Digital River 2006 Annual Report Download - page 49

Symantec and Microsoft. We currently believe that sales and marketing expenses will increase in absolute
dollars in 2006 compared to 2005, as we continue to grow and expand our reach to clients, as we continue to
offer increased levels of strategic marketing services, as we incur costs for acquisitions completed in 2005 and
2006, and as we record expense related to stock-based compensation. See Note 6 — “Stock-Based Compensa-
tion,” in the consolidated financial statements for a discussion of the impact of SFAS 123(R), “Share Based
Payment,” which we adopted on January 1, 2006.
PRODUCT RESEARCH AND DEVELOPMENT. Our product research and development expense line
item includes the costs of personnel and related expenses associated with developing and enhancing our
technology platforms and related systems. Product research and development expense increased to $8.3 million
and $23.4 million, respectively, for the three and nine months ended September 30, 2006 from $5.2 million
and $14.9 million for the same periods in the prior year, an increase of $3.1 million, or 59.0%, and
$8.5 million, or 57.2%, respectively. The increases were primarily driven by increases in personnel-related
expenses to support our growth initiatives, costs from recent acquisitions, development related to our expanded
relationship with Microsoft and stock-based compensation expense related to employee stock options and
employee stock purchases recognized under SFAS 123(R). During the first nine months of 2006, we continued
to advance our remote-control technology, as well as the international and e-marketing capabilities. We
capitalized approximately $0.0 million and $0.4 million of software development costs related to these efforts
in the nine months ended September 30, 2006 and 2005, respectively. We did not capitalize any material costs
related to software development during the nine months ended September 30, 2006 and do not expect to
capitalize any such costs for the balance of 2006. As a percentage of revenue, product research and
development expense was 11.1% and 10.4% in the three and nine months ended September 30, 2006,
compared to 9.9% and 9.4% for the same periods in the prior year. We currently believe that product research
and development expenses will increase in absolute dollars in 2006 compared to 2005, as a result of
(i) continued investments in product development required to remain competitive, (ii) costs from acquisitions
completed in 2005 and 2006, and (iii) recording expense related to stock-based compensation. See Note 6 —
“Stock-Based Compensation,” in the consolidated financial statements for a discussion of the impact of
SFAS 123(R), “Share Based Payment,” which we adopted on January 1, 2006.
GENERAL AND ADMINISTRATIVE. Our general and administrative expense line item primarily
includes the costs of executive, accounting, and administrative personnel and related expenses, insurance
expense, and professional fees for legal, tax and audit services. General and administrative expenses increased
to $8.1 million and $24.6 million, respectively, for the three and nine months ended September 30, 2006 from
$5.3 million and $16.2 million for the same periods in the prior year, an increase of $2.8 million, or 52.1%,
and $8.3 million, or 51.4%, respectively. The increase resulted primarily from the addition of personnel and
facilities to support our global expansion, such as our offices in Ireland and Luxembourg, as well as those
gained through acquisition of other businesses, and from stock-based compensation expense related to
employee stock options and employee stock purchases recognized under SFAS 123(R). As a percentage of
revenue, general and administrative expense was 10.7% and 10.9% for the three and nine months ended
September 30, 2006, compared to 10.0% and 10.2% for the same periods in the prior year. We currently
believe that general and administrative expenses will increase in absolute dollars in 2006 compared to 2005, as
we (i) continue to invest in our infrastructure to support our continued organic growth, (ii) incur costs from
acquisitions completed in 2005 and 2006 and (iii) record expense related to stock-based compensation. See
Note 6 — “Stock-Based Compensation,” in the consolidated financial statements for a discussion of the impact
of SFAS 123(R), “Share Based Payment,” which we adopted on January 1, 2006.
AMORTIZATION OF ACQUISITION-RELATED INTANGIBLES. Our amortization of acquisition-related
intangibles line item consists of amortization of intangible assets recorded from 13 of our acquisitions during
the past four years. Amortization of acquisition-related intangible assets was $3.3 million and $9.2 million,
respectively, for the three and nine months ended September 30, 2006 compared to $2.1 million and
$6.6 million for the same periods in the prior year. The increase was due to additional amortizable assets
acquired throughout 2005 and the first half of 2006. We have purchased, and expect to continue purchasing,
assets or businesses, which may include the purchase of intangible assets.
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