Digital River 2006 Annual Report Download - page 54

As of June 30, 2006, we had net U.S. tax loss carryforwards of approximately $82.4 million, and foreign
tax loss carryforwards of $4.8 million. The U.S. amount consists of $40.4 million of deductions resulting from
exercise of stock options and $42.0 million of acquired net operating losses. The tax loss carryforwards from
exercise of stock options expire in the years 2020 through 2024. The acquired net operating losses expire in
the years 2020 through 2025 and are subject to other deductibility restrictions discussed below.
In prior years, there was uncertainty of future realization of the deferred tax assets resulting from
temporary differences and from tax loss carryforwards from operations and stock option deductions, therefore
a valuation allowance equal to the deferred tax assets was recorded. At December 31, 2005, we evaluated our
deferred tax assets related to tax loss carryforwards from stock option deductions and other items and
concluded that the valuation allowance should be reversed. We met the requirements under GAAP as we
believe it is more likely than not that we will realize the benefit of these deferred tax assets. This conclusion
was based primarily on our earnings history over the last three years as well as our expected future taxable
income. The impact on U.S. taxable income of future stock option deductions should not reduce taxable
income to a level that would jeopardize this conclusion or unreasonably extend the period in which we may
recognize the tax benefit associated with these deferred tax assets.
We also have evaluated our deferred tax assets related to acquired operating losses and we believe a full
valuation allowance for these assets is required under GAAP. This valuation allowance is due to anticipated
limitations, including limitations under Section 382 of the Internal Revenue Code, on acquired losses. Any
future release of this valuation allowance will reduce goodwill.
Quarterly Period Ended March 31, 2006
The following table sets forth certain items from our condensed consolidated statements of operations as
a percentage of total revenue for the periods indicated.
2006 2005
Three Months Ended
March 31,
As Restated(1)
Revenue . .................................................. 100.0% 100.0%
Cost of Revenue (exclusive of depreciation and amortization expense shown
separately below):
Direct cost of services ....................................... 2.4 2.4
Network and infrastructure .................................... 9.6 8.2
Sales and marketing ......................................... 34.5 30.2
Product research and development .............................. 9.7 8.2
General and administrative .................................... 10.6 10.3
Depreciation and amortization ................................. 2.9 3.9
Amortization of acquisition related costs .......................... 3.6 4.4
Total costs and expenses ....................................... 73.3 67.6
Income from operations ........................................ 26.7 32.4
Other income/(expense), net ..................................... 3.8 2.1
Income before income tax expense ................................ 30.5 34.5
Income tax expense ........................................... 9.5 5.3
Net income ................................................. 21.0% 29.2%
(1) See Note 2, “Restatement of Consolidated Financial Statements,” in Notes to Consolidated Financial
Statements.
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