If 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. Similarly, our net revenues and operating expenses will decrease if the
U.S. dollar strengthens against foreign currencies. As we have expanded our international operations, our
exposure to exchange rate fluctuations has become more pronounced. We may enter into short-term 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. The use of such hedging activities may not offset
more than a portion of the adverse financial impact resulting from unfavorable movements in foreign exchange
rates. See Item 7A of Part II, for information demonstrating the effect on our consolidated statements of
operations from changes in exchange rates versus the U.S. dollar.
Changes in our tax rates could affect our future results.
Our future effective tax rates could be favorably or unfavorably affected by changes in the mix of
earnings in countries with differing statutory tax rates, changes in the valuation of our deferred tax assets and
liabilities, or by changes in tax laws or their interpretation. In addition, we are subject to the continuous
examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly
assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our
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