Digital River 2006 Annual Report Download - page 43

requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. Our pro forma information required under SFAS 123, for periods
prior to 2006, accounted for forfeitures as they occurred. In March 2005 the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”), which provides supplemental implemen-
tation guidance for SFAS 123(R). We have applied the provision of SAB 107 in our adoption of SFAS 123(R).
SFAS 123(R) also requires the benefits of tax deductions in excess of recognized stock-based compensa-
tion expense be reported as a financing cash flow, rather than an operating cash flow as required prior to
adoption of SFAS 123(R) in our Consolidated Statement of Cash Flows. On November 10, 2005, the Financial
Accounting Standards Board (FASB) issued FASB Staff Position No. FAS 123(R)-3 “Transition Election
Related to Accounting for Tax Effects of Share-based Payment Awards.” We have elected not to adopt the
alternative transition method provided in the FASB Staff Position for calculating the tax effects of stock-based
compensation pursuant to SFAS 123(R).
As a result of adopting Statement 123(R) on January 1, 2006, our income before income taxes and net
income for the twelve months ended December 31, 2006 were $13.9 million and $9.0 million lower,
respectively, than if we had continued to account for share-based compensation under APB25. Basic and
diluted earnings per share for the twelve months ended December 31, 2006 were $0.23 and $0.20 lower,
respectively, than if we had continued to account for share-based compensation under APB 25.
See Note 6 in the Consolidated Financial Statements in this Form 10-K for further information regarding
the impact of our adoption of SFAS 123(R) and the assumptions we use to calculate the fair value of share-
based compensation.
Results of Operations
The following table presents certain items from our consolidated statements of operations as a percentage
of total revenue for the years indicated.
2006 2005 2004
As Restated(1) As Restated(1)
Revenue........................................ 100.0% 100.0% 100.0%
Costs and expenses:
Direct cost of services ........................... 2.5 2.3 3.4
Network and infrastructure ........................ 9.5 9.0 9.8
Sales and marketing ............................. 36.9 31.5 33.8
Product research and development................... 10.5 9.4 9.3
General and administrative ........................ 11.1 9.7 11.0
Depreciation and amortization ...................... 3.6 4.0 5.3
Amortization of acquisition-related costs .............. 3.9 4.0 5.4
Total costs and expenses............................ 78.0 69.9 78.0
Income from operations ............................ 22.0 30.1 22.0
Other income, net ................................ 7.1 2.3 1.1
Income before income tax expense .................... 29.1 32.4 23.1
Income tax expense ............................... 9.3 6.8 0.7
Net income ..................................... 19.8% 25.6% 22.4%
(1) See Note 2, “Restatement of Consolidated Financial Statements,” in Notes to Consolidated Financial
Statements.
Revenue. Our revenue increased to $307.6 million in 2006 from $220.4 million in 2005 and $154.1 mil-
lion in 2004. The revenue increases were primarily attributable to higher online sales activity across our client
base, growth in the number of software publishers and online retailer clients we served, increased sales from
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